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Banking Reform

Volume 498: debated on Tuesday 3 November 2009

With permission, Mr Speaker, I should like to make a statement on the banks in which the Government have shareholdings. This morning the Treasury, Lloyds Banking Group and the Royal Bank of Scotland issued market notices in the usual way.

In October last year, I set out a range of measures designed to prevent the collapse of the banking sector. Those measures are working, and countries across the world took very similar steps over the following weeks. But the uncertainty in global financial markets had a very serious impact on confidence, resulting in a world recession. That in turn worsened the outlook for our economy, leading to higher losses for UK banks.

It was clear that further action was needed to strengthen the banks, and in January we announced an asset protection scheme to prevent a further shock to confidence, and to ensure that lending could continue. We continued to support the economy through fiscal and monetary policy, and we co-ordinated a global policy response at the G20 London summit in April. Those measures are working, too: fears of a global depression have receded and market confidence has started to return. As a result, we are now able to achieve our objectives on financial stability and banking reform at a lower overall cost to the taxpayer.

The asset protection scheme that I announced in January has played a vital role in supporting confidence in financial markets. Let me remind the House of the key features that I set out back then. The scheme provided insurance against losses arising on a pool of bank assets, and in return the banks paid a fee in the form of shares. The effect of the scheme is to strengthen the capital position of any bank taking part in it, but that of course carries a risk of exposure for the taxpayer. The scheme was open to all major UK banks, but in the event, improved market conditions meant that only two banks decided to participate.

Since then, further improvement in market conditions means that Lloyds has been able to develop a better plan. It now does not need to participate in the scheme, which will significantly reduce the cost and exposure for the taxpayer.

I will now explain in detail our proposals to restructure the banks better and also to make them stronger. Turning first to Lloyds, following the recapitalisation last October, the Government owned 43 per cent. of the bank. In March we reached an agreement in principle with Lloyds on its participation in the asset protection scheme. This would, through the fee, have increased its capital by over £15 billion, increasing the cost to Government, with our stake in Lloyds rising to 62 per cent. We agreed then in principle to insure £260 billion of assets, giving us a very large contingent liability. But now that market conditions have improved, we have agreed a better proposal for Lloyds, to bring in substantial private capital and reduce taxpayer exposure.

So Lloyds has announced today that it will raise £21 billion in the open market. This capital raising is fully underwritten by commercial banks. As a shareholder, the Government have the option to take up part of the newly issued equity. If we did not do so, the value of the existing taxpayer shareholding would be diminished. To protect the value of our shares, we have therefore decided to take up our share of this new capital, investing £5.7 billion net of an underwriting fee. By raising capital in the markets, Lloyds will begin its transition from state support to private finance, and no longer need the insurance of the asset protection scheme. Because Lloyds has benefited from the existence of that scheme since March, it has agreed to pay the Treasury a fee of £2.5 billion and to reimburse our costs. Today’s decisions make Lloyds a stronger bank and provide better value for the taxpayer, ending the exposure of the taxpayer through the insurance scheme, with a substantial fee in return for the insurance provided to date, and a substantial capital contribution from the private sector, while maintaining our shareholding at 43 per cent.

I now turn to the Royal Bank of Scotland. It is a bigger bank than Lloyds, with a more complex balance sheet and a greater exposure to losses, mainly due to its purchase of the Dutch investment bank ABN Amro. Under February’s agreement in principle, the Government said that they would insure £325 billion of assets through the asset protection scheme, as well as providing an additional capital injection of £13 billion, a second tranche of capital amounting to £6 billion, and a further £6.5 billion-worth of capital support through additional shares issued to pay the fee. Together, this would have increased RBS’s capital by £25.5 billion, taking the Government stake to 84 per cent.

Before we could reach a binding agreement, we needed to carry out due diligence on the assets and to ensure that the final terms were consistent with the then emerging European Commission guidelines. The restructuring guidelines were published in July, following extensive work with the UK and other countries. We have also now completed, with the Financial Services Authority, due diligence work on the RBS balance sheet. As a result, we are making a number of changes to the terms of the scheme, which will improve incentives and share risks better with the private sector.

