Skip to main content

Bank Lending

Volume 482: debated on Tuesday 11 November 2008

It is a pleasure to participate in this debate and to do so under your chairmanship, Mr. Martlew. It is the first time that I have served under you, but I have heard highly of how fairly and sympathetically you chair Committees. Hopefully, I will need neither your fairness nor your sympathy.

My objectives in the next quarter of an hour are, first, to demonstrate the culpability of the financial sector in landing us in our present very straitened circumstances; and, secondly, to consider how the sector seems, at this very early date, to be responding to Government measures and to the recession that is just getting under way. I will contend that the way in which the financial sector behaves will affect the length, depth and seriousness of the recession. If the financial sector is positive in partnership with the Government, there is a chance that we will have a short and shallow recession. However, if it is not, and I will contend that there is every sign that it is not acting positively, the great fear is that we will have a deep and long recession, which will adversely affect many people in this country.

I start by making the point that yesterday in the Chamber we had a debate on the economy on an Opposition motion. There was the political opportunity to blame the recession on the Government’s policies and so on. However, any fair person who has looked at the events of the past 12 months, or who has been involved in them, must say that the origin of the current economic problems clearly lies in the finance industry and in the United States.

I am glad to see that I have support in another part of Westminster Hall today.

The fact that there was cheap money enabled money to be pumped into the system and inappropriate lending to take place. My favourite example from America is that of the old lady of 90 who was employed as a cleaner and given a $450,000 mortgage. After two years with that mortgage, she felt that it was time to retire, which I think was a very sensible move, but of course she lost her house because the mortgage was called in. That is probably an extreme example but it is none the less an example of the extent of the laxity and irresponsibility of borrowing, because of the cheap money that was available.

However, the really bad thing that came out of the United States was that the financial sector, not content with extending the market with cheap money, packaged it into different financial instruments. For some reason that, looking back now, no one can understand, those instruments received a triple A rating and the American financial sector was able to sell them throughout the world—a major selling place was the UK—without the buyers taking the trouble to analyse what was in these financial vehicles, because of the triple A rating that had been granted to them. Thus, some of these very doubtful loans were added to—what? No one knew, because they just bought these instruments, as they were covered by a triple A rating. The instruments were very saleable and they made money.

The lack of judgment, the irresponsibility and, some would say, the greed of the financial sector stored up a huge problem. When the sub-prime market fell apart in the United States, the repercussions were felt, but they were really felt because of these financial vehicles. In the UK, what was happening was that the banks and building societies were borrowing short and lending long. They were going to the wholesale markets and borrowing money, lending out on mortgages, and repaying their own loans by borrowing further. Because of the toxicity, or rather the contamination, of these financial instruments, the wholesale market just froze completely and the financial institutions were caught in a very difficult situation. As a result, Northern Rock went under; other financial institutions are merging, and others have been taken over.

After 12 months, we were almost feeling that we could see our way through this problem when the American Government decided not to rescue Lehman Brothers and a fresh tremor went through the financial markets. The situation is now so serious that, to reflect it, I would like to quote the Governor of the Bank of England, from a speech that he made in Leeds:

“An…almost unimaginable sequence of events began…It is difficult to exaggerate the severity and importance of those events. Not since the beginning of the First World War has our banking system been so close to collapse.”

If that was extravagant language from Mervyn King, his deputy, in a casual interview with the Scarborough Evening News, gave that newspaper a lovely scoop that went round all the world. He said:

“This is a once in a lifetime crisis, and possibly the largest financial crisis of its kind in human history. In terms of impact on the real economy we are still in early days.”

Now that comment might be a bit overstated, but it reflects the second worry, which is the impact on the real economy. For 12 months, we hoped that the problems in the financial market would not move across to the real economy, to affect employment, but it is now clear that that is happening.

Does the hon. Gentleman agree that the statement to the Scarborough Evening News is unfortunately all too true, in that, although the Government have acted with determination to rescue our banks, there is now a desperate need to repair those banks? I say that because they are in such a bad shape, in terms of their ability to lend, that it would be good news if the Government could think seriously about taking the bad debts off the balance sheets of the banks and copying what was done successfully in Sweden in 1992. Then, bad debts amounted to 15 per cent. of Sweden’s GDP but by taking those bad debts off the banks’ balance sheets, Sweden was able to come through very difficult times successfully. We now face similar problems, if not worse ones, in this country.

