I beg to move,
That this House has considered the matter of financial stability.
The events in the USA in the past few weeks and in Europe in the past few days have demonstrated once again the global nature and sheer scale of the problems affecting the financial system. What started in America last year has now spread to every part of the world. Disruption in global financial markets has intensified, particularly over the past few weeks, and people are rightly concerned about what is happening. As well as the USA and ourselves, Ireland, Germany, the Netherlands, France, Spain, Denmark, Austria, Belgium and Iceland are affected; these are global problems that need international, as well as national, responses. My right hon. Friends the Prime Minister and the Chancellor of the Exchequer have made it absolutely clear that we will do whatever is necessary and right to maintain stability. Along with Governments across the world, we have the responsibility to support a stable, well-functioning banking system.
Financial transactions are at the heart of everything that we do: they allow people to buy goods, pay for services, buy homes, save for pensions and invest for growth and prosperity. It is essential that we take action both to support the banking system as a whole and to intervene in particular cases when it is necessary to do so. It is not a case of one or the other; general support and individual intervention are needed. We want to work with other countries to tackle the causes of these problems as well as deal with their consequences.
Yesterday, the Chancellor announced to the House the decisive, comprehensive action that the Government are taking to restore confidence in the banking system and put banks on a stronger footing. That has been widely welcomed.
The House welcomes what my right hon. Friend has said about financial stability. One of the underlying reasons for the weakness in our and America’s banking systems is the weakness in the housing market and the fact that increasing numbers of people are unable to pay their mortgages. What will be done, as autumn turns to winter and winter turns to new year, to make sure that our constituents do not find themselves at the mercy of repossession? What will be done to support people in their homes and against arbitrary repossession?
I am sure that my hon. Friend will welcome yesterday’s Bank of England announcement of a reduction in interest rates. Of course, if we are successful, as we hope we will be, in opening up the lending market again, we will see the housing market—and, indeed, other parts of the economy—benefit from that change. It is essential that we take action both to support the system as a whole and to intervene in particular cases when we need to.
Does my right hon. Friend accept that some people must be puzzled? Over the years, we have been told by all kinds of people that state intervention is wrong, that any form of extending public ownership is highly undesirable and that all such measures would undoubtedly lead to wicked socialism, which is no doubt being considered in Washington. Is it not also puzzling that at this moment, when there is such a crisis in financial markets across the world, it is precisely state intervention that is essential?
My hon. Friend is absolutely right. I have been struck by how some people who have customarily denounced any form of Government intervention are now calling for precisely that intervention.
There are three strands to what the Chancellor announced yesterday: first, the provision of sufficient liquidity now; secondly, making available new capital to UK banks and building societies to strengthen their resources and restructure their finances while maintaining support for the real economy; and thirdly, ensuring that the banking system has the funds that it needs to maintain lending in the medium term.
The Financial Secretary has mentioned three points, but are there not really four? First, there is a transfer of debt to the national purse; secondly, there is a deferral of debt from today until tomorrow. The third and fourth points are the subsequent choice between cutting public spending or increasing taxes.
No. The three strands are precisely as I have set them out. I am not sure whether the hon. Gentleman is expressing opposition to the package; in common with others outside the House, Conservatives have generally welcomed the proposals as precisely the decisive and bold action that is needed, given the circumstances that have resulted from the problems in the USA.
The Financial Secretary mentioned the need for bold action. In his statement yesterday, the Chancellor said that he had frozen the assets of the subsidiaries of Landsbanki in this country as a first step in trying to address the issue of retail deposits at that bank. However, he was not so clear about what was intended in respect of local authority deposits with the bank. My local authority, the London borough of Sutton, has £5.5 million in a subsidiary of that company. It was invested in a prudent fashion and in line with guidelines issued by the Treasury. The authority wants to know what will happen to that money and whether the Government will stand with it and council tax payers to make sure that the money is safe.
I am aware that my right hon. and learned Friend the Leader of the House fielded several questions about this at business questions. I can tell the hon. Gentleman that there will be a meeting this afternoon between my hon. Friend the Economic Secretary, my hon. Friend the Minister for Local Government and the Local Government Association to consider exactly this issue.
The hon. Member for The Wrekin (Mark Pritchard), who has now left the Chamber, asked about affordability. Does my right hon. Friend take some reassurance from the editorial in today’s Financial Times, which says:
“The government can afford this plan. National debt is relatively low and the UK can borrow more”?
When the Conservatives left office, our national debt was 47 per cent. of gross national product. We have got it down to 37 per cent., which has created, through good economic management, the room for this kind of intervention when it is so necessary.
The Minister will be aware that Norfolk county council is among a number of local authorities with money on deposit with subsidiaries of Icelandic banks. It seems to many of us that, in the circumstances post-Northern Rock, that was not the wisest thing to have done. Did the Treasury give any specific instructions or advice to those local authorities?
If a local authority has any concerns about that, I suggest that it contact the Local Government Association, which, as I said, has a meeting with my hon. Friends this afternoon.
Within the package of proposals that we have brought forward, we will ensure that where public funds are involved there will be conditions on remuneration arrangements in banks—we do not want rewards for excessive risk-taking—and to secure and maintain credit to home buyers and to small businesses. The proposals have been widely welcomed. As well as supporting stability in the financial system, they will protect depositors, safeguard their interests and play an important part in the international response to this global crisis. In turn—
I will make a little more progress before I give way again.
In turn, that should help people and businesses to support the economy in these extraordinary times. Whenever possible, countries should work and act together to maintain stability. My right hon. Friend the Chancellor has agreed with European Union Finance Ministers to work together to rebuild confidence in the banking system. All member states have now committed to immediate steps to enhance depositor protection. My right hon. Friend will also be in Washington this weekend to discuss steps to be taken internationally, including on strengthening the system of international supervision, and the Prime Minister has agreed with other major countries on a meeting of Heads of Government to ensure that international action is taken.
It has been necessary for Government to take decisive steps to strengthen the stability of the banking system. The best solution to a firm’s specific concern is, where it is available, a private sector solution. On 18 September, it was therefore announced that Lloyds TSB and HBOS were to merge following market turbulence whereby HBOS found itself in increasing financial difficulties as investors lost confidence in its ability to continue operating. To help to secure the deal quickly in the best interests of wider financial stability, the Government have changed competition rules to allow financial stability to be considered in the scrutiny of this merger. The decision on whether the merger should be referred to the Competition Commission will be taken in the normal way by the Secretary of State for Business, Enterprise and Regulatory Reform in the light of implications for competition and financial stability, and an affirmative resolution will be made to add the maintenance of UK financial stability to the list of public interest considerations in the Enterprise Act 2002.
This banking crisis followed a severe oil price shock in the summer, with the price of oil reaching $150 a barrel. Since then, it has fallen by 40 or 50 per cent., but the price of petrol and diesel at the pumps has remained stubbornly high. Is the Minister considering the possibility of investigating anti-competitiveness among the oil companies at petrol stations, because this is having a real impact on household budgets?
The fall in the price of oil is certainly very welcome. There are also indications that the recent increases in food prices are moderating. However, the hon. Gentleman is absolutely right—those reductions need to be reflected in the prices charged to ordinary consumers.
