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Credit Provision

Volume 490: debated on Thursday 26 March 2009

3. What further steps his Department plans to take to encourage banks to provide credit to businesses. (266525)

The Government will continue to take whatever action is needed to maintain the stability of the financial system and to kick-start credit in the economy.

There has now been a credit crunch in the economy for 18 months. The Government have introduced a great many measures, but is there any evidence that they are working? Has not all the extra liquidity that the Government have thrown at the banks been insulating them from the need to make the changes to and the clarifications of their balance sheets? Is it not the case that they will not start lending to each other until they trust each others’ balance sheets, and that the Government have not actually forced them to come clean about what is on their balance sheets?

The restoration of trust in the banking system is essential; it is a precondition of fixing the problems in the wider economy, here and across the world, and it is absolutely necessary. The second thing to say to the hon. Gentleman is that it was necessary, as I believe most people accept, for us to recapitalise the banks in October. It was also necessary to go further than that and to help to deal with the problem that we face of these banks having on their books assets for which there is no market or whose value has been much reduced. That is why we introduced the asset protection scheme—the United States Government have announced something similar in its intent earlier this week, and other countries are doing that too. We have to make sure that we fix the banking conditions, because that is a precondition of sorting out the wider problems in the economy. Our approach is having an effect and will continue to have an effect. There is no overnight fix, but we are doing the right things to get lending and credit flowing in the economy, as well as supporting the wider economy and protecting jobs.

Does the Chancellor accept that some people are finding a significant difference between the headline funds that the banks announce are available to support businesses and the amount of credit actually facilitated? We have banners in banks in Northern Ireland saying, “Lending isn’t ending”, but the message from business is, “Credit? We can’t get it!” That comes from sound, reliable businesses. Will the Chancellor seek a report from the lending panel on what exactly is happening with the banks in Northern Ireland in terms of support for business?

Yes, and we will continue to do that. I can understand the frustrations of businesses and individuals when they find that a credit line that was available is no longer available, or that the price being charged has increased. Our objective in everything we are doing to support the banking system is to get credit flowing in the economy again. As I said a moment ago, that is essential. We will continue to monitor what banks are doing. There is some evidence that in several cases credit is now available, although as we continue through one of the severest downturns we have seen—the House will have seen the figures from Japan and Germany earlier this week, which show a significant downturn—it is necessary that we maintain the course that we have set and do everything that we can to get credit flowing again. That is very important.

Nobody doubts the Chancellor’s commitment on this issue, but in drawing parallels with the US recapitalisation, will he accept that because their preference stock was at 5 per cent. while ours was at 12 per cent., US banks have an incentive to rebuild their businesses, whereas British banks have an incentive to minimise their exposure to Government recapitalisation?

I am not sure whether the hon. Gentleman has noticed, but in the past six weeks we have converted the preference shares that we held in the RBS Group and the Lloyds Group into ordinary shares, because they needed the additional capital. The Financial Services Authority’s requirements were quite clear about that. I welcome what the hon. Gentleman says about supporting the banks, but what we are doing in supporting the banking system is complemented by what we are doing to support the wider economy.

I know that there is a difference of view about whether there should be any fiscal stimulus, but a substantial amount of money has gone into the economy, on which the Governor of the Bank of England fully agrees with us. I also agree with the Governor that it is necessary to continue to take action to support our economy. In particular, it is necessary to do everything we can, when people face losing their jobs, to get them back into work. That is one of the big lessons that people should have learned from what happened in the 1980s and 1990s.

Will my right hon. Friend consider placing a cap on interest rate charges for credit? For some store cards, interest is 26 per cent. APR and some companies charge as much as 182 per cent. as legalised moneylenders. That is obscene at a time when interest rates are below 1 per cent.

I do not think that a generalised cap or Government regulation of interest rates would work. I have great sympathy with what my hon. Friend says about the very high interest rates imposed by some unscrupulous lenders, and I know that he has done a great deal to try to address those problems. People have to remember, however, that if we impose controls and try to restrict lending, it comes at a wider cost to individuals, businesses and the economy. It is important to tread the fine line between sufficient public regulation, supervision and controls to protect the public interest, and stopping the flow of credit on which everything in our economy depends.