Although market conditions have improved, RBS still needs to do more to be able to stand on its own feet. So we will continue with our plan to invest £25.5 billion of capital in RBS—but there are three key changes. First, there will be a £43 billion reduction in the pool of assets covered by the insurance scheme, which reduces the Government’s contingent liability. Secondly, the first loss on these assets—payable by RBS—will be increased from £42 billion to £60 billion, which further protects the taxpayer. Thirdly, in return, RBS will pay an annual fee of £700 million for each of the next three years, and £500 million per year thereafter, which gives it an incentive to leave the scheme as conditions improve. When it does leave the asset protection scheme, it must have paid a minimum fee of £2.5 billion, or 10 per cent. of the actual capital relief received.

To reflect the increase in the first loss, amounting to £18 billion more payable by RBS, we will no longer require RBS to give up its tax losses, which it estimates at between £9 billion and £11 billion. In the unlikely event of a severe downturn, it may be necessary to provide up to £8 billion contingent capital, but this will be triggered only if there is severe stress, taking its core capital ratio down to 5 per cent. Again, in return for that, RBS will pay an annual fee of £320 million for as long as the contingent capital is available.

In the case of RBS, the overall level of Government support will remain broadly the same as I announced in February, but this revised deal is better structured, with better risk sharing and greater incentives to exit. There is a higher first loss payable by RBS—£60 billion, up from £42 billion. There are better incentives, with a fee of £700 million for three years and £500 million thereafter, and fewer assets to be insured—£282 billion instead of £325 billion. I will provide the House with full details of the operation of the scheme when the final agreement is signed and approved by the Commission.

As part of these restructured deals, we are also pushing forward reform at the banks, with improved lending and remuneration policies. Both Lloyds and RBS will be in a stronger position to continue lending. Lloyds will increase lending capacity this year and next, with an additional £11 billion for businesses and £3 billion for home buyers in each year. RBS will continue to meet its lending commitments of £25 billion this year and next, as I indicated earlier this year. Both will publish customer charters on good practice, particularly on small and medium-sized enterprise lending, increasing transparency and improving loan conditions for business customers.

On pay, all major retail and investment banks in the UK need to meet the G20 principles and Financial Services Authority rules, so that bonuses are transparent, variable and with no multi-year guarantees. Between 40 and 60 per cent. must be deferred over a number of years, not paid out immediately, and they must be subject to clawback to ensure that pay is aligned with long-term performance. However, we have agreed with RBS and Lloyds that they will go further than that. For this year, there will be no discretionary cash bonuses, except for staff earning less than £39,000 a year. The executive boards of both banks will have their bonuses deferred in full until 2012. That goes much further than the G20 agreement, and further than any other banks in the world.

I will continue to strengthen the supervisory regime, building on the proposals that I set out in July, by adopting the recommendations of the Walker review on corporate governance for banks, reforming the mortgage markets and legislating to make banks put in place “living wills”, as well as providing enhanced powers and objectives for the FSA, to strengthen regulation further.

I believe that those steps are better for the taxpayer, better for the banks and better for the economy. As a result, the likely cost to the taxpayer and the risks faced by the public finances have reduced markedly. The total assets protected have been reduced by more than £300 billion, there is more private sector investment and the fees received are better structured. I expect, subject to wider factors, to revise downwards the provision for financial sector interventions in the pre-Budget report.

As I said in my statement in July, our second objective is to encourage greater banking competition in the high street and for small and medium-sized businesses. Since the financial turmoil started in 2007, the banking industry has become more concentrated in most advanced economies. Over the course of this year, we have been working with the Commission to agree on how to restructure the banks while meeting state aid rules.

As for Northern Rock, I have already set out my intention to split the bank into two separate companies, and we now have Commission approval for that. That will mean that less capital support is needed to keep Northern Rock lending, and when the time is right it will facilitate a return to the private sector. Lloyds will sell Cheltenham & Gloucester, the Intelligent Finance internet bank, the TSB brand, Lloyds TSB Scotland and some Lloyds TSB branches in England and Wales—altogether, more than 600 branches by 2013. RBS plans to sell its insurance businesses, including Direct Line and Churchill, as well as its commodity trading arm and its card payment processing operation. It will also divest itself of more than 300 branches across the UK, again by 2013. Together, those businesses could amount to about 10 per cent. of the retail banking market in the UK.

In each and every case, we will insist that those institutions should not be sold to any of the existing big players in the UK banking industry. Lloyds and RBS will each be required to sell their retail and SME businesses as a single viable package to a smaller competitor or new entrant to the market. That, together with Northern Rock, will potentially create three new banks on our high street in the space of five years, which will increase diversity and competition in the banking sector, giving customers more choice and a better service.