I hesitate to interrupt my right hon. Friend’s flow, but it had already been interrupted.
Not enough is being made of the fact that there will be strict controls through the Financial Services Authority on compensation packages for the executive directors of these various banks. Let me remind the Financial Secretary of what the Chancellor said:
“In reaching agreement on capital investment the Government will need to take into account dividend policies and executive compensation practices and will require full commitment to support lending to small businesses and home buyers.”
Can the Financial Secretary repeat that today, because it is being overlooked in the outside world, where there seems to be a view that we are going to skate away from these so-called golden parachutes?
Let me make a little more progress, if I may.
I talked about our response to the difficulties of HBOS, so let me move on to Bradford & Bingley. Purely private solutions to firm-specific problems are not always available, and there will be circumstances in which the Government need to take steps to deliver solutions with the private sector to ensure that depositors are protected and that banking services are not disrupted. Following a period of extreme market dislocation, Bradford & Bingley found itself in increasing difficulties as investors lost confidence in its continued independence. On 17 September, the FSA declared that Bradford & Bingley no longer met its threshold conditions as a deposit taker, and after consultation with the FSA and the Bank of England, and having explored all the options, we announced that Bradford & Bingley’s UK and Isle of Man retail deposit business, along with its branch network, would be transferred to Abbey. The remainder of Bradford & Bingley’s business was taken into public ownership through the transfer to the Treasury of the company’s shares. That included its mortgage book, personal loan book, headquarters and relevant staff. The remainder of Bradford & Bingley’s business will be run down over time—for example, as mortgages are repaid by its customers. The Treasury and the financial services compensation scheme will recover payments in the wind-down. The financial services compensation scheme paid out approximately £14 billion to enable retail deposits covered by the scheme to be transferred to Abbey. The Treasury has also made a payment to Abbey for retail deposit amounts not covered by the financial services compensation scheme—some £4 billion. We fully expect taxpayers to get the full £4 billion back.
The Minister has been talking about the recovery of assets. He will be aware that the Chancellor said that Icelandic accounts had been frozen and that steps would be taken to recover the assets. Can the Minister give any further update on the measures that are being taken and on any further discussions that have taken place with the Icelandic authorities on the recovery of those funds?
I will come to the position of the Icelandic banks in a moment, but I wanted first to update the House on the range of issues that have emerged.
If there are losses at the end of the wind-down of Bradford & Bingley, the cost will be met first by Bradford & Bingley shareholders and subordinated debt-holders. The financial sector and the Treasury will then share any further losses between them. It is anticipated that the financial sector will bear a significant proportion of any such further losses from future profits when financial markets return to normal. It would require some £4 billion of impairments on the mortgage assets before the Treasury and the taxpayer suffered significant losses. Moody’s credit rating agency estimates that asset impairments will amount to about £1.2 billion. We are confident that, through quick and decisive action, we are doing whatever it takes to stabilise the financial system in the UK while protecting the taxpayer.
Savers at Bradford & Bingley are now savers at Abbey, with the assurance of their deposits being with a major bank. Savings can be accessed in the usual way and remain covered by the financial services compensation scheme. Bradford & Bingley’s branches, call centres and internet operations continue to be open for business as usual. The Government have also guaranteed that for those working in Bradford & Bingley’s headquarters, there will be no compulsory redundancies over the next six months, employee terms and conditions will remain unchanged, and pension rights will be protected.
On the issue that the hon. Member for Hornchurch (James Brokenshire) just pressed me on, acting yesterday on the advice of the Bank and the Financial Services Authority, and in light of recent announcements by the Icelandic authorities, the Chancellor took action to protect retail depositors in three Icelandic banking operations in the UK: Icesave, which is a UK-based branch of Landsbanki; Heritable, which is a UK-based banking subsidiary of Landsbanki; and Kaupthing, Singer and Friedlander, which is a UK-based banking subsidiary of Kaupthing bank. That action was taken to ensure stability of the UK financial system and savers’ money is now safe and secure.
As my right hon. Friend the Chancellor made clear, all the deposits by retail savers will be protected.
Yesterday, the FSA deemed Icesave to be in default. Because of the Chancellor’s decision, no retail depositor will lose any money as a result of the closure of Icesave. The Treasury and the financial services compensation scheme are working with the Icelandic authorities and their deposit insurance scheme to ensure that depositors are paid back as quickly as possible. My right hon. Friend the Chancellor emphasised to the Icelandic Finance Minister that UK depositors in Icesave should have the same protections as depositors in Iceland, and receive their deposits back in full promptly. Arrangements are being put in place to ensure that all ISA customers of Icesave will continue to benefit from the tax-free status of their accounts.
To protect UK economic interests, the Government have frozen the funds and financial assets held by the Icelandic bank, Landsbanki. We fully understand the exceptionally difficult challenges faced by the Icelandic Government and the pressure that they are under. We want to work co-operatively and constructively with them, particularly to ensure that depositors and creditors are protected. We have, though, been unable to obtain complete clarity from Iceland on the position, so the freeze we introduced is a precautionary measure protecting UK interests, and it could be lifted once safeguards are in place to prevent action detrimental to the UK economy.
I just have a quick question on the freezing of assets. Could the Financial Secretary clarify under which legislation the assets were frozen? My understanding from reports in today’s newspapers is that the freezing took place under anti-terrorism legislation, and I am interested to know how the Government justified freezing the assets through such legislation.
The important thing was to safeguard UK economic interests. The hon. Lady is quite right: the power used happened to be in the Anti-Terrorism, Crime and Security Act 2001, but it was felt necessary to protect UK economic interests.
Yesterday, the FSA also deemed that Heritable and Kaupthing did not meet threshold conditions. In order to provide for as much business continuity as possible, the majority of Heritable’s retail deposits, and the Edge accounts in Kaupthing, were transferred to ING Direct, using the Banking (Special Provisions) Act 2008. ING Direct is working rapidly to ensure business as usual for customers. Action by the tripartite authorities protects savers’ money and provides certainty for retail depositors. The transfer of the retail deposit book has been backed by cash from the Treasury and the financial services—
Over recent months, we have seen the impact of the credit crunch move beyond the banking system, first to home owners and now to businesses. What was seen as a problem of banks being unwilling to lend to each other has become a problem of banks being unable or unwilling to lend to their customers. In the mortgage market, that has been characterised by lower loan-to-value ratios as banks ration credit, and higher interest rates as the spread between the London interbank offered rate—LIBOR—and the base rate widens. Businesses are seeing comparable issues. For example, businesses have seen their overdraft rates go up from 10 per cent. to 15 per cent. The markets seized up because of concerns about banks’ capital and their ability to withstand losses, which added to concerns about liquidity.
As I understand it, the mark-to-market rules fall within international accounting standards, which are implemented through EU law. The International Accounting Standards Board is looking at how illiquid financial instruments are valued in the absence of financial markets. That work is ongoing, and we need co-operation between the EU and the United States on that issue because there is a risk of divergent standards being used.
Following the point raised by the hon. Member for Congleton (Ann Winterton), would the hon. Gentleman agree that it is unlikely in the long term that confidence will be built in inter-bank lending or in consumer depositing internationally until international regulations are established by an organisation such as the International Monetary Fund, so that people would know that if a financial institution did not meet regulations, there might well be something dodgy going on?
