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Bradford & Bingley (Bonds)

Volume 493: debated on Tuesday 9 June 2009

3. What representations United Kingdom Financial Investments has received on the cessation of interest payments on Bradford & Bingley’s 11.625 per cent. perpetual subordinated bonds. (278506)

The Treasury and UKFI receive a wide range of representations on issues relating to banks in receipt of public funds. It is not the Government’s practice to provide details of all such representations.

Bradford & Bingley has announced that it is going to default on the interest payments on these bonds. When it made that announcement the capital value of the bonds fell, so many people who have invested in these securities for their retirement income have lost out on both interest and capital. Given that Bradford & Bingley is effectively a Government-owned institution, does this not suggest that the Government are prioritising getting their money back ahead of their moral and legal obligation to bondholders?

This was a decision for the Bradford & Bingley board to make, judged against the objectives it had in its business plan. The hon. Gentleman will be aware that the statutory debt owed to the Financial Services Compensation Scheme is about £14 billion, and the Treasury is owed about £4 billion. He will also be aware of the normal creditor hierarchy, and I believe that it is fair that the FSCS and the Treasury should be repaid ahead of subordinated liabilities. Furthermore, he will be aware that in such circumstances the 11.625 per cent. rate of interest should have given people who were taking advantage of these bonds some sort of clue that they were making a reasonably risky investment and that they would not necessarily be ahead of others who were making less risky investments.

Yesterday, we saw that Lloyds TSB was able to pay back to the taxpayer a net £2.3 billion, and the British Bankers Association today reports that bank lending to small businesses has increased over the past month. Although there is a long way to go, what do those developments tell us about the effectiveness of the Government’s strategy towards the banks?

My hon. Friend is right to highlight the announcement made yesterday by Lloyds Banking Group. I think that it indicates that the recapitalisation of the banks and the actions that we took in January, on top of those in October, are working. We need to do more to continue to ensure that lending is available in the financial system, be it lending for people who want mortgages or lending to business, which is vital. Well over £50 billion of additional lending has been committed this year, which should make a difference in the future. The Government need to keep taking actions that will make a real difference in helping people and businesses through these difficult economic times, rather than leave people to their own devices, as the Conservative party would do.

Can the Minister confirm that he is about to appoint a valuer for the assets in Bradford & Bingley and that the valuer will be able to act with complete independence from the views of Ministers in valuing those assets? Can he also confirm that the valuer will be free to offer the same deal to bondholders and shareholders in Bradford & Bingley as the preferential deal offered to the same groups of people in respect of Northern Rock?

I can indeed confirm that the Government will appoint a valuer shortly. We hope to be able to do that before the recess, and a public appointments process is going on at the moment. The hon. Lady will be aware of the powers in the Banking Act 2009 and the role of the valuer—they have a remit to act independently. The valuer’s decisions will undoubtedly be a matter for the valuer, acting in accordance with his or her remit and existing legislation.

I congratulate my hon. Friend on the development at Lloyds. May I ask him to look further at the form of recapitalisation executed there—namely the reduction in high interest rate preference shares for normal equity—to see whether or not he could consider, in the case of Bradford & Bingley and others, using high-yielding bonds too? They could be repaid and therefore make it much easier, in terms of bank liquidity, to promote the very increase in borrowing that we seek.

My hon. Friend has a great deal of expertise in these matters, and I always listen with interest to what he says. Lloyds has made a commercial decision about wanting to repay the preference shares, and it is right to refer to the vital importance of liquidity in the financial system. As always, the Government will keep these matters under review.

Does the Minister accept that it is essential that United Kingdom Financial Investments should be seen to have genuine operational independence? Will the Government therefore take early action to put that body on a proper statutory footing?

We have made a number of announcements with regard to UKFI, and as the hon. Gentleman knows, it operates on an arm’s length basis. It is right that Bradford & Bingley and other banks that have received Government funds and involve UKFI in a supervisory management role should act on a commercial basis. We will continue to ensure that we provide the right level of resourcing for UKFI so that it can undertake the work that it needs to do, which is about protecting the taxpayer’s interests.

We have to bear in mind the fact that as a Government, we have invested huge sums on behalf of the taxpayer in our banking system. We need to ensure that we do all we can to protect the taxpayer’s interests, and that is what we will do.