With permission, Mr. Speaker, I should like to make a statement on today’s announcements on bank lending. The House will, I hope, understand that it was necessary to issue a market notice this morning in the usual way.

In the last few months our priorities have been: first, to prevent the collapse of the banking system; secondly, to support the economy; and, thirdly, to ensure that we get lending going again. That problem is also faced by Governments across the world and it is therefore necessary to achieve the maximum degree of international co-operation.

We are taking steps not just to support the banking sector but, importantly, to safeguard the millions of jobs that could be put at risk by the continuing difficulties in the international financial system. Extending the banks’ ability to lend is an essential part of the economic recovery, so today I am proposing further measures to meet two objectives. The first is to begin to replace the lending capacity lost by the withdrawal of foreign banks and other institutions, and the second is to remove the barriers that are preventing UK banks from expanding their lending.

I want to set out the new measures in the context of the strategy we have put in place to steer the country though the worst global economic crisis for generations. Over recent months, banks have faced increasingly difficult conditions, as we have seen everywhere around the world, with the Bank of America rescued last week, with Citigroup—one of the largest banks—broken up, with Anglo Irish nationalised, with Commerzbank rescued in Germany and with RBS today reporting substantial write-offs.

Last October, faced with the potential collapse of the banking system, we recapitalised the banks, strengthening their position. As a result, the Government took temporary stakes in two British banks, but, as I said then, we have a clear view that British banks are best managed and owned commercially and not by the Government. That remains our position. As a result of the action we took, no savers in UK banks have lost money.

In the pre-Budget report, I announced substantial extra help for people and for businesses. Lower income tax, more capital investment now and lower VAT, hand in hand with interest rate cuts and lower inflation, will support the economy and jobs. There is clear international consensus that putting money into the economy now, to counter the recession and to help people, is the right thing to do.

The cost of doing nothing would be substantially greater. In almost every country, fiscal expansion policies have now been agreed—including Germany only last week. In the United States, President-elect Obama has already signalled the scale of the fiscal expansion there, but as the President-elect said only yesterday,

“restoring the economy requires that we maintain the flow of credit to families and businesses.”

In the UK, the total amount of lending available still falls short of meeting the needs of the economy. Over the last 10 years, lending by foreign banks and non-bank institutions accounted for over half of new corporate loans and 45 per cent. of new mortgages here. A significant amount of lending capacity—by those foreign-owned banks and specialist lenders, for example—has been withdrawn or has been returned to their home markets, demonstrating again the need for co-ordinated international action. On top of that, in the last few weeks the world economic downturn has intensified everywhere: the US, the euro area, and now spreading to Asia, including China, which are all seeing weaker production, companies in trouble and fewer jobs.

As we go into what will be a difficult year, dealing with this global financial crisis will need continuous effort. There is no single remedy. There is no instant solution. We will need a range of measures designed to support lending, help businesses and protect jobs. Together, my measures today remove uncertainty and accelerate a resumption of lending—a necessary precondition for recovery both here and around the world.

There are three measures to address the capacity reduction in the banking sector. First, because of current conditions, companies are finding it harder to get loans, so the Government have today authorised the Bank of England to create, for the first time, a new £50 billion fund that will help increase the amount of funding available to companies—by purchasing corporate assets from the banks—enabling them to invest. That will help large companies and complement the substantial measures announced last week by my right hon. and noble Friend the Secretary of State for Business, Enterprise and Regulatory Reform to support small and medium businesses. The fund will buy assets from banks, financial institutions and financial markets, with finance provided by the Treasury. The Treasury is also supporting the fund with an indemnity. It will initially purchase high-quality private sector assets, such as corporate bonds, commercial paper and syndicated loans, which companies use to finance their business.

The assets purchased by the Bank of England will be good-quality investments, which will eventually be sold, so the taxpayers’ interests are protected, and will enable larger companies to get the funding they need at a lower cost. The operating remit of the scheme will be set by the Government, but it will be run on an independent basis by the Bank of England. When purchasing those assets, the Bank of England will ensure that the total amount of money in the economy does not increase. In future, the Monetary Policy Committee will keep under review whether the facility could be used as an additional way of meeting the inflation target, in line with similar operations at the US Federal Reserve. In such circumstances, I will decide the overall scale of the scheme, and I will keep the House informed.

Secondly, to maintain some of the capacity being lost in the mortgage market, I have decided that Northern Rock will no longer pursue a policy of rapidly reducing its mortgage book. In addition, looking at when the housing market recovers, I am considering whether, and if so how, Northern Rock or other UK lenders can best support prudent lending to creditworthy customers who need mortgages but can only afford deposits of less than 25 per cent.

Thirdly, to ensure that RBS, which owns NatWest and a number of other banks, can continue to support lending, I am taking action to strengthen its position. When the Government purchased their stake in the bank in December, a new management team was put in place. The company has announced further losses today, many of which are associated with its investments in the US following its takeover of a Dutch bank, ABN, in 2007, so I have agreed to its request to convert the Government’s stake of preference shares into ordinary shares. The Government could now own up to 70 per cent. of RBS. In return, we have agreed with RBS an extension of lending commitments to large companies, and an increase in lending of £6 billion in the next 12 months.

As well as taking action to maintain lending capacity, I want to remove some of the barriers and uncertainty preventing the existing banks from lending further, but in return for that we intend to negotiate with each bank a lending agreement. Those agreements will be specific, covering both the quantity and type of lending made available to people and businesses across the country, just as we have done with RBS today. These commitments will be binding and externally audited.

In return, the banks will get access to support measures: first, a new scheme under which the Treasury will insure certain bank assets, for a commercial fee, against losses on banks’ existing loans. The purpose of the protection is to allow the expansion of lending, so the pricing has to be fair and reflect all our objectives. The banks’ problems stem from uncertainty about the value of their assets, and faced with that uncertainty, individual banks are reluctant to lend to businesses and companies. This reduces the banks’ exposure to risks and will give them the room that they need to lend more. We will insist on the highest international standards of public disclosure and transparency in the operation of the scheme. Countries all over the world are considering similar proposals, and we will work with them to take action together.

The second step towards removing barriers to lending is an expansion of the funding capacity in the financial markets. The credit guarantee scheme that I announced in October will be extended beyond its current end date of April this year, so that it will run until the end of 2009, subject to state aid approval. That scheme guarantees new unsecured borrowing, and so far over £100 billion of the guarantees have been taken up. These guarantees have been successful in helping to bring down the inter-bank lending rate from 6 to 2.25 per cent. To complement that, the Bank of England will continue to provide similar types of liquidity support when the special liquidity scheme expires at the end of this month.

Until recently, up to half of UK mortgages were funded from the wholesale markets. At the time of the pre-Budget report, I accepted the recommendations in the Crosby report on mortgage finance markets. I have announced that the Government will provide up to £50 billion of guarantees, initially on new mortgage lending and eventually on other assets. Overall, the liabilities taken on will be backed by financial assets, and fees will be charged for guarantees and insurance, which will safeguard the taxpayer’s interest.

Thirdly, the Financial Services Authority has set out today its policy on capital requirements. It has set out the level of capital that individual banks need to keep on their books to allow them to withstand the slow-down and maintain lending. It will be a key signal that banks should allow their capital to be used to absorb the losses from investments, while not unnecessarily restricting their lending. And because the regulation of capital is fundamentally an international matter, tomorrow I will present our plans to European Finance Ministers in Brussels, and I hope that we can agree similar capital policy changes there.

This financial crisis is affecting every country in the world, so it is crucial that other countries, too, take steps to support their banking sectors. We cannot risk a damaging worldwide spiral of weakened confidence and national-only policy solutions. Stronger international collaboration will be strengthened with the arrival of the new US Administration, and we must not give way to financial protectionism, which could be every bit as damaging now as it was to trade in the 1930s. Instead, we must look to the causes of this international financial crisis; we must strengthen the supervisory and regulatory regime both here and internationally. I shall publish proposals on the regulatory framework for the banks in the spring, together with the FSA’s own review.

Internationally, we will be actively pursuing that, as part of our presidency of the G20 throughout 2009. Our objectives in the G20 will be to continue to take action jointly to support the world economy, to act together to restore the flow of credit and to improve the international regulatory regime. This is a continuing effort. Countries all over the world are united in supporting their economies, maintaining lending and protecting jobs. We are ready to do whatever it takes, and I commend this statement to the House.

I begin by thanking the Chancellor for his statement, but he should have been straighter with the British people about the announcements that he is making today. This is not some long-planned, carefully thought-through second phase of Government policy; it is instead the clearest possible admission that the first bail-out of the banks has failed, and now the Government have no option but to attempt a second bail-out—a bail-out whose size we still do not know, whose details remain a mystery and whose ultimate cost to the people of Britain will be known only when this Government have long gone.