I am not sure whether the hon. Gentleman is referring to accounting standards, which are rightly set by the International Accounting Standards Board, or a single global regulator. There is a cross-party consensus that there should not be a global financial services regulator, but this crisis has demonstrated the need for greater international co-operation when it comes to such challenges.
I congratulate the hon. Gentleman on his knowledge of competencies and the relationship between accounting standards and European law. He mentioned co-operation with the United States and, to enlighten him further, the US Congress is at this moment looking at mark-to-market. Everything will come together in a package one way or another, and I am sure that the hon. Gentleman will welcome that.
My knowledge of international accounting standards comes from the fact that I am a chartered accountant, although I am no longer practising. When looking at mark-to-market, and international moves to deviate from that—my right hon. Friend the Member for Witney (Mr. Cameron) proposed a temporary suspension of mark-to-market last week—it is important that we adopt a common approach. It is unhelpful if the US adopts one approach while UK and European markets adopt another. There needs to be some consistency if we are to have comparability of financial statements.
The seizing up of inter-bank lending has led to illiquidity as banks seek to hold on to cash. As Northern Rock shows, a bank can be solvent, but still face problems because of liquidity. We believe that action needed to be taken to tackle both liquidity and capital and that you could not tackle one without tackling the other. This is where yesterday's £50 billion rescue package is pivotal in its support for recapitalisation and further moves to improve liquidity in the inter-bank market. I want to raise some detailed questions about yesterday’s package in a moment.
Taxpayers will ask us why we needed to do this, who else is sharing the pain and more crucially, how we will know if it has worked. The answer to why we need to do it is clear: financial instability has caused problems for businesses and households, and if action had not been taken those problems could have got far worse. It is also clear, however, that if taxpayers are to bear risk they need to know that others are taking their share of responsibility, too. Banks will have look again at dividends to conserve their capital and there will be little public support for banks paying bonuses when the taxpayer is at risk.
Writing in today’s issue of The Daily Telegraph, the Conservative party leader sought a guarantee that there would be no bonuses for senior executives of banks that have taken the greatest risks. Is that just political bluster or does he have a list of the banks in question? How would the hon. Gentleman’s party propose to ensure that no bonuses were paid? What legislative measures would it put in place to ensure that?
It is good that the hon. Gentleman does that. He should have asked the Financial Secretary how the Government intend to achieve what he outlined, because yesterday’s statement refers to executive compensation packages. There will be an agreement between the Government and banks on recapitalisation using the £25 billion that has been set aside. It would be interesting to hear the Government present their mechanism for that. Perhaps the Financial Secretary could outline the Government’s progress on it.
I am conscious that many hon. Members want to take part in the debate, and I have already been generous in taking an intervention from the hon. Gentleman.
The package will not work if it simply enables people in the City to breathe more easily and leaves those in our cities and towns no better off. The conditions attached to it are therefore important. How will the Government ensure that the banks’
“commitment to support lending to small businesses and home buyers”
happens in practice? The Prime Minister and the Chancellor ducked that question yesterday—I hope that the Financial Secretary is in a position today to give us an answer because the link is important if the package is to work.
I shall ask detailed questions about the three aspects of the scheme. The special liquidity scheme has been extended to the end of January and increased to £200 billion. If there is continued demand for it, can it be extended in duration and increased in value? People in the banks will be interested in the answer to that.
On the equity package, one of the eligible institutions is the Nationwide building society, and other building societies could also be eligible. What are the consequences for the mutuality of building societies if they seek Government support to recapitalise their balance sheets?
Will the Financial Secretary clarify the purpose of the second tranche of £25 billion? We understand that it can be used to invest in only preference shares or permanent interest-bearing shares, yet the Treasury press release yesterday stated that the Government are
“willing to assist in the raising of ordinary equity if requested to do so”.
Does that mean that the Treasury will invest in the ordinary shares of banks and eligible institutions? If not, will the Financial Secretary explain that statement in yesterday’s press release?
My hon. Friend makes an important point. A small part of yesterday’s statement suggested that the Government would underwrite issuing new ordinary shares. If that is the case, the package is different from what we have been led to believe.
My hon. Friend highlights the ambiguity in the statement. It is important that the Financial Secretary uses the opportunity today to clarify the point, because investing in or helping underwrite ordinary shares is different from investing in a form of preference shares.
I am grateful for that clarification, but the problem is that the statement, as published yesterday on the Treasury website, is not sufficiently explicit about the meaning of assisting in raising ordinary equity. Some clarification would be helpful rather than relying on Hansard or contemporaneous notes.
Will the Financial Secretary explain the link between the recapitalisation fund and the £250 billion facility to guarantee the repayment of short and medium-term debt issuance? If a bank does not take Government money for recapitalisation—I understand that at least three institutions so far have declined to do that—can it take advantage of the Government guarantee? If a bank has not sought any of the £50 billion available for recapitalisation, but wants to use the guarantee, is it bound by the commitment to
“support lending to small businesses and households”?
If so, how will that be policed?
Currently, the scheme is limited to eight eligible institutions, although the Treasury press release makes it clear that other UK incorporated banks, including those that are subsidiaries of foreign banks, can also join the scheme. Clearly, Abbey, as a financial institution, is an example of that form of organisation. However, other UK incorporated banks are subsidiaries of foreign banks, for example, J.P. Morgan and Citibank. Will they have access to the £250 billion guarantee fund? Will institutions that operate primarily in the wholesale market also have access to it? They are unlikely to lend to households or small businesses, and some clarity would therefore be helpful.
Are the Government confident that the £250 billion is enough to help institutions refinance their wholesale funding obligations? What work have they done to assess the adequacy of the fund? I do not know where the figure has come from or the suggestion that it is enough. Might it be topped up later? Again, some clarity would be welcome, not only in the House but outside. When can eligible institutions use the guarantee fund? The statement on the Treasury website was silent on that matter. Institutions that wish to refinance their short and medium-term debt issuance will want to know when the fund is open for business.
I have made some detailed points, but I think that the Financial Secretary appreciates that more clarity about the way in which the money is to be used, who has access to it and how the conditions are policed will not only help financial institutions that may benefit from it understand what is happening, but help our constituents, who are paying for the package, understand how the Government will secure the link between the money that has been advanced to the banks and their commitment to support lending to small businesses and families.
Next Tuesday, we will return to the debate on banking reform. The Banking Bill sets out several mechanisms, which have partly been used during the past year to rescue institutions with problems. However, we need some long-term changes to entrench financial stability. The Bill that we discuss next week deals largely with the consequences of failure, not prevention of the recurrence of such problems.
Conservative Members believe that, in setting up the FSA, the Prime Minister broke the link between the understanding of market-wide risk and the supervision of individual institutions. To avoid the repeat of a debt bubble, we believe that we need to reinstate that link, with the Bank of England being given a much greater role in determining the overall amount of capital needed in the market. That will strengthen the system and entrench financial stability in markets. The Government have embraced our proposals to increase the deposit protection limit from £35,000 to £50,000, and a bank-led reconstruction of a failing institution. Perhaps they will endorse the idea that I have just outlined.