That suggestion was made during the debate on the economy yesterday, and I think that it has some merit. It is interesting that the Paulson rescue launch in the US was initially going to do that, but it did not get through Congress. The Americans have now moved across to the model proposed by our Prime Minister and Chancellor, which has gone round and been accepted.

I am comforted by what the Prime Minister said when he was interviewed with the Chancellor on the day of the rescue. When he was asked, “This is plan A, what is plan B if it does not work?” the Prime Minister simply stated: “Whatever it takes.” If I was in the financial sector and the Prime Minister said that he would do “whatever it takes” to deal with the problems the sector faces, I would be enormously comforted.

I would just like to go back to the Governor of the Bank of England. In the same speech in Leeds, he said:

“The actions that were taken”—

by the Government—

“were not designed to save the banks as such, but to protect the rest of the economy from the banks.”

I hope that every bank’s board of governors reads those words from the Governor of the Bank of England and digests them, because that is the situation that we are in. The banks have been rescued. They will still have problems and may need more help, which they have been promised, but are they prepared to have a positive partnership with the Government in ensuring that the rest of the economy—the real economy—is protected and the recession is abated and kept shallow?

I would just like to race through the reactions to the Government’s rescue package and what has happened since it was announced, because I am not certain that those reactions have been positive. The Government have very sensibly pointed out that they are using £500 billion of taxpayers’ money to bail out the banks that got us all into this mess, and that taxpayers would have something to say about it if that money were handed over without any conditions. The three conditions are very modest. The gist of the first one is that bonuses to boards of directors should end for the period of the recession. The second is that shareholders should forgo their dividends for a suitable period. Given that we are rescuing the whole financial market from collapse, in the words of the Governor of the Bank of England, that is not an extreme condition. The final condition, which is the most important for the real economy, is that lending should carry on at 2007 levels in terms of competitiveness and availability.

The reaction to those conditions has been interesting. Barclays needed about £3.5 billion, but did it go to the UK Government and sign up? It did not. Rather than sign up to those conditions, it went off and sold nearly a third of the bank to two middle east states. That does not strike me—a politician who represents 60,000 people —as showing a positive attitude to the problems of people in the community.

After the 0.5 per cent. co-ordinated rate cut that was put through before the 1.5 per cent. rate cut by the central banks, half of all lenders passed on nothing of that cut, and the majority of the remainder passed on only a percentage. That raises questions about the spirit of the banks’ thanks for being rescued. Then we had the farce of the 1.5 per cent. cut. The Chancellor had to pull the banks into Downing street, feed them breakfast, show them what the papers were saying about them and browbeat them into passing on the cut. I was interested to see, in Sunday’s Observer, that Barclays, which owns Woolwich, has yet to decide whether it will pass on the cut. HSBC, First Direct and a host of smaller, but still large, building societies, including Britannia, Coventry, Yorkshire and Skipton building societies, have also yet to make that decision.

There has been open and public repudiation of the conditions by TSB, which has told all its staff that bonuses will be paid. That is the same bank that, in the week before the 1.5 per cent. cut, prevented customers from moving from making repayments on both interest and capital to having interest-only loans. If one is in trouble, the first suggestion that a sensible bank would make would be to change to an interest-only mortgage, because those payments are cheaper than the repayment option. So, TSB stopped existing customers from switching to interest-only mortgages in those straitened days. Before the 1.5 per cent. cut was pushed through, there was an almost universal withdrawal of tracker funds from the market, but since a few building societies have passed on the 1.5 per cent. cut, public statements of open defiance have been made that the next cut will not be passed on.

There are 4.7 million small businesses in this country, in which 30.5 million people are employed. The Federation of Small Businesses says that one in three small businesses has seen no new credit on the market, that a third have seen an increase in the cost of new credit in the past two months, and that more than 30 per cent. have seen an increase in the cost of existing credit—that is the rub—in the past two months. One in 10 small and medium-sized enterprises has been refused credit in the past two months. As a result, one in three small businesses will reduce employee working hours, cut staff and stop all future hiring if the current credit climate continues. The FSB’s newsletter, which is just out, says that although it

“welcomed the Government’s bail out of the banks, the effects of this are not being felt by small businesses.”