Of course we cannot allow the banking system to fail—but for two months now, the Opposition have warned the Government that bank recapitalisation was not working, that the cost of the preference shares was too high, that the liquidity operations had to be extended, that the promised lending to businesses was not taking place, and that Government guarantees to get lending flowing to the real economy were needed.

For almost a year we have argued for countercyclical rules that control bank lending in a boom and encourage it in a bust. Each one of those arguments was dismissed by the Government, and each one is today accepted by them. The Prime Minister has finally been forced to confront the truth: he has not saved the world, he certainly has not saved the economy, and he has not even saved the British banks yet. Let us remember what he promised last autumn. He said at the Dispatch Box that

“the aim of the recapitalisation…is to ensure the flow of money to small businesses and families in our economy.”—[Official Report, 20 October 2008; Vol. 481, c. 30.]

Yet he did nothing to make that happen, and the result has been dozens of companies going bust through lack of credit, and thousands of jobs being lost, while the Prime Minister and the Chancellor wasted their time on a temporary VAT cut that the country could not afford.

The Prime Minister also said at the time of the first bail-out in October:

“We believe that these shares”—

bought by the taxpayer—

“will grow in value over the next period of time”.

Well, perhaps the Chancellor could confirm today that on current market valuations the taxpayer has lost almost £17 billion on those shares. We now discover that the Government really did not have a clue about what they were buying, and they did not bother to find out. They did not appear to know that the Royal Bank of Scotland was preparing to post the largest loss in British corporate history. Indeed, on today’s share price, the entire bank is now worth less than the £5 billion of preference shares that the Chancellor is swapping.

The Prime Minister says in interviews that he is angry with the banks. What about the anger of the taxpayers who trusted him with their money? So when the banks come to the Government and say, “Please can we have some more?” we expect the Prime Minister and the Chancellor to answer the following questions before they say yes. First, will the Government conduct their own full, independent audit, not just of the agreements signed, which the Chancellor mentioned in his statement, but of the balance sheets of the banks, so that we know exactly what we, the taxpayers, are now underwriting?

The Prime Minister called this weekend for the banks to come clean about their losses. Instead of pleading with them, why does he not insist? That is what the Swedish Government did when they pursued the bad bank model in the early 1990s. That is the minimum required if we are to price correctly the insurance that the Government are offering and protect the taxpayer from catastrophic loss. That is the minimum if we are to reassure the public that there is some control over their losses, and that they are not writing a blank cheque.

That brings me to the second question that the Chancellor must answer. How much is the taxpayer in for? What is the potential loss this time? He could not tell us this morning on the radio, even as the Treasury appeared to be briefing people that the amount was £200 billion. What is the correct figure? What is his estimate? Surely that is the very least that Parliament and the public have a right to know. We need to be absolutely sure that the threat of insolvent banks does not turn into the threat of an insolvent country. We need to be clear that our country’s reputation in global markets, and its credit rating, is not put at risk.

Finally, will the Chancellor be straight with people about the announcement today of an asset purchase facility? He mentioned it in his statement, but he did not spell out that it could have implications for the whole country for years to come. That asset purchase facility gives the Bank of England the power to use asset purchases for monetary policy purposes. That amounts to a programme of “quantitative easing”—the modern equivalent of printing money. While no one rules it out, it is the last resort for Governments who have run out of other options. Two weeks ago the Chancellor said in Liverpool that it was “an entirely hypothetical debate”; that was the phrase that he used. Two weeks later, it has become a real option for which the Government are clearly preparing. What has changed in the space of a fortnight?

The first bail-out has failed. The VAT cut has failed. None of the endless summits and initiatives has worked. Unemployment continues to rise. New figures out this morning show that Britain is set to have the deepest recession of any major economy in the world. The Government have achieved nothing. As the Prime Minister and the Chancellor ask the British people to put more of their money on the line, surely the time has come for the Prime Minister and Chancellor to stop blaming everyone else and start accepting their responsibility for the boom that turned to bust. When will they accept that, ultimately, the buck stops with them?

Let me deal with the various points that the hon. Gentleman made. First, let me deal with his point about the bank rescue scheme that we put in place last October. His criticism would have much more strength if, in fact, he had not at the time supported what we were doing. There was cross-party consensus that what we did to recapitalise British banks was the right thing to do, because we faced a situation in which the system, not just here but in different parts of the world, faced collapse. That is why we took action, and why it was followed in just about every other developed country, and the hon. Gentleman supported it at the time—although he subsequently found it convenient to move away from that and take up a different position, as the truce the Opposition promised, with cross-party co-operation, appeared to break down.

Secondly, in relation to the support we have announced today, we have done so, because it is quite obvious not just in this country—and it is happening here—but in other countries across the world that economic conditions have deteriorated over the past few months. That is blindingly obvious to everyone, and it is affecting every country in the world. We are seeing it in America and in the euro area. In Germany we have recently seen the effect in industrial production and growing job losses. Growth in China has dropped quite dramatically in the past few months, which in turn has had an impact on confidence in banks and on their reluctance to lend. That is why I have introduced a range of measures to try to unblock some of the problems that we face, as well as providing greater security.

The hon. Gentleman asked about costs, and in October and again today, I have set out the costs that we anticipate. He should remember that many of the up-front costs are offset to a large extent by the fact that the Bank of England or the Government will take securities, or fees will be charged to protect the taxpayer’s interest. However, the cost of doing nothing would be far, far greater and far, far more damaging for the country as a whole. He rightly said that if the Government are to insure, acting as backstop, some assets, there must be a thorough audit so that we understand exactly the risks to which we are exposed. The reason why I announced today that we would offer that scheme is that it is now necessary for us to enter into discussions with individual banks, to see what we are prepared to insure. At that point, I will be able to come back to the House and explain exactly what the Government are taking on.

However, I must tell the hon. Gentleman again that we are not the only country doing this. Unless we are prepared to use the power of government to get lending going again, the problems will simply be compounded as more and more firms get into difficulties—they cannot get access to credit and so get into difficulty—which feeds back into the effect on the banks.

The hon. Gentleman is right—I agree with him—and I said in my statement that we needed to have a thorough audit, openness and substantially more transparency than we have seen in the banking system over the past few years.

The last thing about which the hon. Gentleman asked was the question of monetary policy and quantitative easing, which I mentioned quite deliberately in my statement, because I wanted to tell the House exactly what we are doing. Under the scheme that we are proposing, there would be no increase in the amount of money going into the economy, because for any additional money that the Bank of England puts in through normal market operations, an equivalent sum will be taken out, so that it will not affect the quantity of money in the economy.

I did say, however, that by having this mechanism it is possible that if, at some point in the future, we wanted to use it for monetary purposes, it could be so used, but that is not what we are doing at the moment. I shall repeat to the House what I said this morning: if that policy changes, I shall tell the House. At the moment, although our interest rates are low at 1.5 per cent., we are not in the same position as they are in America, where interest rates are virtually zero. I have been very up-front: I have said to the House that this is exactly what the position is just now, but if the policy changes, I will tell the House.

I would, however, say in conclusion that I am sorry that the hon. Gentleman and the Conservatives could not maintain cross-party support. I really do think that at this time, when we face such serious economic conditions across the world, that all of us should work together to help get credit going again, to help the wider economy, and to help the people of this country and of countries around the world.

It is clear from the statement today that the crisis in the banking system is even more serious than it appeared three months ago, that the economy is in an even more vicious downward spiral, and that the bank rescue did not work. The Government increasingly resemble somebody who is trying to give the kiss of life to a corpse.

But before we discuss the latest resuscitation techniques, may I go back to the bank rescue that we had? It was a £37 billion recapitalisation: what happened to the £37 billion? Where did it go? The Government tell us that they are putting in place new lending agreements, but when the £37 billion was put in we were told that there was conditionality and that there were lending agreements. What happened to them, and where did the money go? Why was no inventory of bad debts taken at that time?

Is not the truth of the matter that instead of lending the money, as the Government and the Treasury wanted, the banks held it in reserve, as required by the Financial Services Authority? The significance of the FSA’s statement today is that it got it wrong and is now having to change its instruction, which undermined what the Treasury, the Government and the taxpayer were trying to achieve.

On the new £100 billion guarantee scheme, how is it possible to insure enormous amounts of bad debt if the insurer does not know the risk and if the risk cannot be evaluated until we have a valuation of the bad debts, which nobody yet has? Are the Government not operating the scheme in a falling asset market, with potentially enormous losses coming through on commercial property, for example? This morning, one of the brokers in the City estimated that in a falling asset market, the £100 billion insurance scheme could produce losses for the taxpayer of £30 billion to £40 billion. We are talking about an amount the size of the defence budget, which could go down the pan if this is wrongly timed and wrongly operated.