The minutes from the Bank of Japan tell us that Japan’s quantitative easing programme was expected to encourage the banks to provide more credit to business, but the evidence is that bank lending reduced over the period of quantitative easing. What can the Chancellor say today to give us more confidence that the UK’s version of printing money will have the right result and encourage the banks to provide more credit?

Quite simply, in the 1990s Japan did not address the underlying problem in the banking system. It did not put in enough capital and did not deal with the assets that had gone bad, and until one addresses those problems anything else that one might do will not have the full effect that is hoped for. The Japanese are now quite clear about what went wrong in the previous decade and that is why most countries are now at pains to avoid it. The very fact that Japanese exports have gone down by nearly 50 per cent. demonstrates the extraordinary circumstances that we face. When a country such as Japan is facing such problems, there is all the more reason for us not only to take action to deal with the bank problem and to sort that out, but to take whatever action is necessary to support the economy through fiscal stimulus. We have given the Bank of England additional fire-power to put more money into the economy, because that is essential if we are to protect jobs in quite extraordinary conditions across the world.

I am quite clear that banks should not be lending to businesses when underlying weaknesses are not being properly addressed. However, it seems to me that in my constituency at least many decent businesses, without underlying weaknesses, are told when they apply for credit that they have to cover that advance many times over—sometimes twice—with securities. I believe that the banks have to take some of the risk themselves, rather than trying to transfer the whole amount to small business owners, who have wives, families and so on to keep. It is quite unrealistic to expect that level of cover from ordinary small businesses when advancing credit.

If my hon. Friend would let me have a note of some of the problems that his constituents have encountered, I would be happy to look at them. I agree that as part of the process of restoring trust in the banking system we have to be clear about banks’ responsibilities as well as the responsibilities of individuals and businesses. If someone takes out a loan, they have to be clear that they can repay it. Equally, banks have to be responsible in their lending and ensure that they are realistic and reasonable about the conditions that they impose. That is very important and it is all part of restoring trust in the system, which I regard as absolutely essential.

Does the Chancellor agree that with the declining prospect of growth in the economy, the banks are faced with an inevitable deterioration in the quality of their loan books, so that far from increasing their loans to businesses, they are likely to be seeking the whole time to increase their capital? How will that problem be overcome?

The hon. Gentleman raises a quite reasonable point. All over the world, we have this problem. We need to ensure that banks strengthen their capital position, because in the long term that is essential. Of course, if banks did that and there was no other intervention, there would be less credit in the economy and the economy would shrink further. The result would be that the bank assets that are currently impaired would become even worse. That is why we have not only taken action to recapitalise the banks—in the case of RBS and Lloyds Group we have put additional capital in—but put in place schemes such as the credit guarantee scheme, which is working very well, the special liquidity support system, which has provided liquidity for the banks, and, in addition, the asset protection scheme, which, as I have said, will go down a similar road to the scheme in the United States. I am sure that the hon. Gentleman recognises that, as he is in a minority in his party in that he sees the point and the reason behind Government intervention in such extraordinary circumstances. Government intervention is absolutely necessary to complement the process that he and I agree has to take place if we are to maintain credit in the economy.

The simple way to get the banks lending to business again is the Conservatives’ national loan guarantee scheme. Yesterday, in Prime Minister’s questions, the Leader of the House criticised the scheme, claiming that there was no money behind it. The Chief Secretary said much the same thing a few moments ago. For the record, will the Chancellor confirm what the Economic Secretary told the House about the Government’s guarantee schemes on 14 January? He said:

“We expect the measures to be run on a break-even basis”.—[Official Report, 14 January 2009; Vol. 486, c. 220.]

He said that for a very good reason, because the premiums that are being charged are expected to cover the losses. There will be no additional cost to public expenditure from those schemes. Is it not the truth that the Government’s only sustainable objection to the national loan guarantee scheme is that they did not think of it first? British businesses are suffering because the Prime Minister puts his political sensitivities ahead of their business needs.

With your forbearance, Mr. Speaker, I think that I can answer that quite shortly. When the loan guarantee scheme was announced by the shadow Chancellor, he said that

“it does not add to public expenditure” —[ Official Report, 18 December 2008; Vol. 485, c. 1228.]

On 11 March, the shadow Business Secretary said, with exemplary candour, that

“the taxpayer will take some of the hit.”

How on earth does one square the Conservatives’ position that they would spend nothing extra with the fact that this scheme, even if it were workable, would cost the taxpayer money? That just shows the nonsense of the Conservative position.