I return to Barclays, which is not my favourite bank. In September, it sent a letter to a firm, which the federation has sent to me. I shall not mention the firm because I have had no contact with it and do not have its permission. The letter states:

“Like many of our customers, you have an overdraft facility with us to help you manage your cashflow. The interest rate margin on your overdraft will be changing from 6.870 per cent. to 10.870 per cent. above Barclays Bank Base Rate.”

So, we are talking about the mythical 14 to 16 per cent. overdraft rate. As if that is not enough, the next sentence in the letter says:

“Please may I reassure you that our commitment to your business hasn’t changed.”

Who says that banks do not have a sense of humour? But it is a sick sense of humour for small businesses that are struggling to stay alive.

Two banks—HSBC and TSB—said that they would pass on the rate cut to small businesses, but when the Financial Times money market survey looked at the rates, there was no indication that the cut had been passed on to small businesses. Does anyone get the impression that the banks have learned any humility after having to be rescued? I have not seen an ounce of humility or sympathy. We have to help people through the recession, but it is clear that the banks are not going to be positive or willing partners, and that raises problems for the Government and the public. The Government have put more than £500 billion of taxpayers’ money into rescuing the financial sector, only to receive the sort of responses that I have described. As a representative of taxpayers, I have to ask the Minister whether he thinks that we are getting a good deal.

I have some questions for the Minister. Given that the bail-out has rescued all the banks and building societies in the industry, as the Governor of the Bank of England has pointed out, is not it sad the deal has been confined only to the three banks that have signed the agreement? Banks that have refused to take the money, such as Barclays, are under no obligation to meet the terms of the agreement. The industry will be protected from a domino effect, and banks such as Barclays will gaily carry on doing business.

Is the money that has been taken being defined as capital only, rather than as loan guarantees or the Bank of England’s special liquidity scheme, which I am sure that all the banks and building societies have participated in at some stage? If they are participating in the other two funds, should not they be caught by the conditions?

As far as mortgages are concerned, repossessions are growing at a sad rate. Is there a mechanism available, or is one being put together, to check that the banks are, in every case, seeking repossession only as a last resort? When will the Government begin their scheme to help those who are unemployed or on benefit, but have a mortgage and are unable to meet it? What will be the trigger point?

The next question will be difficult to answer, but I am sure that given his abilities, the Minister will manage to deal with it with no problem. The one bank that the Government own has the highest number of repossessions of any major bank and the highest standard variable rate. How can we order other banks to do certain things when the one bank that we control and own is behaving in that irresponsible way?

I shall finish by adding some questions that the hon. Member for Twickenham (Dr. Cable) asked in yesterday’s debate, which were not answered. I think that they are pertinent. Particularly in the case of small businesses, are the Government or anybody else monitoring the amount of business lending, and especially checking that it is actually taking place? Are they monitoring on a weekly or monthly basis how much credit is going from each individual bank into the business sector, and do they have any mechanism for telling Parliament what is happening as regards the flow of funds?

I am grateful for this opportunity to speak. I reiterate that the Government deserve to be congratulated on their judgment and political courage in taking steps to put such a huge sum at the disposal of the financial markets. However, to prevent the recession from extending deeper into the real economy, and to prevent people from losing their homes, or losing their jobs and then their homes, the banks need to behave in the spirit of the Government’s requests. I cannot see any sign that they are doing that willingly, and I would welcome answers to my questions.

I welcome the debate and the opportunity to consider bank lending, which is very important at the best of times, but particularly so in the current tougher economic circumstances. My hon. Friend the Member for Leeds, East (Mr. Mudie) is absolutely right that we have seen unprecedented turbulent conditions in the world economy in recent weeks, and that the action that we in the UK have taken has been widely copied by other Governments around the world, who have admired the leadership that the Prime Minister and the Chancellor have provided. They will both be going to Washington to meet the Finance Ministers and heads of national banks of the G20 countries later this week. I was at the meeting last weekend of the same countries’ Finance Ministers and central bank governors in Sao Paulo in Brazil. The crisis is a global problem and international collaboration will be key to resolving it.

Here, the Government have a central responsibility to ensure financial stability so that confidence can return to the financial system on which we all depend. We will focus on providing the right conditions and the right framework to support responsible lending at reasonable prices to creditworthy businesses and individuals. The recapitalisation scheme announced in early October has seen £37 billion of public money announced for investment in preference shares in Lloyds TSB, the Royal Bank of Scotland and Halifax Bank of Scotland.