May I get to what I think we all agree is the central issue, which is how we get new lending going to sound commercial and household borrowers? I welcome the change of direction at Northern Rock; it had to happen. But the key is what the Government are doing with NatWest-Royal Bank of Scotland. The Government have increased their share from 58 per cent. to 70 per cent. Is that not nationalisation in all but name? Why do we not just say so, and why do the Government not spell out the implications of acquiring a bank whose balance sheet is bigger than the British economy? Why do they not explain to us, for example, why this bank managed to lose £2.5 billion through lending money to a Russian oligarch? This is not just about the past. I have been corresponding with the chairman about the bank’s loans to another oligarch, Mr. Deripaska. The chairman tells me that it is a commercial matter—but it is not a commercial matter but a public policy issue. Another public policy issue is what happens to the hundreds of billions—not tens of billions—of toxic paper in the investment bank, because the taxpayer now has responsibility for that.

I want to conclude on this point. The Government now effectively control one of the largest banks in the world. They will almost certainly have to put more money in, and they may well acquire other banks. Why do they not now focus on the issue of how to get those banks—those enormous institutions—channelling funds into the British economy, and concentrate on that single-mindedly as their major objective?

I agree with the hon. Gentleman to this extent: the key for us, as for other Governments, is to get lending going into the wider economy. But I disagree with him in that I think that that has to be done not just through one particular bank, but through the banking system in general. The proposals that I have made aim to do that.

The hon. Gentleman asked a number of questions. He asked about the £37 billion. That was used to buy shares in the Lloyds group of banks—Lloyds-HBOS—and also in RBS. We still have those shares, and in time, when conditions improve as we get through this, our intention is to return that back on a commercial basis.

The FSA has made changes to the rules, but it can do only so much; it is also necessary to reform the Basel agreement, which governs the international capital ratios to which the hon. Gentleman referred. He was not the only one calling for that change; many, many people have been doing that.

The hon. Gentleman also asked about the agreements with RBS. The majority shareholding in RBS was acquired by the Government in December, and overall lending by RBS did increase as part of that wider agreement. Indeed, today, in return for converting our preference shares into ordinary shares, RBS has agreed to extend its lending by £6 billion. In relation to the other bank in which we have a shareholding—the Lloyds group—it is only today that that new organisation has come into force because of the procedures that had to be followed through. I agree with the hon. Gentleman and the hon. Member for Tatton (Mr. Osborne) that it is important that we, and indeed banks, are clear about what exactly is on their balance sheets. Clearly, in the case of RBS, the decision to acquire ABN a couple of years ago, with all the problems that have followed from that, caused that bank some very substantial problems.

If we are going to enter into an insurance scheme, or any scheme anything like that, we need to be clear exactly what the exposure is. The hon. Member for Twickenham (Dr. Cable) asked why we do not know today—but he answered that question to some extent himself. That process is difficult when conditions are deteriorating, and it takes time. However, I thought it right to tell the House what the Government’s intentions are in that respect. I agree with him that the key thing is to ensure that we take action to get borrowing going into the economy, but that has to be done through the whole banking system, not just part of it.

I commend the Chancellor for today’s initiatives on top of the £37 billion that the Government gave, which most definitely kept these banks alive, albeit that some are on life support today. Let us be clear that the reason for today’s injection is the lack of openness and honesty by the banks on the amount of bad debts that they have on their books. That amount has had an almost fatal influence on the lack of confidence in the financial sector. If the steps that the Government take today do not free up lending—after all, what are banks for, if they are not there to lend?—can my right hon. Friend assure us that he will protect the taxpayer’s interest, as Sweden did, as the shadow Chancellor said, by taking a 100 per cent. equity stake in the institutions that have failed their shareholders, failed their customers and failed the taxpayers in this country?

I am grateful to my right hon. Friend. He is absolutely right that the Government have to continue to do whatever is necessary to get credit flowing. As I said before, my guess is that there is no single solution, and a range of measures will be necessary. However, it is absolutely imperative because our recovery, and the recovery of economies throughout the world, depends on credit flowing again.

We know that RBS shares are falling like a stone after its announcement today. What concerns many people out there is that the Government took a majority stake in that bank back in December, yet never seemed to know anything about the level of bad debt that it was about to announce less than a month later. How can the Chancellor genuinely reassure the public out there that what he is now proposing, with even more money—billions more—going in, with, it appears, even less knowledge than before, is not good money going after bad?

The Government acquired their shareholding in RBS about five weeks ago. A new management team was put in, and a new chief executive, and one of their jobs was to go through the books and find out what their liabilities were. Until that time we did not have the power to go in and conduct that examination, because it was a privately owned bank; it was not owned by the state. That has been possible only since we got that shareholding and put in the different team. Of course, the reporting requirements of the markets mean that these things are reported to the stock market rather than to the House of Commons. I entirely agree with the right hon. Gentleman that very many people in this country are justifiably angry about what has happened. We need to sort the matter out, and we need to ensure that we can sort out the particular problems in the banks that we own, but above all we need to ensure that we can get credit flowing again.

I thank my right hon. Friend and support his statement today, particularly his clear stand about an obligation on banks to start lending to our citizens and to our companies in the wider economy. In his negotiations with banks, what obligations will he place on them to deal more fairly with borrowers from low-income families? For the past few years, banks have failed abysmally to offer those people proper facilities and resources to bank in an adequate way, leading them sometimes to become the victim of loan sharks. Can he give some indication of what banks will now be expected to do to assist this huge group of people in Britain who are suffering very badly in the current crisis?

My right hon. Friend has a long and distinguished record of putting in place measures to help people on low incomes who have found themselves in the hands of loan sharks. There are two aspects to this issue. One relates to the specific and quantifiable commitments on increasing lending. The other thing that irritates people is the banks’ conduct of business and the way in which they communicate with customers. Many people—I have constituents who have had problems like this—say that they have had a perfectly happy existence with their bank for many years, but then suddenly get a letter saying, “By the way, your facilities have been withdrawn or changed—and here’s a fee.” My right hon. Friend is absolutely right. It is not just a matter of the lending conditions and getting lending going; customers have to be treated fairly. Institutions often fall over themselves to sign people on, but they need to show exactly the same consideration to people who, in some cases, have been customers for many years.

Every sensible business in the United Kingdom and across the world will conduct due diligence before purchasing another organisation, so why did the Government not conduct a sufficient level of due diligence? Will the Chancellor apologise to the British people for losing £17 billion of their money?

If the hon. Gentleman just thinks about it for one moment, he will remember that in October, the banking system and individual banks were facing collapse. I suppose we could have said, “Let’s consider our position. Let’s wait for several weeks or months while we carry out some due diligence and see what happens.” We were in a position last October where we had to act immediately and decisively. I remind the hon. Gentleman that at that time the Conservative party supported us; I appreciate that its position is different now. We had to act decisively, for reasons that most people understand.

I am grateful to the Chancellor for his past courtesy in correspondence and in his offer of meetings. I welcome in today’s announcement the embedding of the principle that there must be a quid pro quo: if guarantees have been given by the taxpayer, transparency and legal obligations are incumbent upon the banks. Will he consider how he might generalise that in his proposals for international reform, for instance, through international monetary exchanges? Market transactions would continue, and they would be balanced by central bank guarantees, but only in return for a greater degree of transparency that would allow some regulation, and a financial contribution from the transacting parties that ultimately could provide reinsurance to replace Government guarantees. Would that not be a better way of internationally combining the market with central Government assistance and guarantees?

My right hon. Friend has indeed been in correspondence with me on this subject. I repeat that I would be very happy to meet him to discuss it further. As I said in that correspondence, the question turns on just how much risk the state should be prepared to take on what might be a long-term basis. A balance has to be struck. In the position that we face, every Government will have to do things that they might have thought unimaginable a couple of years ago. It would be foolish to rule out from the start all sorts of things that might be necessary or possible in the future, but a balance has to be struck between what risks we can reasonably expect institutions to take on and those that the state might take on. I am happy to pursue correspondence with my right hon. Friend or to have a discussion with him, should he wish to do that.

Does the Chancellor not recall, after the first bank bail-out on 13 October, when I specifically asked what due diligence there had been in respect of his £37 billion investment, he replied that “a cautious view” had been taken of the banks’ liabilities. If he was that careless about the £37 billion, what assurance have we got that the next £50 billion is going to be better value for the taxpayer?

As I have just explained to the hon. Member for Windsor (Adam Afriyie), we had to take action very quickly and in a very short period. I think that the hon. Member for Sevenoaks (Mr. Fallon), like most of his colleagues, supported us at that time.

I welcome my right hon. Friend’s statement, but does he accept that this bail-out of Tory bankers will be acceptable to the people of this country only if they can be assured that there will be strict national and international regulation of banking to prevent such a catastrophe from occurring again, and severe constraints on pay and bonuses in all the banks that are receiving public money? If they want public funds, they should be subject to public pay constraints.