As we have made clear, for the package to work, we need not only inter-bank lending to reopen, but lending to businesses and families to recommence. Taxpayers want an end of the age of irresponsibility, but they also want responsible lending. That is the true test for this package, and we hope that it meets that test.
Order. Mr. Speaker has imposed an eight-minute limit on Back Benchers’ contributions, but several hon. Members have expressed a wish to participate in the debate since then. Given that we have rather less than an hour, may I ask hon. Members to restrict their comments further?
There is undoubtedly much concern among the public about the fact that the bail-out for the banks is necessary. I am sure that I am not the only Member of Parliament who has had e-mails and phone calls overnight from constituents who are angry that people who have made massive amounts of money and enjoyed massive bonuses are expecting the taxpayer to pick up the tab for their mistakes. That public anger is not misplaced, but there is no doubt that yesterday’s action was right and necessary.
I speak as a Member who represents a constituency in Edinburgh, where the problems in the banking and financial industry have a direct and immediate local dimension. Sixteen thousand people in Edinburgh are directly employed by HBOS or the Royal Bank of Scotland. Thousands more are employed in Lloyds TSB or its subsidiaries, such as Scottish Widows, and thousands are employed in other businesses, such as Standard Life. On top of that, many thousands of my constituents are employed in sectors dependent on the banks and financial services. That is why I and other parliamentary colleagues from Edinburgh have been in regular contact with senior management in those businesses, with our colleagues in the Scottish Parliament and in local government, and of course with the Chancellor, to discuss those issues at this worrying time.
The package that was announced yesterday should certainly reassure those who are employed by the banks and the financial sector in Edinburgh, Halifax and elsewhere. It should make it more possible to achieve an ordered recovery from the current crisis and for decisions to be taken in the longer-term interests of the banking sector and the economy as a whole. I hope that, along with the effect on small businesses, one of the factors that the Government take into account when they agree the details of any support for particular banks will be the effects on the thousands of ordinary people employed by those businesses, in places such as my constituency. The ordinary workers in those businesses should not be the victims of greed and excessive ambitions higher up in those institutions.
However, everyone in Edinburgh would of course be affected in the same way as those in the rest of the UK by a meltdown in the banking sector. The local authorities that now face the loss of millions of pounds as a result of the failure of an Icelandic bank emphasise how the effects of a bank failure rapidly spread into the wider world. If, heaven forbid, one or more big British banks were ever to fail, it would not be just a few local authorities that would face the situation that some face now. Every local authority in the country would have severe difficulties in meeting its pension commitments and continuing to provide vital services for their communities.
The same would be true of pension funds and there would be consequences for those seeking to remortgage. There would also be consequences for millions of businesses, which would have difficulties with cash flow. Problems would arise in international trade and there would be consequences for the stock market and threats to the billions of pounds of private savings if any banks were in that situation.
That is why it was right for the action to be taken and why it had to be dramatic and bold action. We have to remember that the collapse in the 1920s was one of the contributors to the eventual growth of dictatorships and fascism and, ultimately, the second world war. That might sound dramatic, but it is a reminder of a reality that we could face if action were not taken internationally to try to tackle the current crisis and if the banking system seized up. That is why the action taken this week is welcome, but it can only be the start of much more dramatic and radical action at the national and international levels combined.
First, we need to return to sound banking practices here in the UK. Hon. Members asking questions yesterday expressed their fears that once the immediate crisis was, hopefully, over, some in the financial sector would return to their bad old ways. That is a real concern. The problem is not just with a few people at the top, earning big bonuses. There is a cultural problem in much of the industry that needs to be addressed and on which we need action in a number of ways, from the Government, the regulators and the industry itself. The public will expect us to do that and they will be very angry indeed if the problem is not addressed in a thoroughgoing and long-lasting way.
A return to sound banking will also be more likely if the Government and regulators seek to strengthen those parts of the financial services sector that have now fallen prey to the greed and irresponsibility of some, but not all, in other parts. I refer to the strength displayed by the mutual sector—the building societies. Although there have been problems, which have been dealt with so far, the building societies certainly have not overextended themselves with massive international expansion, funded by expensive borrowing, in the way that some of the banks have. I would therefore like to hear an answer to the question that the hon. Member for Fareham (Mr. Hoban) asked about how the mutuals would be affected if they wished to take advantage of the financial arrangements announced yesterday.
Secondly, it is clear that we need stronger international rules and agreements to ensure that collective action can be taken successfully. The action taken by the UK so far can lead the way in setting an example for the rest of the world.
Finally, we also need to strengthen the ability of the European Union to act together. The fact that that did not originally happen in the way that it should have happened should not lead us to the conclusion that the EU’s role should be weakened. Rather, the conclusion that we should draw is that it is time to strengthen the EU’s ability to ensure that its members work together in such crises and put into effect a common response and action plan when it is agreed. That might not be popular with Eurosceptics in the Chamber, but now is the time for more European co-operation, not less.
The context of today’s debate is the understanding that every economy needs a functioning banking system. Businesses and individuals have to be able to borrow money to invest. Without that confidence, the economy as a whole and, indeed, our whole society, is adversely affected.
We on the Liberal Democrat Benches therefore welcome the financial rescue package that the Prime Minister and the Chancellor announced yesterday. It was in the national interest; it was the right thing to do. That does not make it any less galling that the greed and excesses of the banks have put us in this position. However, when a house is on fire, recriminations about how it started are secondary to putting out the fire. That is the task that we have now embarked upon.
Changes in the rules of engagement between the taxpayer and the banks are nevertheless inevitable as a result of the Government’s intervention, as well as being desirable. It is essential that the taxpayer’s investment is as advantageous in its terms as possible. If, or perhaps when, normal order resumes and banks return to profitability, I want to see the return on that investment at the highest possible level for the British taxpayer.
Senior bankers also have to wake up and realise that their old ways are in the past. Unlike the Conservatives, I do not want the Government to micro-manage every boardroom decision. I say this with kindness to the Conservative party: running a bank is not like deciding the location of chocolate oranges in WHSmith. We are talking about the banking sector being free to make innovative decisions, but within the changed context of the different times in which we find ourselves. The City and the wider banking sector must realise that the context is now different.
The hon. Gentleman talks about micro-management of boardrooms, but I do not think that anybody, in any part of the House, has talked about micro-management. What we are talking about is effective and substantive regulation, which has not necessarily been in place in the past 10 years.
I take the hon. Lady’s point about effective regulation, but, as I understand it, the leader of the Conservative party is keen for the Government to intervene and decide the remuneration policy of people working in the banking sector. That is an extraordinary transformation. The Conservative party, which wholly embodies the culture of excess and “loadsamoney” banking spivvery, is now going to a 1970s incomes policy. I know that many on the Conservative Benches look back to the era of Margaret Thatcher with fondness, but this is the first time that I have seen Conservative Members look back with such enthusiasm to the era of James Callaghan.
I know that the Liberal Democrats’ new political strategy is to put themselves to the right of the Conservative party, but surely when the banks are coming cap in hand to the taxpayer, it is reasonable for the taxpayer to except a degree of accountability—that is, no fat cat bonuses. What is unreasonable about that?