The banks are certainly not getting a free ride. Public money is being lent on commercial terms and taxpayers will be rewarded for the calculated risks that are being taken with their money. The banks have signed up to specific conditions, including on mortgage lending and loans to small and medium-sized enterprises, such as maintaining for the next there years the availability and active marketing of competitively priced lending to home owners and small businesses at 2007 levels. To pick up on a point that my hon. Friend made at the end of his speech, we are putting in place effective monitoring. UK Financial Investments Ltd, which we are setting up, will oversee the implementation of those conditions. Participating banks, as can be seen in the notices on their websites, have committed to publishing an annual report on their small business and mortgage lending so that there is transparency about how banks are supporting SMEs and home owners.

The effects of the global crisis are being felt here. The cash flow of businesses across the country is being hit, and families are finding it hard to locate affordable mortgages. That is the sharp end of the credit crunch. We are taking steps to direct support to those who need it most. Of course, there are good reasons why banks’ business models have changed over the past year. Lenders face inaccessible and expensive funding and are having to take steps to strengthen their balance sheets.

Unfortunately I will not be able to give way, but I think that the hon. Gentleman and I will be together in a debate tomorrow, so we might be able to touch on some of those points then.

Individual decisions on offering loans, and on the price of those loans, must remain commercial decisions for lenders. It would be a serious error to require banks to take uneconomic decisions against their judgment of risk and cost. I know that my hon. Friend the Member for Leeds, East, will recognise that that would just store up trouble for the future, so we will not do that. However, he is right that banks are at the heart of our economy and that they need to play their part in helping the UK through these difficult times. Recent cuts in interest rates by the Bank of England should have a positive effect on inter-bank lending and on credit markets more generally. As credit conditions ease, the banks should pass savings on to their customers whenever they can. As my hon. Friend rightly reminded the House, the Chancellor met chief executives of major UK banks to make that clear last week, and there have been some welcome announcements since.

We know that ensuring that there is sufficient access to appropriate credit is vital to enabling SMEs to start up, grow and survive as flourishing businesses. By guaranteeing loans to small businesses, we have encouraged lenders to extend the credit that SMEs need to grow. In the year up to March, more than £200m of lending to SMEs was guaranteed, and in this year’s Budget we increased the lending available under the small firms loan guarantee scheme. The total of the outstanding loans to British companies with a turnover of less than £1 million was just over £53 billion in the second quarter of this year, a rise of 12 per cent. on the year before.

This is not just about lenders passing on the cut in the base rate of interest. They fund themselves from a range of sources; some will reflect much of the fall in the base rate, but others will not. For example, deposits from savers and market borrowing are likely to be less affected by the cut.

My hon. Friend is right that repossessions have risen recently. He mentioned Northern Rock, and the reduction in the total size of its mortgage book has contributed to an expected increase in the proportion of the book showing repayment difficulties. In particular, its loan book contains a number of high-loan-to-value “Together” loans, which, as is well established, have a poor repayment record. The company acknowledges that, and I understand that it is investing in its management operations and talking to debt charities to discuss their concerns about its repossessions.

Of course, Northern Rock’s mortgage rates, which my hon. Friend mentioned, reflect a key part of its business plan—to pay back its substantial taxpayer loan. It announced in its quarterly trading statement in the middle of last month that it had reduced the amount of loan outstanding to the Government by £15.4 billion. The outstanding amount was £26.9 billion at the end of December, and it has fallen by £15.4 billion—more than half—to £11.5 billion. In that context, and given the desirability of Northern Rock repaying its loan to the Government and the taxpayer, that explains some of what is happening. Since Northern Rock is in receipt of what European law describes as state aid, it needs to operate with various competitive restrictions while it is in public ownership.

We have taken other steps to support home owners who run into difficulties. My hon. Friend asked about the reform of the support for mortgage interest scheme. I think that I am right in saying that the changes that have been announced will take effect at the beginning of the new financial year. They will help people in the first couple of years, after a shorter period of waiting when they start on benefit. We have issued new guidance to the courts to halt court action on repossessions unless alternative options that help the home owner have been fully examined first. I agree with my hon. Friend that repossession must be the very last resort.