As my right hon. Friend knows, the banks in which we have taken shareholdings do have restrictions on the pay of their boards of directors. I agree that there needs to be an overhaul of supervision and regulation, and that rules need to be toughened up to reflect the reality of how banks are now developing in this country and others. I certainly agree that far greater international co-operation, so that some of these problems can be spotted and dealt with far earlier, is even more urgent than it was when we first raised the subject in the international community, about 10 years ago.

As part of his due diligence, has the Chancellor discovered what percentage of Rusal is currently pledged at the Royal Bank of Scotland, and does it cause him any concern?

I would have to write to the hon. Gentleman on that.

When the Chancellor brought forward the £37 billion, it was supported in the House because it was seen not as a bank bail-out but as a way of helping the real economy. The bankers took the money and let the Chancellor down. He is now giving them more money. Can we be assured that we have guarantees this time that we did not have last time, and will he spell them out to the House? We need to know that the guarantees are there, and that the bankers cannot let the Chancellor and the people of this country down again.

The purpose of the recapitalisation in October was mainly to ensure that the banking system was able to function. [Interruption.] I know that that is what it was, because that was precisely why I agreed to it. In return for that, the banks in which we took shareholdings had to agree to maintain their level of lending. RBS, the only bank in which we have had such a shareholding for the past five or six weeks, has increased its lending. It has agreed today, in return for converting the preference shares, to an extra £6 billion of lending. The other group in which we have taken a shareholding, the Lloyds group, is being listed as a single bank for the first time today, so that is when the agreement starts.

My hon. Friend makes a good point about ensuring that we have binding agreements with any bank that uses such facilities, and it is important that we do that. The object is to get money flowing through the economy and providing people with the credit that they need.

The Chancellor said that over the past 10 years, foreign banks had contributed a huge amount of lending for both mortgages and corporate loans. Can he give us any assurance about whether that lending is to be replaced by foreign banks or UK banks?

The hon. Gentleman is right to say that a lot of lending came from foreign banks. Indeed, it came from what his colleague the First Minister of Scotland referred to, until recent times, as “the arc of prosperity”. Unfortunately, the arc of prosperity is not providing the level of funding that it did in the past. Part of my announcement today, implementing the recommendations of the report that I commissioned from James Crosby, is that we will guarantee additional lending for both mortgages and businesses, so that we start to fill that gap. Of course, we will do so completely openly, so that people can see what those guarantees are based on. The problem in the past was that a lot of securitised markets were so opaque that people did not know what was going on, which led to a substantial part of the problems that we all now face.

May I give my right hon. Friend an example of how the banks are treating people who should be some of their more valued customers? A constituent of mine who runs the last medium heavy engineering company in the south Wales valleys was told by Barclays bank just before Christmas that it would be cancelling a temporary overdraft facility, rejecting an application for a Government-guaranteed loan without properly considering it, and cancelling a mortgage offer on the day when it was to be completed. He says:

“All our plans to refund the company have now been scuppered and closure is now imminent.”

Will my right hon. Friend explain how his statement today might help my constituent with his problems?

First, I would be grateful if my right hon. Friend would let me have a copy of that letter. It is precisely because we are concerned about the way in which some banks are dealing with their customers that we have put in place arrangements to deal with those individual cases to try to resolve them, and it would be useful to have that information. On the general point, I have made it clear that if any bank in this country chooses to take advantage of the schemes that I have announced today, terms and conditions will attach to them. Without seeing the letter and the precise problems facing her constituent, I cannot answer the question in more detail, although I would be happy to do so and to write to her.

The situation is obviously vastly worse than the Chancellor or anyone else thought a few months ago. In the pre-Budget report less than two months ago, his forecast was based on the economy recovering in the second half of this year, and the maximum fall in gross domestic product being 1 per cent. On that basis, he forecast a Government borrowing requirement of 8 per cent. of GDP. Surely, those assumptions are now totally implausible. Would he care to revise them, and how bad does he think Government borrowing will be in 2009-10?

As I said to the House earlier, there is no doubt that conditions across the world have deteriorated sharply over the past few months. As the hon. Gentleman knows, the Government will next publish their forecast at the time of the Budget.

The Government are right to place the emphasis on jobs, people, employment and business. As my right hon. Friend is speaking to European Union Finance Ministers tomorrow, may I remind him that European Union Governments have put €180 billion into their banking sector?

Building on the question asked by my right hon. Friend the Member for Makerfield (Mr. McCartney), will not the first edict of President Obama be that banks should continue to lend to their customers during the recession, in addition to putting in $800 billion? Is not the problem a global downturn, and can the Chancellor resist the Opposition’s siren calls to stop the world, because they want to get off?

My hon. Friend is right that President-elect Obama has made it very clear that he wants a substantial stimulus to the American economy, and that that is one of the first things he will do when he is sworn in as President tomorrow. In addition, he has made it clear that the American Government need to take action on credit—[Interruption.] Opposition Members say from a sedentary position, “We know.” They know, but they are the only people in the world who are not prepared to do anything about it.

Does the Chancellor remember telling us in his Budget in March 2008 that the United Kingdom was in a better position than other countries to withstand the global difficulties, and does he remember that in October he told us, with much preening, that he had saved the situation? If the current blank cheque does not work, when will we move to the inevitable phase 3—the more careful analysis, appraisal and isolation of toxic assets, and the use of public money to support only sound banks?

In relation to the hon. Gentleman’s point about banks, it is important that we understand the nature of the exposure of the banks themselves, as well as any banks with which we enter into agreements on insurance, so that we understand the risks. I made the point earlier that I am afraid that it is necessary for the Government to take action. The action that Governments take may vary in approach. Some favour the “good bank, bad bank” approach, and others are considering insurance, but whatever happens, the position now—none of us wants to be in it—is that the world and countries depend on the banking system working efficiently, so we must carry out that investigation.

This is clearly a severe global crisis, and the Chancellor is right to safeguard our financial institutions, but although I want companies of all sizes to be supported in terms of credit, I am sure that he understands that major sectors such as steel also need their share of attention. I take it from what he said today that they will have access to the credit that they need, because they are the bedrock of our manufacturing.

Companies such as Corus have subsidiaries in France and Holland. Can my right hon. Friend assure me that measures that we put in place in this country will be comparable to those in the EU, and that work forces in companies such as Corus will not be disadvantaged?

I can well understand my right hon. Friend’s concern about the steel industry, which he has raised with me before. It is important that we have help available to the larger companies, and the Bank of England scheme that I announced this morning will do that. I also agree with him that it is important that we act together with other countries, because the effect of us all acting together will be so much greater than if countries act individually.

The Chancellor has many times told the House that the crisis that arose last October was the reason that he invested taxpayers’ money, to the tune of £37 billion, in the banks. Have we learned the lesson? I have studied the views of many people, including expert economists and those from the City and in finance. They warned that what was happening in this country—excessive, irresponsible lending and borrowing—could not go on. Why did the Government not act sooner? Coming from a smaller business background, I certainly would have.

First, in relation to the recapitalisation of the banks, there are not that many people around who would argue that we were wrong to take the action that we did. We had to do it, and we had to do it pretty quickly, because we were facing a pretty dire situation. The hon. Gentleman raises a far broader point, however, which is that over a number of years we have seen massive credit flows going from the developing countries to developed countries, particularly the United States. Many people commented on those imbalances and wrote about them, but unfortunately the world’s international financial institutions were not, I think, up to the task of ensuring that we did something about them. The hon. Gentleman is absolutely right: that is an area that needs considerable strengthening, and it is precisely one of the areas that we will be pursuing through our presidency of the G20—the largest group of developed countries—at a meeting that we will have in London in April.

Does not the Chancellor share my anger at the banks’ failure to declare the true extent of their toxic assets? We seem to have to drag the banks, kicking and screaming, to declare them. Until we have a clear understanding of the extent of the toxic assets, we will not get the recapitalisations of the banks or any private investment to achieve that.

As I have said, it is important that we understand the extent of the problem. I would say to my hon. Friend, however, that when there is a downturn, there will inevitably be cases in which what might have been a perfectly good loan or investment last year will, because the economic circumstances are changing, turn out to be not such a good investment, and therefore a bad asset. We are in a position where things are changing fairly rapidly, but one of the things that will help restore confidence—we have been saying this for some time now—is that once people believe that they know the full extent of the losses, they will become more confident in dealing with each other.