It is entirely reasonable that the taxpayer, having taken a stake in the banks, should have an interest in how those banks operate. However, that is not the same as setting an incomes policy for banks and deciding on the remuneration of individual bankers. I know that the issue is a mere footnote to the great events that have taken place in recent weeks, but it highlights the dangers of a party using shallow marketing devices to reinvent itself without any reference to core beliefs and values.
I noted that, when the hon. Gentleman had the Floor earlier, the hon. Member for City of York (Hugh Bayley) asked him how the leader of the Conservative party envisaged the Government enforcing an incomes policy in the banking sector. There was no answer from the Conservatives, because they do not have any practical way of delivering their policy. They think that the best way of deflecting attention from the fact that they have no credible policies whatever in this area is to give this nod to populism.
My answer to the hon. Member for Fareham (Mr. Hoban) is that of course the circumstances have changed when the taxpayer is investing so heavily in the banking sector, but the Government cannot decide in every minute detail how the banks should be successful and go forward. There may be circumstances in which a particularly innovative, entrepreneurial banker is so successful at turning round the fortunes of his bank—to the advantage of my constituents and the hon. Gentleman’s—that that needs to be recognised. I am sorry if the Conservatives find that frighteningly right wing, but I do not believe that it is possible to run the entire banking sector and the boardroom of every bank from the Chamber of the House of Commons.
The hon. Gentleman does not seem to understand that one of the issues in this debate about the remuneration of bankers is whether banks pursue bonus policies that encourage people to make short-term profits without paying attention to the long-term sustainability of their own financial institutions.
I do understand that point. I am not saying that I am in favour of all bonuses or of bonuses for short-term behaviour that is disadvantageous to the long-term prospects of a bank. But that is not what the Conservatives are saying; they are saying that they are against any bonuses being paid in the banking sector in any circumstances. Bonuses are also being paid in the public sector at the moment. I do not favour that practice because, by and large, they are being given to people who are simply doing the job for which they are already paid a salary. However, there might be circumstances in which there is such exceptional performance in the public sector that it is right to recognise it financially in order to create incentives to greater creativity, flair and entrepreneurialism and to a more effective delivery of services. I am simply saying that we should keep that scope in the banking sector as well. I do not think that the Conservatives are wise to say that, however good the bankers are, the Government should intervene in all circumstances to prevent a bank from paying a bonus to recognise outstanding creativity, talent and wealth creation.
It is important that there is a housing dimension to the Government’s action. The £8 billion of public money that has already been approved for social housing should be used rapidly to acquire the land and property that is becoming available at big discounts at the moment, due to market circumstances. Steps must be taken to protect home owners from premature and unnecessary repossessions.
In addition to the financial package that was announced by the Prime Minister and the Chancellor yesterday, the Bank of England announced a half-point interest rate cut. My party welcomes that decision by the Bank. Its effectiveness was increased by it being part of a co-ordinated international approach that cut interest rates in the leading industrial countries around the world. However, it is fair to say to the Bank of England that this is not the time for cautious incrementalism. We are entering an era in which more dramatic action will have to be taken on interest rates to try to restore greater confidence and to give people the ability to lend and borrow, which they have felt unable to do in recent months. I, and most observers, expect further interest rate cuts to follow.
We do not know whether the Government’s action will succeed, but we know that it must do so. The only plan B available to us is to continue with plan A until we are clear of the crisis. Financial stability is essential for the workings of our entire economy, which is why the rescue package announced by the Prime Minister and the Chancellor has our support.
As time is short, and there are many Members here, I shall move quickly through my speech. I shall not, however, take the advice of my Newcastle colleague, my hon. Friend the Member for Newcastle upon Tyne, North (Mr. Henderson), who has just suggested that, if I wanted more time, I should make my speech in the next debate, when I would get 15 minutes. Of course, you would notice if I did that, Madam Deputy Speaker.
I have heard what has been said in the debate, but I think that congratulations are in order. We cannot go overboard, but I think that the package that was delivered yesterday was a very good one, in both content and presentation. If we compare its content with that of the US package, we see that it is completely different, in that it is far more relevant and far more likely to be successful. Its presentation, despite being spoiled by some nonsense, to which I shall return later, involving discussions between the Opposition and officials, was very good. It has gone down very well, and the Government have certainly played their part in doing what they can in the global fight for stability. Locally, we have certainly delivered a package.
As a member of the Treasury Select Committee, I did one or two interviews yesterday. The media seemed to have moved on to the next day’s news—or the next hour’s news—and were asking what would happen if the plan did not work. We put £400 billion into the equation, yet they still wanted to know what would happen if it did not work. The answer has been given by the Prime Minister and the Chancellor of the Exchequer: if it does not work, we will do whatever it takes. That is the only possible answer.
Today, although the markets have stabilised and even gone up, the situation is still volatile. We do not know whether the plan is going to work. We can only hope. Some Members have asked about the cost of the package and how we are going to meet it, but that does not matter. We have to win this battle, because the price of losing it would be so devastating for ordinary people’s standard of living, so we will do whatever it takes. This is not simply about money. It is more about money plus confidence. If confidence results from this package, that will be lovely. If it does not, another package will have to be delivered until confidence returns to the markets and we can get back to normal.
I am delighted to see what is emerging as a result of the package, although it places some pressure on the Minister. When the lending facility for the special liquidity scheme was introduced by the Bank of England, and introduced in the Chamber by the Chancellor, I made the point that we were talking about creating a £100 billion facility to rescue the banks—the very people who got us into this problem. Has any part of the negotiations tied the banks not only to rescuing themselves with the money, but to ensuring that their customers—small businesses and, above all, home owners—are rescued? The answer that the Governor of the Bank of England gave to the Treasury Select Committee was that that was not his concern. The Chancellor answered that it would be improper for him to take such action.
I am delighted that things have moved on, and that this larger package contains specific reference to freeing liquidity in loans, and to lending to home owners and to small and medium-sized enterprises. However, when the Minister was questioned on the package earlier, he suggested that it should do certain things. I wonder whether we can press him on this issue. I do not fancy going back to my constituency and telling people that, this week, we made £400 billion available to rescue institutions headed by people whose reckless—one could say greedy—behaviour has endangered the economy of this country and the livelihoods of most of its people. I do not fancy telling my constituents that, without also being able to say that, in moving to save the banks to stabilise the financial markets, we have obtained an explicit agreement that, as soon as possible, and in defined terms, they will start proper lending facilities.
The chief executive of the British Chambers of Commerce was on television this morning: a survey of 5,000 businesses has been undertaken and every indicator is negative. Above all, we must look at the number of housing repossessions that are taking place. At first, we had a problem caused by the financial markets in the financial markets and the real challenge was to see whether we could prevent it from spreading to the real economy. It looks as though we may fail, but this is our last chance. If we have not nailed these bankers to an agreement that is explicit and that will be honoured, we will not be thanked by ordinary people watching events on television, doing their sums and looking at their household budgets and worries. I press the Minister to tell us whether all this is a hope, trickle-down or something that will happen.
On salaries, I cannot understand the hon. Member for Taunton (Mr. Browne), and there is real sense in questioning both parties that say that something should be done. Something will be done. There is the question of having a bit of fun and saying, “Tell us the details,” but it is more important that there is political will. If we say to people out there, “We’ve rescued the ones who caused you these problems, but we haven’t got an understanding that they will change their behaviour,” once again we will not be forgiven. We need that political will.