Can the Chancellor say whether he thinks that the changed terms of engagement with Northern Rock will enable it to review its lending interest rates? Northern Rock’s standard variable rate is currently more than 5 per cent., against an industry average of 3.5 per cent. Does he share my concern that, with many people in negative equity, the prospects of finding a better deal elsewhere are nil? Such people rely entirely on their lender treating them fairly; this relates to the conversation about treating customers fairly that we had back in October. This issue is critical, so I rather hope that the Government will now insist that the Financial Services Authority use its regulatory powers to make bankers and lenders treat customers fairly, because some of them are not doing so.

I agree that all customers ought to be treated fairly. I think I am right in saying that Northern Rock announced recently that it would reduce its rates following the reduction of the Bank of England’s rates. [Interruption.] The hon. Member for Runnymede and Weybridge (Mr. Hammond) comments from a sedentary position. It was the case that Northern Rock was not reducing rates as much before then, but it did announce a change of policy, I think at the time of the last rate cut.

In general terms, when Northern Rock was the only bank that people were particularly concerned about, because of the difficulties that it had got into, it was right that it should reduce its exposure and repay the substantial sums that the Government had lent it, through the Bank of England, of course. Northern Rock has been reducing those sums and is ahead of its repayment schedule. However, given everything that I have said about capacity, it is now time to look at that policy again, because it does not make any sense to take people off the books of Northern Rock. In some cases they find it acutely difficult to find somewhere else. I therefore agree with the hon. Member for Ryedale (Mr. Greenway) on that point.

Since my right hon. Friend’s first attempts to restore lending did not wholly succeed, and since there can be no guarantee that this latest scheme will succeed, either because some of the big banks decline to participate or because the pricing of the insurance might turn out to be wrong, why, when we all agree that restoring lending is absolutely critical to the fate of the whole economy, will he not use the one device that is guaranteed to restore lending? Why will he not temporarily—I repeat, temporarily—bring the banks into public control?

My right hon. Friend has long held that view. His use of the word “temporarily” is actually a more recent amendment. I made it clear in my statement that the Government believe that the banks ought to be in the commercial sector, and that remains our position.

Bearing in mind my right hon. Friend’s statement that

“we will insist on the highest international standards of public disclosure and transparency in the operation of the scheme”,

will he make a clear commitment to the customers of our high street banks? Despite statements by the banks that they would maintain lending, many of their customers have discovered that that commitment has not been honoured. Will he ensure that any bank that takes part in the guarantee system, or in any equity arrangements, will have to inform customers of the arrangements that it has agreed with the Government, so that businesses up and down the country can compare their experience with the commitment that has been given?

As I have said, if banks take advantage of the facilities that I have outlined today, they will have to enter into specific, legally binding agreements, and people will be entitled to see those agreements. The agreements that have been reached so far attach only to the RBS group, because the Lloyds group came into existence only today. The RBS and other banks have increased lending, although it is becoming very obvious that, when we start to break down the figures, the picture can be very different in different sectors and different parts of the country. That is what we need to sort out.

Out of the colossal £2,000 billion that the RBS has at risk, only one pound in seven is being lent to British people and companies. Will the guarantee scheme apply to foreign loans, to derivatives and to other assets, or will it be ring-fenced to UK loans?

We would have to look at the loans that a bank had as a whole. We are trying to ensure that banks do not have to make so much provision that they would have to do so without the guarantee, and if we excluded assets that were not in this country, the scheme might not be as effective as it might otherwise be. It is important that we understand what is being insured, and that is the difficulty that banks all over the world are facing, because there has sometimes been a lot less clarity on that than we would have hoped.

I refer to the question asked by my right hon. Friend the Member for Oldham, West and Royton (Mr. Meacher). A lot of my constituents cannot understand why, when the banks have made a right mess of things, and the building societies, credit unions and mutuals have not, the Government still hold the

“clear view that British banks are best managed and owned commercially and not by the Government.”

My right hon. Friend the Chancellor has just said that in his statement, but it seems rather counter-intuitive, given the mess that we are in today.

The Government do not actually own the building societies, which my hon. Friend is praising, either. In the long tern, the banks are better left in the commercial sector. Of course the Government have a regulatory duty and a duty to ensure that a proper supervisory regime is in place, but in the long term, in normal times, I do not think that they ought to be running banks.

The Chancellor has given an undertaking that he would come back to the House if he were to change the policy to allow the Bank of England to use the new system to increase the amount of money in the economy, but can he set out today what criteria he would use to make that judgment?

What I said was that if the Government’s policy were to change in the light of further interest rate falls, I would come back to the House and set out our position at that time. As I said the other day, that is rather hypothetical at the moment.

While I welcome what my right hon. Friend is attempting to achieve today, many small businesses are finding it extremely difficult to obtain credit when banks are refusing it or taking too long to make decisions over requests from businesses, particularly in my constituency. When my right hon. Friend next discusses these issues with the banks, I urge him to investigate exactly what arrangements they are putting in place to liaise with small businesses, to understand what such businesses need and to make speedier decisions to allow them either to keep their staff or avoid going under completely?

I agree with my hon. Friend, which is why our right hon. Friend the Secretary of State for Business, Enterprise and Regulatory Reform has set up a lenders’ group to work with organisations representing small businesses and try to work their way through these problems. My hon. Friend is absolutely right to raise these issues, as many small businesses have encountered difficulties. The object of that particular group is to try to get to the bottom of those problems and to try to resolve them.

Following on from that question, the Chancellor has indicated the vital importance of getting lending out into the real world, notably to small businesses. Surely this is an opportunity, considering how grievously they are all suffering, for the Chancellor to indicate that he will not proceed to increase taxation, as planned, on small businesses in this country.

The Government have taken a number of measures to help small businesses and they will continue to do so; such businesses are a very important part of our economy.

With permission, Mr. Speaker, I would like to make a further statement to the House on Gaza.

From the outset of the conflict, the UK has called and worked for an immediate ceasefire. I know from questions on my statement last week that the whole House will have felt enormous relief on Saturday night when Israel halted its military operations in Gaza, and on Sunday when Hamas stopped its rocket fire. Our relief at the ceasefire is matched by our distress that it has taken so long to be achieved. The respite has come too late for too many.

A ceasefire, as Security Council resolution 1860 made clear, was always going to be the essential first step. We urge Israel to complete the withdrawal of its troops from Gaza with all due speed. Hamas must put a definitive end to rocket fire at Israel. That is why the Prime Minister travelled to Sharm-el-Sheikh and Israel yesterday to join other world leaders in starting to embed that ceasefire and ensure it becomes the durable and fully respected ceasefire that we and the Security Council have called for.

In the last 22 days of the Israeli offensive, more than 1,200 Palestinians have been killed, many more injured, countless thousands displaced and critical infrastructure destroyed. We are yet to know the full extent of the destruction, but horrific accounts and images already fill our news bulletins and we can be sure that life for Gazans, which was already grim, has become desperate. Systems for power, sewage and food distribution are broken or under strain. Meanwhile rockets have reached further than ever from Gaza into Israel. Israel has lost nine soldiers and four civilians.

The Gaza crisis has reverberated around the world. There have been large demonstrations in the middle east, but also in the west. The conflict has also been used to whip up hatred, including in this country, and I am sure the whole House will want to send a very clear and cross-party message that we all denounce the anti-Semitic attacks that have taken place and vow to work for their elimination.

We are faced with two immediate challenges: stopping the flow of arms and starting the flow of aid into Gaza. In respect of trafficking in arms, as the Prime Minister announced yesterday, we are ready to play our part. The immediate security responsibility lies with Egypt, but the origin of these arms stretches way beyond the Egypt-Gaza border. This is where international help, aimed at interdiction, using intelligence and a range of military assets, is important.

It is not just arms that are smuggled, however. The closure of the crossings has also created a thriving illegal trade in necessities, which has filled Hamas’s coffers without providing Gazans the basics that they require. Hand in hand with closing illegal traffic must go a vast increase in legal traffic. The immediate priority is to meet the desperate humanitarian needs. That means not simply food and medicine but, for example, sanitation equipment. Then there are all the supplies that are required to repair Gaza’s ruined infrastructure and to return power and water. The Government have pledged a further £20 million, on top of the £6.8 million that we pledged earlier in the conflict. British charities have raised millions more.

The Prime Minister made it clear in Egypt and in Israel that reopening the crossings would be vital. The 2005 movement and access agreement between Israel and the Palestinian Authority should provide the framework. We are ready to help, including by reinstating and, if necessary, extending the EU border assistance mission at the Rafah crossing.

Smuggling and the crossings will be at the heart of the discussions this Wednesday evening, when all 27 EU Foreign Ministers meet Foreign Minister Livni, and on Sunday evening, when we meet our Palestinian, Egyptian, Jordanian and Turkish counterparts. However, the critical actors alongside Israel in securing progress, never mind peace, are the Palestinians themselves. Full humanitarian reconstruction will be impossible unless accompanied by political reconstruction. Unity in Palestinian politics is vital to so many things—to rebuilding Gaza, to holding elections, to delivering peace. It is for President Abbas to lead that process. The Arab League and Egyptian commitments of last November point the way forward.

At a time of enormous loss for Palestinians, one thing should not be forgotten. Palestinians on the west bank did not respond to Hamas’s calls for a third intifada. In fact, the Government of Prime Minister Fayyad on the west bank showed clearly in their management—political, economic and security management—that given half a chance, Palestinian government can be hugely effective and provide a real partner for peace.

At the UN and in the House last week, I said that the Gaza crisis was a symptom of political failure. To avoid its repetition we need a political process—a strong one. The Arab League showed in its letter to President-elect Obama in December that it was serious about its ground-breaking offer of peace embodied in the Arab peace initiative: the creation of a Palestinian state in return for Arab normalisation of relations with Israel, a genuine 23-state solution.

The challenge is to ensure that this Gaza crisis does not simply provide another grim milestone in an endless conflict. As we help Gazans to rebuild their lives, we must find a way to ensure that this is the last time they will have to do so. That means showing serious progress towards a Palestinian state alongside improved Israeli security. It means a peace process in which closed-door negotiations are buttressed by Israel and the Arab world taking steps to support rather than undermine the peace process.

However, anyone who doubts that peace in the middle east requires the full, intense engagement of the international community needs only to look at the streets of Gaza today. International engagement that is full and intense includes the immediate engagement of the new American President and Administration. President-elect Obama and his Secretary of State-designate Hillary Clinton have made it clear that they understand the urgency and are committed to acting. This will certainly be the first topic raised when I speak to the new Secretary of State this week.

Palestinians and Israelis will be asking themselves today whether they are fated to permanent conflict. I know that I will have the support of the whole House in doing everything possible to avert that future.

I thank the Foreign Secretary for his statement. Of course, in common with him, we welcome the ceasefire that took effect at the weekend and the withdrawal of Israeli defence forces from Gaza. I join him immediately in sending the united message from the House to which he referred: whatever the very strong debates about this conflict, they must never be the excuse for anti-Semitism or any other kind of hatred. I also join him immediately in the tribute that he paid to the Administration of Prime Minister Salam Fayyad on the west bank, whose conduct is in such stark contrast to that of the Hamas leaders in Gaza.

Although there is no doubt that the immediate trigger for this crisis was the barrage of rocket attacks against Israel from Hamas, I know that the Foreign Secretary will agree with us that it was very much in Israel’s own interests to bring the conflict to an end. While it is alleged that Hamas may often have used civilians as human shields and fired rockets from civilian areas, it is also clear that the civilian toll in Gaza and the number of attacks on United Nations-run schools and compounds, which have yet to be explained, have caused damage to the reputation of Israel in the wider world. The Foreign Secretary did not tell us in his statement—I hope he will do so now—whether the Government believe that these incidents should be investigated, by whom they think they should be investigated, and whether the issue was discussed at the summit in Sharm-el-Sheikh at the weekend.

There are three issues on which I want to ask the Foreign Secretary a few quick questions: how we can bolster what is currently a fragile ceasefire, how to ensure a quick and effective aid supply to the people of Gaza, and how to ensure an early return to the middle east peace process. On the bolstering of the ceasefire, can the Foreign Secretary be a little more specific? There is the Israel-US agreement on preventing arms smuggling, and it is reported that under that agreement the United States will act to block the transfer of rockets from Iran to Sinai and the Gaza strip via the sea and through east Africa. Can the right hon. Gentleman confirm reports that Israel has approached European states, including Britain, to reach similar agreements? As part of the ceasefire agreement, the Prime Minister has offered Royal Navy support. Can the Foreign Secretary say what form that will take, and what impact it will have on the many competing priorities of the Royal Navy at a time of serious overstretch? Can he also say who will lead this mission? Will it be NATO, the EU or a coalition of the willing, and what will be the legal mandate for the mission?

My second few questions for the Foreign Secretary are about the imperative of getting aid to the people of Gaza. We welcome the announcement of his right hon. Friend the Secretary of State for International Development that Britain will be making available an additional £20 million in humanitarian aid. Does the Foreign Secretary believe that the scale of the relief effort overall is likely to be sufficient, and will sufficient technical assistance be available quickly in Gaza to restore the basic infrastructure and prevent the spread of disease, which is always a great worry in these situations? Given the obvious need to open the crossings if aid and assistance is to enter Gaza on the scale needed, can he confirm that the Israeli Government have indicated that the crossings are starting to open from today? What role will be played by the Palestinian Authority at those crossings, and what will happen to the Hamas representatives who are on the ground there? Are there any plans for a broader international monitoring mission to be put in place? Can the Foreign Secretary therefore say precisely what role the EU proposes to assume on Gaza’s crossings, and how close we are to an agreement on how this will operate?

Thirdly and finally, the House is obviously united in agreeing that an early return to the middle east peace process is vital. We all want to see this as a top priority for the incoming US Administration right from tomorrow. When the Foreign Secretary speaks, as he said he would do this week, to the incoming Secretary of State, will he make the point that it is vital in that process that the following three things now happen: international pressure and attention to encourage Israelis and Palestinians to make the compromises necessary to achieve long-term peace, including over settlements on the west bank; continuous, albeit cautious, dialogue with Syria; and, on Iran, the stepping up of European pressure against her nuclear programme to buttress any new approaches on this issue by the United States? Is it not the case that we need all those three things to happen together in order to set the region on a path to long-term peace and stability—a vital objective for this Government, and so many other Governments, in the months ahead?

I will go through the three sets of specific questions that the right hon. Gentleman raised. Before raising them, however, he referred to the investigation of serious allegations of war crimes and other misdemeanours, and he will know that I said very clearly in my statement last week that those allegations must be closely and speedily investigated. Obviously, the three key parties to that investigation are the United Nations, the International Committee of the Red Cross and the Government of Israel, and we are in touch with all of them. I should also point out that however heinous is the crime of using people as “human shields”—a terrible phrase—that does not change the responsibilities of parties to the conflict to spare the lives of civilians; it is important not to forget that.

In respect of the ceasefire, we will hear more from the Israeli Foreign Minister on Wednesday. I spoke to her on Friday, and we will have to wait and see where the Israelis’ thinking has got to on the smuggling issue and the suggestion of further memorandums of understanding. Obviously, we want to make sure that we make a practical difference in respect of the smuggling, which is in part a local issue across the Egypt-Gaza border, but which is also a wider one given the regional and even global flows of arms that take place.

There are three limits on how much detail I can provide. First, by definition, since the people trying to do the smuggling are acting illicitly, there are natural limits on how much we will ever be able to reveal. Secondly, discussions are under way about the precise combination of different countries and different assets that will be deployed. Thirdly, the legal mandate also needs to be worked through. What was significant about the meeting in Sharm-el-Sheikh yesterday, and the one in Israel, was the commitment of the international community to making a difference on that issue. That is definitely a step change.

On the humanitarian situation, it is very important to distinguish between immediate relief—the matter of life and death, in some cases, in respect of medical supplies now—and the reconstruction that will have to take place in due course. The right hon. Gentleman asked whether I was confident that there was enough; one can never be confident that there is enough, not least in circumstances such as these. Although I understand that the number of lorries going through the crossings has increased over the past day or two—I hoped to have the exact figure when I came to the House, but it had not arrived by the time I left for here—it would be foolish to say that I was confident that the organisation and the amount will meet the need. That is because the need is huge and, as was pointed out last week, given that journalists have not been to the area, the extent of the need is only now being sketched out. A joint EU-UN mission—a so-called “needs assessment mission”—will go in precisely to get to the bottom of the extent of the need. I think that to pronounce confidence now would be complacent.

On the role of the European border assistance mission, the 2005 agreement provides the basis for it and the personnel are in place and waiting, but, of course, very difficult political issues are associated with it. It was an agreement between the Palestinian Authority and the Israeli Government, and both insist that they should be the partners of the EU force at any crossings. There are seven crossings in total—one of them into Egypt—and we need to ensure that the management arrangements are appropriate for all of them.

Finally, on the wider comprehensive peace that is sought, one of the casualties of this crisis has, of course, been the Israel-Syria talks, which were broken off at its beginning. The comprehensive peace to which we are committed, as I believe are the right hon. Gentleman and his party, does indeed require compromises, but it also requires a process. That process will have to be akin more to the Madrid process of the early 1990s than to the Annapolis process of the past year—the key difference being the breadth of the Madrid process compared with the relatively narrow focus of the Annapolis process, however worthy and important it has been.

rose—

Order. Many hon. Members are hoping to catch my eye. May I ask that single questions be put as briefly as possible, so that more hon. Members may be able to contribute to the debate on this important statement?