I hope that, for the first time, the banking and finance industry will show a bit of humility and put its own house in order, but if it does not do so I hope that we retain the consensus to do something about it.
I say to the Minister and the Chancellor that this is a great package, but given the amount of money we put into those institutions I cannot understand why we did not get board representation. Lending policies are being considered and salary policies are on the table. We ought to have our representative in there to ensure that our part of the deal is delivered.
I am sad that the Liberals have departed from Bank of England independence. That independence was given and supported, but when things get tough they want to take it away. The Bank of England and the Government must improve their relationships a bit, including more trust and more partnership, but taking independence away from the Bank would be a wrong step.
I agree with a great deal of what the hon. Member for Leeds, East (Mr. Mudie) said, and I might come on to a few of those points.
Government action has been required to recapitalise the banks for quite a while. It was made particularly urgent by the collapse of Lehman, which sent shivers through the banking system. Cash hoarding and de-gearing by banks was being reinforced by counter-party risk, with the banks themselves fearful that other banks might go bust. Finally and belatedly, the Government have responded to widespread calls for a recapitalisation plan, and I think we should support it.
One of my concerns is the fact that the Government are positioning what has happened as purely a failure of the banking sector. They have had financial stewardship of this country for the past 11 years. Surely they must take some responsibility for getting us into this position and for the failings of the regulatory bodies that are meant to oversee the activities of the banking sector.
I strongly agree. It is important that we alert people to the myth that is being propagated, which is that, somehow, this crisis blew over on a transatlantic breeze. Of course, it was partly made here as a result of excessive borrowing by the Government, the corporate sector and individuals.
Furthermore, the crisis has been made worse by the failure to act quickly. Throughout, we have had a reactive policy from the Government. This is the first time that they have been prepared to look comprehensively at what has been a deepening crisis. The package was not the product of several weeks of hard work, still less months, and one has only to look at the Treasury press release to see how thin it is. It is absurd—in fact, it is an insult to the intelligence of us all—that the Chancellor and the Prime Minister should suggest that it was the product of a lot of deep work.
So we are left with a lot of questions that now need to be answered. My hon. Friend the Member for Fareham (Mr. Hoban) asked quite a lot of them, but I will add a few in general terms. First, is this really a voluntary scheme, or were the banks, as appears to be the case, dragged to the table to agree to it? What will the Government do if the full £25 billion window is not taken up? There is first-mover disadvantage to taking up such deals. The banks that ask for the money are perceived by the markets to be made weaker as a consequence.
Secondly, will the facility be drawn down and will it be allowed to be drawn down primarily by the weakest banks? Will there be limits as a proportion of market capitalisation for each bank? There are great risks to the taxpayer from pouring most of the money into the weakest banks. The upside for the taxpayer will obviously be much smaller, but, on top of that, the strengthening of the balance sheets, and therefore the propping up of the management of the weakest banks, might get in the way of the consolidation of the banking industry, which is what we need. We need the sector itself to run that consolidation around the management of the strongest and best banks. For those reasons, in Monday’s edition of The Times I advocated a comprehensive scheme in which the Government would take a stake across the whole sector.
The third question revolves around shareholder activism. I strongly support greater shareholder activism in the corporate sector—the hon. Member for Leeds, East alluded to that—which should include oversight of compensation and small business lending. Should the Government be involved in that process? I would much prefer them not to be. I would like them to commit to handing all the corporate governance functions and aspects of the package to the Financial Services Authority.
Furthermore, I would like the Treasury to make it clear that in exercising that shareholder influence the FSA will act on the same basis as all shareholders—that is, long-run profit maximisation. The reason for that is something we should not forget: the health and prosperity of those banks represent the country’s savings and pensions. The last thing we want is the recovery of the banks, which will come, to be suffocated by politically inspired excessive regulation.
That brings me to another issue. We have heard a lot of vague talk about more regulation. We do not want to find ourselves being drastically over-regulated by a panic response. Furthermore, it is quite possible that the United States will engage in exactly that overreaction. We should ensure that we are well placed to benefit from it. That is what happened over Sarbanes-Oxley—we picked up some of the listing business. It is what happened many years ago over what was known as the interest equalisation tax, which enabled the eurodollar deposit market to come to the UK. Regulation needs to reflect the lessons of the crisis, but it also needs to have in mind the fact that there will be opportunities in the recovery phase for the UK and for UK businesses. That recovery phase will come.
The fifth question is, what will be the criteria for judging whether the Government’s package is a success? The Government should give us confidence, and give confidence to the markets, that we know how to measure that success. They should also give us some indication of contingency planning for what we would do if it turned out that those criteria were not being met. I could throw out a few examples, but obviously I am not trying to devise anything remotely full or comprehensive. Will it be a return to normality in the inter-bank market or the commercial paper market, or in relation to commercial lending generally? We need to be given some indication of what constitutes a return to normality. The absence of guidance on what the Government would do in such circumstances has been damaging the markets further in recent weeks, prior to the announcement of the package.
I would like to raise a number of other issues, but I shall raise only one to enable other hon. Members to speak, although I suspect I may burn up the remainder of my speaking time. The issue of lower interest rates has already been mentioned today. The half-point cut is welcome and I completely agree with the criticism made by the hon. Member for Leeds, East of the policy of the Liberals: at the first sign of difficult anti-inflationary gunfire, they want to start to tear up the system that has been put in place. That is what it would mean if we were to alter the inflation target.
On the other hand, although I do not make a habit of trying to second-guess the MPC, I do not think that they have got it right this time. Interest rates should always be set at the equilibrium point between a balance of risks. We can easily ask ourselves what those risks are at the moment. Is the risk of a sharp economic downturn, and the accompanying monetary contraction, bigger or smaller than the dangers of deeply embedded and prolonged inflation? That is the choice that the MPC needs to consider. I think it is clear that the balance of risks lies on the side of the danger of contraction, and that points to lower, not higher, interest rates. Cuts can always be reversed if the economy recovers quickly and confidence returns, and if there is a return to a risk of embedded inflationary expectations.
However, that is not the crucial issue for the country at the moment. The crucial issue must be to get through this crisis by showing vigorous Government action—whatever is required to ensure that confidence returns to the banking sector. I strongly welcome the package, but I regret that it has come so late, and only after strong pressure, especially from the Conservatives—over the weekend, and in some detail in the press on Monday and elsewhere, completely contrary to what the Liberal spokesman suggested. The Government must now start demonstrating that they are doing far more of the contingency planning to bring confidence to the market than they have shown in the previous 14 months of this deepening crisis.
Obviously, the whole House welcomes the financial rescue package, but it is not the end, or even the beginning of the end, of stabilising our financial and business worries. It is the beginning of the process. The House and Select Committee system will have to continue to question Ministers on many issues, some of which have been raised this afternoon.
There is a lot of talk about individual bankers and their greed, and a lot of talk about toxic assets, as if they were meteorites that came from outer space and landed in the vaults of the financial institutions. I will not talk about individual greed, although it is attractive to do so, because the real issues are structural and institutional and relate to the regulatory system.
In the 1990s I served on the Treasury Committee, and we conducted a major inquiry into the collapse of Barings bank. The reason why Barings collapsed was not that Nick Leeson was greedy or even a criminal, but first because he was trading in derivatives, which no one in the management of the bank understood. They were quite happy for such trading to go on, however, as long as they could trouser their bonuses. Barings folded because of trading instruments that people did not understand and failure of management controls. In that instance, Nick Leeson was not just a trader but covering the back office. The lessons of the collapse of Barings—that management should understand what they are trading and making their profits in, and the lesson about management controls—have not been sufficiently learned.
On the question of regulation, although my right hon. Friend the Prime Minister did many wonderful things as Chancellor of the Exchequer, the tripartite system of regulation, with the FSA, the Bank and the Treasury attempting to regulate the banks, has not been a success. One does not have to be an economist or an investment banker to know that if three sets of people try to do something, it will not be done effectively. It is time to revisit bank regulation; it should not be more complicated or onerous, but more effective.
I remember taking evidence from the Bank of England regarding the collapse of Barings and then BCCI—Bank of Credit and Commerce International. We rather mocked the Bank for its notion of regulation, which was, “We’re all good chaps in the City of London. We have you in for a nice chat, you reassure us and we send you away again.” Banking regulation has moved on slightly from that approach, but perhaps not as far as we would like. There is a case for more scrutiny, and to reopen the issue of audits. Many of the banks that are now collapsing have been audited in the past 12 months. The auditors did not reflect any problems with underlying asset values in their audit. When we ask auditors about that, they say that they go on what they are told—if they are told that the asset is worth a certain amount, that is what they put in the audit. If the audit process just allows the big five audit companies to make a lot of money by going through a process, but gives no real information to the public or politicians as to the underlying health of the company, there is something wrong. Such audits are not aiding transparency, regulation or public understanding.
This view will be extremely unpopular, but I am the only person in the Chamber, and one of the few Members still in Parliament, who voted against independence for the Bank of England in 1997. I voted against it because of just this eventuality. The history of the Bank in past financial crises, going all the way back to the 1930s, is that when it is asked to choose between bearing down on inflation, and the growth and health of the real economy, it has always chosen to bear down on inflation. That is the danger of an independent Bank of England, about which I spoke 10 years ago. An independent Bank of England that chases inflation above all is marvellous when the going is good. When the going is bad, however, we will see why some of us would not vote for such independence.
The hon. Lady makes an interesting point. Does she not agree that when the Bank of England was made independent, certain of its previous powers were transferred to the FSA? Does she believe that the FSA has acted in the meantime, as it ought to have done, to ensure that the banks had sufficient reserves?
It is an interesting question. Historically, the FSA has not been an effective regulator, and the House will have to return to the matter.
I want to comment on my Prime Minister’s economic war council. With 28 people gathering as a war cabinet for economic crisis, it is very impressive. For my taste, however, it is overbalanced towards investment bankers, hedge fund managers, former investment bankers, and people who would like to work in investment banks when they finally leave politics. I put it to the House that wonderful as investment bankers are, we need a more balanced source of advice if we are to move forward in this financial crisis. Of course they will suggest that we pour money into the investment banks. As many Members have said, however, there are other issues that our constituents will ask us about when we return to our constituencies over the weekend.
I am still concerned about the situation of parts of local government that have big holdings in Icelandic banks. It is well and fine that investment bankers are happy with the financial rescue package, but if my constituents or those in other parts of the country find that their services or day-to-day expectations of local government are threatened because the Government are unwilling to support local government in this situation, their love for the financial rescue package will start to drain away.
I was not satisfied by my right hon. Friend the Financial Secretary’s answer on the question of repossessions. One of the reasons for our financial problems is the housing bubble in both America and Britain. Ministers need not console themselves that we did not sell sub-prime mortgages. What is a mortgage for 125 per cent. of the value of a house but a sub-prime mortgage? Our constituents will not understand if we can throw billions of pounds at bankers, but can offer people in danger of losing their homes nothing more than the hope that their mortgage holder might be a bit kinder or nicer. We must put in place a practical scheme to make sure that our constituents do not face a rising tide of repossessions while the investment bankers sit back, recapitalised by the taxpayer but under no pressure whatever to resume lending, either to each other or to small business, and certainly under no pressure to have a more long-term and constructive approach to the issue of repossessions.
The availability of loans for small business has been mentioned. I tell the House that the financial rescue package will soon turn into a joke if small business continues to have its current problems with getting bridging finance and finance generally. The possibility of bringing forward public sector spending on housing was raised yesterday. We have promised £8 billion of such spending; why can it not be brought forward? That would do a great deal for the real economy.
I believe that the financial rescue package is right and important, but I also believe that there are many other issues about which our constituents will ask us in the coming weeks and months, which will need to be raised and pursued both on the Floor of the House and in Select Committees. One of the most amazing features of today’s debate, meanwhile, has been to see the Liberal Democrats trying to occupy a position to the right of the Tories on City bonuses. I have to tell them that not even the City is defending the current City bonus regime.
We are facing the most serious economic crisis for a lifetime. I hope, as a Back-Bench Member of Parliament, that I shall be able to play my part in the debates and discussions, and I hope that we can arrive at a real and lasting resolution of the crisis in which we find ourselves.
I draw the House’s attention to my interest, as in the Register of Members’ Interests.
It is a privilege to follow the hon. Member for Hackney, North and Stoke Newington (Ms Abbott). She referred to a speech that she made in a banking debate 10 or so years ago, which is one of the very few speeches from 10 years back that I still remember. It was as distinguished as was her speech today. She was right to say that we face a very serious problem.
I shall try to be brief in making a number of assertions. The first is that recession is now inevitable, but depression is still avoidable. There has never been a 1930s-style depression when the stock of money and credit has been maintained, and I therefore welcome the measures taken by the Government to prevent the contraction of credit and money that would have occurred if there had not been an injection of public money into the banking system to help recapitalise it. My second assertion is that while it was right to put in public money and take a public stake in the banking system, we should seek to maximise the return to the taxpayers from that money, and maximise the private contribution of new capital to the system.
Members may find it slightly odd that I should support what is effectively partial nationalisation of the banks, about which the Chancellor of the Exchequer appeared rather sheepish yesterday. In fact, I am the last Conservative Minister ever to have nationalised anything, albeit in a rather different sort of crisis: I nationalised all the Iraqi-owned assets after Iraq invaded Kuwait. In an emergency it is necessary to take drastic action, and it is essential for the Government to prop up the whole structure of credit, which exists only because Government allow fractional reserve credit banking and stand as lender of last resort.
We need, however, to maximise the return to the taxpayer and maximise the injection of private capital into the banks. I am therefore puzzled that, in terms of maximising the return, the Chancellor of the Exchequer is proposing preference shares rather than convertible preference shares. If he had insisted on convertible preference shares, if and when, as we hope, the banks are restored to health and vigour and the economy likewise, the public sector would have seen a recognition, in the form of a profit, of some of the good that it had done. By failing to make the shares convertible—perhaps it is not too late to do so—the Chancellor of the Exchequer has deprived taxpayers of some of the profit that they could have made. If we had convertible preference shares, he would also be right to encourage the private sector to put in money instead. If the banks would prefer to have private capital coming in on the same terms, they should be allowed to do so. I should like the Chancellor to consider that.