Unilateralism is not enough. Does the Foreign Secretary agree that however welcome these temporary ceasefires, they do not necessarily mean that there will be a long-term solution? Will he urgently discuss with his colleagues in the Security Council the implications of the rejection of its resolution 1860 by both Israel and Hamas 10 days ago? Will he try to ensure that if we do get a longer-term ceasefire, it is on a permanent basis? Does he not think that it is necessary to engage with Hamas to secure that?

Order. I have made a request for short questions to the Foreign Secretary.

I admire my hon. Friend’s ingenuity in asking those questions. Of course, he is right to say that the focus must be on making a permanent peace. That is certainly what we are focused on, in terms of not only the immediate issues relating to what remains a dangerously fragile ceasefire, but the longer-term issues. We are, of course, in touch with all our Security Council counterparts; a discussion took place last week and there will doubtless be further discussions in future. We will have to think through precisely the sort of discussion that he describes, given that our immediate focus is on the situation on the ground, but I hear what he has had to say.

Does the Foreign Secretary share my concern that Hamas, unlike the Israelis, has committed itself only to a six-day ceasefire and has refused to contemplate a permanent ceasefire? Does he agree that if the Hamas group resumes hostilities unilaterally, it will not only show its indifference to the welfare of the Palestinians, but bear the prime responsibility for any further hostilities that follow such an action?

As I said in my statement, we want Hamas to put a definitive end to its rocket attacks, and a six-day ceasefire does not constitute the definitive end that we seek. It is vital that over the next few days those with influence on Hamas should explain the gravity of the situation facing the Palestinian people and put humanitarian need before internal political divisions. In that context, I spoke to the Syrian Foreign Minister yesterday and expressed the very strong view that I hoped that he would use his influence to ensure that Hamas understood its responsibilities.

I thank the Foreign Secretary for his statement and totally agree with him that the two key priorities for the next few days must be consolidating the ceasefire and ensuring that the urgent humanitarian aid gets through to all those who need it. May I also immediately agree with him and the Conservative spokesman that we must all fight anti-Semitism wherever it raises its ugly head?

On the ceasefire, will the Foreign Secretary answer in more detail the questions put to him by the right hon. Member for Richmond, Yorks (Mr. Hague) about the Prime Minister’s proposals for a Royal Navy deployment to help to stop some of the smuggling? What would be the exact terms of such a British naval deployment, not least any terms of engagement? Will he confirm whether he and his fellow Foreign Ministers made it clear to both sides that they would both be expected to implement rapidly the well-known conditions needed for a sustainable ceasefire, whether those conditions were the end of rocket attacks or the opening of the crossings into Gaza?

On humanitarian assistance, will the Foreign Secretary confirm that there is no prohibition on the UN or non-governmental organisations distributing British-funded aid via the Hamas authorities when that is simply the most effective and quickest way of getting aid to stricken people?

On the question of longer-term support for reconstruction, will the Foreign Secretary ensure that the EU and the British Government remain pragmatic and flexible in how we get the best value for money and the quickest results for Gazans? Will he accept that whether we like it or not, urgent reconstruction will require a level of engagement with Hamas that the international community has not previously managed? There is talk of a $2 billion Arab programme for reconstruction in Gaza, but will he ensure that the EU formally requests the Israeli Government to make significant contributions, too?

As the world reflects on the past few weeks, will the Foreign Secretary give more details on the timing of the investigations into any breaches of international law by either side that the UN or others might want to pursue? May I also return to the reassurances that he gave me last Monday, when he said that no British-made weapons or weapons components were used by the Israeli defence forces in their operations against Gaza? In general, will he commit to provide to the House as soon as possible a full report of the evidence used by the Government to monitor compliance with the Government’s policies in relation to arms export licences granted for arms sales to Israel? In particular, will he confirm for the record that the Israeli-owned British company UAV Engines did not supply any parts for any of the Israeli drones used?

Perhaps the most ominous words today come from King Abdullah of Saudi Arabia, who said that the Arab peace initiative will not be on the table for ever. Does the Foreign Secretary agree that that is the clearest diplomatic signal yet of the grave damage that the conflict has brought on Israel’s own long-term interests for peace? Does he agree that such views mean that everyone must now redouble their efforts for a lasting peace in the middle east?

Of course, the hon. Gentleman is right that both the crossings and the rocket attacks need to be addressed. That was certainly at the heart of my statement, and it is at the heart of the work the Prime Minister and I are doing. The hon. Gentleman will know that the redistribution of aid is done through the United Nations Relief and Works Agency, which has a record of putting the needs of the people whom it serves first. We support wholly the way in which it has gone about its work.

The hon. Gentleman talked about engagement with Hamas and it is important to repeat what I said last Monday: the Arab League has nominated Egypt as the interlocutor for the Arab League and has requested that it be the interlocutor for the world community in engaging with Hamas. At the moment, that engagement is about the ceasefire—and rightly so, because the ceasefire must be kept in place. That is the right way forward. Others are talking to Hamas, but in this case it is right that we should follow the lead of the Arab League.

In respect of the timing of the investigations, they must take place as soon as possible. People are finally able to get back into Gaza and it is evident that there needs to be a proper investigation. Delay in such matters has obvious dangers.

In respect of arms, the hon. Gentleman did not quote accurately what I said last week, but I am happy to repeat that it is not yet completely clear what equipment has been used. However, as with all conflicts, we will take into account the recent conflict and the conduct and methods of the Israeli defence force in that conflict in the assessment of future export licences. To put it on record again, as I did last week, the policy is absolutely clear: where there is a clear risk of shipments of exports being used either for internal repression or for external aggression the export licence is not granted. That remains exactly the position.

The hon. Gentleman asked for a report on whether the so-called consolidated criteria on arms exports—the EU and national criteria that have been brought in over the last 10 years—are being adhered to. I can offer him not just a Government report; in a recent case the High Court ruled that the Government were implementing the consolidated criteria in full and without any of the dangers or breaches that had been alleged. It found our application of the consolidated criteria correct in all particulars.

Will the Foreign Secretary ensure that investigations take place immediately into the use of illegal weapons by Israel, with reports of re-bombing of places that it has already bombed with white phosphorus to try to destroy the evidence, and that all evidence will be collected, collated and put before the International Criminal Court so that these war crimes can be properly investigated and the perpetrators, be they Ministers or not, brought to justice?

My hon. Friend raises an important point. He will know that there are detailed applications of the law on conventional weapons in respect of white phosphorus and it is important that they are followed absolutely and clearly. Certainly, the practice in respect of avoiding its use on populations is very clear and needs to be followed.

Who does the Foreign Secretary expect to pay for the reconstruction of the non-military targets that were either destroyed or severely damaged in the recent bombardment, and does he expect the Government of Israel to make a contribution towards those costs?

In a way, it is good that the financing arrangements have not been the centrepiece of the focus of commitments on reconstruction and that what have been absolutely clear are the commitments to reconstruction themselves. I hope that the whole international community will make a contribution.

In welcoming the increased aid from the UK to Gaza, may I ask my right hon. Friend to clarify the logic whereby we can send the Royal Navy to enforce an arms ban on Hamas while continuing to sell arms to Israel, after a conflict in which 1,200 Palestinians were slaughtered and four Israelis were killed by Hamas rockets? That is an exchange rate of one Israeli life for 300 Palestinian lives.

It is not least because of those statistics that we have said from the beginning that the response was disproportionate, but that is no comfort to the people at the receiving end. In respect of the logic for which my right hon. Friend asked, the best thing is to repeat that our arms exports criteria remain some of the toughest in the world. They are explicit in saying that where there is a clear risk—not a certainty but a clear risk—that any components would be used for internal repression or external aggression the export does not take place. Given my right hon. Friend’s record in tackling the illicit flow of arms around the world, he will see that there is logic and good sense in trying to do everything possible to interdict the arms upstream so that they do not become either a source of insecurity for Israel or a reason for Israeli attacks on Gaza.

Getting fresh water into Gaza and dealing with the sewage problems must be a priority, and should be considered as one. When the Foreign Secretary is discussing access to Gaza with his counterparts in Israel, will he not neglect Israel’s blockade of Gaza by sea and does he think that it could be lifted at some point? Although he is absolutely right in saying that UNRWA will lead on the emergency services needed in Gaza, it will not necessarily lead on reconstruction, so given the British Government’s recent experience in both Afghanistan and Iraq, will he state today that Britain will take the lead and convene a conference in London to plan the long-term reconstruction of Gaza?

We certainly want to play a leading role in the reconstruction effort, and the presence of the Department for International Development Minister today in Israel is testimony to that. Of course, in respect of the sea, there are two clear issues: one is how aid comes in; the other is the interdiction of the arms that are going there. The truth is that the main supply of humanitarian aid must be through the crossings, and it can be massively increased, given the blockage that has been in place for quite a long time.

On the UK’s contribution to the sea-based interdiction, the Prime Minister’s offer on the role for the Royal Navy has been widely welcomed. The hon. Member for Kingston and Surbiton (Mr. Davey) asked me for exact details on how that would work. I am not in a position to provide those exact details, because that depends on what contribution other countries make, but we certainly want to ensure that the Royal Navy’s expertise is properly used. Its value is being shown around the world at the moment, and I assure hon. Members that we will ensure that the appropriate contribution of the Royal Navy is used to best effect.

I welcome my right hon. Friend’s efforts to achieve a ceasefire, and I hope that he will put equal effort into reopening the crossings and lifting the blockade if the ceasefire is to last. Although specific allegations of war crimes must be investigated, does he not agree with the thousands of people who have marched or written to newspapers that Israel’s conduct of the war has been not only excessive and disproportionate but inhumane, both in scale and method, and an abuse of human rights?

My hon. Friend knows that some very deep legal questions are engaged in the phrases that he has used. In that context, it is better to stick to the political statements that we have made, which have been clear and unequivocal in our view of the conflict. The legal consequences will of course be investigated, and any legal issues will of course be taken up, but they will rightly be taken up in the courts, rather than here.

Surely, it is not by casualty figures but by the scale of the force that we determine whether action has been disproportionate; but by either yardstick, the Israeli actions in Gaza have been wholly disproportionate. Surely, in the circumstances, it is unthinkable that we should issue export licences to Israel until we have what is not just a ceasefire but a peace deal.

We should certainly not issue export licences for internal repression or external aggression, and we are agreed on that. That is the existing policy. In respect of the first part of the hon. Gentleman’s question, both those considerations come into play.

The aid that my right hon. Friend has announced for humanitarian purposes to the Palestinians is very welcome. Will he confirm that UK taxpayers’ money will be properly accounted for and that Hamas will not be able to cream off any of that money for its own ends?

Yes, of course—through the processes that are very well developed and taken very seriously by the Government.

The only thing that seems to be balanced is opinion in Israel, where 41 per cent. of people appear to support the action and 41 per cent. opposed it. Will the Government find a way to publish their assessment of the conditions of life in the Gaza strip before Operation Cast Lead and now, afterwards? Will the right hon. Gentleman also find a way to make a statement again on the British Government’s policy on the wall and its location, on the settlements and on the future possible conflict involving Iran, Israel and perhaps others?

Those in the UN are the best people to tell hon. Members about the situation on the ground. There was a debate last week in the UN Security Council, with a report from Sir John Holmes, the Under-Secretary-General for Humanitarian Affairs, precisely on the situation that existed before the conflict and two thirds of the way through it—at that stage—and, no doubt, there will be a further report from the UN in due course.

I am sure that we will have many occasions on which to debate the wider issues that the hon. Gentleman raises, but the parameters—I use the word advisedly—of a solution are widely agreed. In it, the 1967 borders are, more or less, the borders of a Palestinian state and of Israel; any difference from the 1967 borders being accounted for on a one-for-one basis, with Jerusalem being the capital of both countries. I could almost say that there is consensus. There has been consensus between the Israeli leadership and the Palestinian leadership on the long-term vision at various points. Importantly, in the end, the peace cannot be between Israel and the Palestinians only. It has to be between Israel and the whole Arab world. That is the significance of the comprehensive approach that we advocate.

When I was in the Gaza strip on 14 April last year, the first thing that we came across, just inside the Erez crossing, was a large lagoon of sewage, in which a five-year-old boy had already died. Raw sewage was pouring into the sea 24/7, and there were piles of rotting rubbish lying in all the streets because the refuse vehicles could not function. Does my right hon. Friend agree that the public health situation in Gaza is now even more urgent than it was then, because the population is so traumatised that disease will spread if it takes hold?

Yes, and my hon. Friend did not have time to mention that 13 medical personnel have been killed in the course of the conflict, adding to the dangers of the spread of disease. The emphasis that I have placed on the issue, by talking about not just food and fuel but emergency sanitation equipment, speaks directly to the point that he makes about the sewerage system, or lack of it. That is a significant part of the emergency that still exists, because although things are absolutely terrible now, they could get worse. That is what the whole international community needs to try to avert.

I very much welcome the Government’s offer of naval patrol boats as part of an EU force. Will the Secretary of State assure the House that their remit will place equal emphasis on preventing arms smuggling and ensuring the free and fair movement of humanitarian aid and medicines? That is vital. Also, will he assure the House that incidents such as the ramming of the MV Dignity a few days ago by Israeli gunboats will not be repeated when that remit is in place?

The vast bulk of humanitarian aid will go overland, or by air. Certainly, the purposes of the Royal Navy activity relate to the interdiction of smuggling. I hear what the hon. Gentleman says, but the humanitarian advice that we are getting, from the US and elsewhere, is that it is overland work that is absolutely critical to the humanitarian situation.

Following the point made by the hon. Member for Meirionnydd Nant Conwy (Mr. Llwyd), as the Navy will be deployed in preventing the importation of arms, can we at least seriously consider whether it should be deployed to ensure the importation by sea of any goods that the Palestinians need? We would thus restore the Royal Navy to its ancient task of ensuring the freedom of the seas and breaking blockades.

I take my right hon. Friend’s point very seriously. If there is any way for the Royal Navy to play a positive role in ensuring that humanitarian relief gets to people who need it more quickly, of course we should find and use that option. I have to say that it has not yet been suggested that my right hon. Friend’s idea is necessary, but I know exactly the spirit in which he makes the suggestion, and I assure him that I will look into it.

I was going to ask a similar question. What kind of ports and harbours are there on the coast to the west of Gaza, and are there any plans to extend those ports, temporarily or permanently?

They are very limited; that is the answer. The hon. Gentleman will know that Gaza airport has been closed for a number of years, and that is the obvious way in which to try to get aid in fast, which is important.

My right hon. Friend rightly says that the ferocious violence has reverberated around the world. Many hundreds of people from Crawley have contacted me to raise concerns and make suggestions. Will he give me an assurance that those concerns and suggestions will get to the heart of Government, so that we can dissuade violent and extremist behaviour, and so that those people can know that he is listening to their concerns?

I am happy to confirm that. People all over the country have become engaged, and have focused on the crisis for the past three weeks for good reason. The reverberations do indeed go around the world, and I am happy to hear representations, or discuss further with my hon. Friend the views of her constituents.

First, may I remind the Foreign Secretary that there was a ceasefire before, and the consequence was that Israel tightened and tightened the siege, then it started the bombing in early November that broke the ceasefire? Secondly, there is no peace process, because Israel keeps breaking the Geneva convention, building more settlements and the wall, and the roads are subject to closure. We will not achieve progress without action on Israel, requiring it to comply with international law. We need action in the Security Council to set up a war crimes tribunal—that is how we can get action. So what action will the Foreign Secretary take to ensure that Israel is held to account under the Geneva convention? Otherwise, there will be no progress.

I said last week in this House that, although the immediate trigger for the crisis was the upsurge in rocket attacks after 19 December, as the right hon. Lady rightly says, in the preceding six months there was a ceasefire only in name, because there were rocket attacks, a tightening of the blockade, a further closing of the crossings and a deterioration in the humanitarian situation. I do not quite subscribe to the sequence that she put on those three facts, because I think that they all happened at the same time: there were further attacks, a further tightening of the blockade and a further deterioration of the humanitarian situation. It is obviously vital not just that the Security Council remain engaged—that is why I was in New York last week, and why we continue to believe that the Security Council has an important role to play. It is also why I emphasised the Madrid model—it is not the exact model for the future, but it engaged the international community fundamentally in those issues. It is important, too, that every signatory to any international convention adhere to its requirements and to international humanitarian law in general.

May I welcome the Government’s early and consistent call for an immediate ceasefire in Gaza, and may I contrast it with the situation in Lebanon, as such a call was not made then? If there is to be an investigation, will my right hon. Friend assure me that it will take account of the frustration and anger at the timing of the attack? The Gaza people have suffered, and they are victims of a double whammy. First, the forthcoming elections in Israel have been used for some perverse reason by Israeli politicians to show their toughness. Secondly, those same politicians have exploited the dying days of the Bush Administration, which should be taken into consideration.

I hope that my hon. Friend understands that I shall not comment directly on the implications for the Israeli general election. It is clear that the peace process of the past year was too slow in making progress, which is at the heart of the ticking time bomb in Gaza that went off to such devastating effect. It is certainly to the return of some sort of inclusive process that we are dedicated.

Is the harsh reality not that those two unilateral ceasefires are extremely vulnerable unless the international community convinces lots of ordinary Israelis that there is a better route to their security that does not involve the slaughter of the past few days, and convinces a great many more Palestinians that there is a route to a viable Palestinian state that depends on engaging with the peace process?