Of course, there is always a trade-off between the conversion price and the coupon that is paid. However, if that means that a slightly lower dividend is paid in return for a share of the profit at the end, that is a good thing in itself. We want to restore the capital base of the banks by retentions, rather than by paying out dividends, as much as possible.
I welcomed the Chancellor’s statement that he was prepared to help to underwrite private capital injections. If he does so, I suggest that he take up the idea that I proposed last Monday that additional capital put in now should be given privileged status in the event of an eventual bank reconstruction, and not written off in the same way as old capital. That may indeed be what he is referring to when he talks of underwriting the injection of new capital.
We need to learn the lessons of experience abroad. Some of the best lessons—they involve some of the greatest problems and some of the worst mistakes—can be learnt from the experience of the Japanese, who have undergone a prolonged banking crisis over the best part of 14 years. The lessons there are, I believe, that delay and dithering, a grudging injection of the minimum amount of help rather than help commensurate with the size of the problem, and a piecemeal, bit-by-bit approach, all undermine the impact of any measures that are taken. It is regrettable that we have waited as long as we have before taking this very substantial step, which, as I have said, is one of the Chancellor’s measures that I welcome.
Eventually, the Japanese had to adopt all the weapons available to them: not just recapitalising the banks as we have done and not just injecting liquidity as we are doing, but moving non-performing loans off the balance sheet into a separate institution. I hope that that will not be necessary, but as the hon. Member for Hackney, North and Stoke Newington pointed out, it is a mistake to assume that all bad loans are over in the United States in sub-prime mortgages. There will be bad loans in this country, because many loans are backed by real estate and property values that have fallen dramatically and may fall further, and if we do move into recession many may begin to under-perform for other reasons.
That is exactly the point that I was making. We may have to consider doing likewise, in addition to the things that we have already done.
The Japanese also had to extend a guarantee to all individual deposits. I find it incomprehensible that the Government have not done the same, although implicitly they are offering to do so; they extended a guarantee to all individual deposits in Northern Rock and Bradford & Bingley, which they have now extended to Icesave, or whatever it is called—the iceberg bank. If they can extend such a guarantee to a foreign and rather dubious bank, it is odd that they should not extend it, for a limited period, to all depositors in this country.
The final thing that the Japanese had to do was cut interest rates drastically. I agree with my hon. Friend the Member for Chichester (Mr. Tyrie) that the Bank of England needs to recognise that in these circumstances interest rates may need to be cut further and faster than ever before. In Japan they had to be cut to zero. We should not relate interest rates to what was necessary during a period of excess credit creation, given that we are experiencing a period in which there is likely to be excess credit contraction.
I hope that the Government will not rule out any further measures that are necessary, and I very much hope that the measures that they have already taken will be effective. They will certainly have the support of the Conservatives, but that does not mean that we will not hold them to account for getting us into these problems over the past 10 years. They must accept responsibility for that.
I have only a scarce couple of minutes in which to make my speech. It may shock my constituents that I have sought to address these problems within such a short time scale, but equally I think they would consider it remiss of me not to seek to do so.
I want to focus on three key problems and on responses to them. The first is reserving policies in insurance companies, the second is the difficulties with rating agencies, and the third is shorting in the market. I then want to look at three other issues: how the Government’s proposals deal with pensioners approaching the age where they have to convert their fund into an annuity; local authorities and the need for them to have their funds safeguarded; and business interest rates.
I have been saying for many years that we need to look at the adequacy of reserving policies in our insurance companies, and I will not on this occasion add to the remarks I have made on the subject over a protracted period. To minimise the risk from the sub-prime loans, companies paid rating agencies to advise how to securitise those bundles and turn them into a higher investment grade. Often, that meant packaging them with an insurance policy to cover the expected rate of default. This was, in effect, the modern version of alchemy—turning base metal into gold. There was a clear conflict of interest, as rating agencies were paid to advise how this process of securitisation could happen when their proper job was to police it. This is one of the key issues that the Government need to address to create financial stability.
Shorting in the market is where someone promises to sell a stock they do not own in order to drive down its value in the expectation that they can then buy it at a lower price before having to deliver it to the person they sold it to at the higher price. That is how traders make money in a falling market. I call for two further changes. The seller must effect delivery of any shorted stock to the buyer within three days of the original agreement to sell. That will reduce the time in which a speculator can buy at a lower price than the original sale. Cutting this arbitrage window will discourage aggressive speculation by shorting. The second change would be to introduce a rule that allows shorting of a stock only where the price of that stock has actually risen in the pervious trading period—the uptick rule, as it has been called in America. That would make it much more difficult for traders and hedge funds to engage in a concerted and repeated market attack to drive down the price of a particular share. I hope that my right hon. Friend the Financial Secretary will consider these two solutions, and in deference to him I shall give him a couple of minutes to respond to the debate.
We have had an interesting and thoughtful debate, and I welcome the broad support for the announcements the Government made yesterday. My responses will inevitably be extremely brief, but I want to confirm that the conditions that will be set for banks benefiting from this package will be tailored to the individual case. They will depend on the level and method of the support that is provided, but they can certainly include lending practices, and I agree with what my hon. Friend the Member for Leeds, East (Mr. Mudie) said about the importance of making sure that home owners and businesses are supported through these arrangements. The conditions can also include dividend payments and bonus arrangements and executive pay. In reaching agreements, any beneficiary will need to satisfy the Government that executive compensation practices are appropriate—
It being one and a half hours after the commencement of the proceedings, the motion lapsed, without Question put, pursuant to the Temporary Standing Order (Topical debates).
On a point of order, Madam Deputy Speaker. Yesterday, the Government announced they were taking £500 billion-worth of taxpayers’ money to bail out the banking sector, which failed under their watch, yet today we have had a miserable 90 minutes to debate the consequences. This bail-out alone could cost my constituents in Broxbourne £750 million, the same as constituents in Burnley, Bolton, Barnsley and Bury. How can you help us, Madam Deputy Speaker, to persuade this Government to give Back Benchers from all parts of the House more time to debate and discuss these important matters?
Order. I understand the frustration of Members who have been present in the Chamber today and who wanted to make a contribution. The length of this topical debate is limited to 90 minutes, but I think it is safe to say that this will not be the last time that matters of financial stability are discussed in this Chamber in the next few weeks.
On a point of order, Madam Deputy Speaker. On 8 October, I received a written parliamentary reply to a parliamentary question I tabled to the Under-Secretary of State for Defence, the hon. Member for Grantham and Stamford (Mr. Davies). In that reply, on the sale of helicopters to foreign Governments, I was informed by the Minister that only three helicopters had been sold to foreign Governments since 2002. On a serious point, that contradicts an earlier reply from a previous Armed Forces Minister dated 6 November 2006, in which the then Minister of State said that six helicopters had been sold to foreign Governments. Is it not concerning, Madam Deputy Speaker, at a time when our armed forces need helicopters in Afghanistan and Iraq, that Defence Ministers do not seem to know how many they have sold to foreign Governments?