The financial services sector will remain an important part of our economy. Yesterday’s job losses announced by RBS and today’s job losses announced by HSBC are a reminder that for many employees, these are difficult times. We will do everything we can to work with the banks to help them find new jobs for those affected.

My proposals today will ensure that we have a strong and vibrant financial services sector in the future. They will mean strong and safer banks that are better able to support the recovery, and more competition and choice for people who use them. I commend this statement to the House.

Once again, Mr. Speaker, the Chancellor tells the House of Commons what he already has spun to every national newspaper—last night, long before any market notices were put out.

Let us separate fact from Government fiction. First, we welcome the modest break-up of some of those large banking conglomerates—a break-up that the Chancellor wholly opposed when the Conservatives proposed it six months ago, and which everyone knows was wholly imposed upon him by Commissioner Neelie Kroes. We also welcome the ban this year on all significant cash bonuses in these major retail banks—not least because we proposed that a week ago. Again, the Treasury and the Chief Secretary to the Treasury wholly opposed us. Yet again, the Conservatives are setting the agenda.

However, is not the real story the sheer size of this bail-out? The Chancellor could not bring himself to give us the actual figure in the House of Commons—£39.2 billion, equivalent to £2,000 per family. It is bigger even than the bail-out last autumn, and with the Royal Bank of Scotland, it now breaks a new world record as the single biggest bail-out of any single bank anywhere in the globe.

Of course, the Chancellor presents this as positive Government action, but he had little choice, because the alternative was seeing RBS unable to fulfil the basic requirements of a solvent bank. However, it results in a bail-out bigger than that of Citigroup and that of Bank of America. Indeed, all of that is going into a bank the former chief executive of which, we must remember, was knighted for banking services by the Prime Minister.

In return for this huge slug of money, there is still no guarantee that this will get lending flowing in the real economy, help real businesses to stay afloat or keep people in work. The Chancellor wants us to believe that this is a new era for British banking, when in truth the British people are being presented with yet another enormous bill to try to clear up the mess from the old era of irresponsible banking supervision over which this Labour Government presided.

Let me press the Chancellor on the details—first on the enforced sale of branches and bank businesses. Why did he oppose that when we first suggested it six months ago? He dismissed it out of hand. Is that because—perhaps he could confirm publicly what everyone is saying privately—although he did not want to do it, it was imposed on him by the actions of the European Commission, right up until the weekend? Indeed, during their time in office, this Government have never made any secret of the fact that they have actively promoted the policy of creating a small number of large banks.

The Chancellor shakes his head. Does he not remember what he said in the pre-Budget report last year? He said that

“consolidation”—

of banks—

“results in stronger and better-capitalised…institutions, which will lead to greater financial stability; more protection for consumers; and better availability of competitive financial products.”

Is that still his view? Does he think that the recent consolidation has resulted in stronger institutions, greater financial stability or more competition? Can he really believe that, after he has seen what has happened over the last year?

Secondly, let me ask him about the details of this £39 billion bail-out. He said that it was broadly the same as the deal that he put before the House of Commons in February, and presented the various numbers involved in that deal. Of course, what he was actually doing was comparing apples with pears. In February he told us that RBS would get a £13 billion capital injection and a £6 billion contingency reserve—he just added to the total today—and today he says that it is going to get £25.5 billion capital injection and an extra £8 billion in reserve. Will he confirm that this is not the same as the deal he announced in February?

The Chancellor talks about the asset protection scheme. Again, will he confirm in public what everyone involved in these negotiations is saying in private—that the asset protection scheme he announced in January proved to be unworkable, impossible to negotiate and incompatible with European state aid rules, which is why he has had to go back to the drawing board? When did he realise that the asset protection scheme would not work? Why does he think that the United States has been more successful with its public stress tests in leveraging private capital into its banking system so that, unlike Britain, it is not turning to the taxpayer for further large-scale capital injections?

Will the Chancellor confirm that the Royal Bank of Scotland will not be paying taxes even when it returns to profit? That is a remarkable circumstance that I suspect will be a feature of several debates in the House over the next few months. What signal does that send to the rest of the global banking sector which is trying to minimise its UK tax bill at the moment?

On bank lending in the real economy, every time the Chancellor has announced another form of bank bail-out, he has promised that it would lead to more lending. In October the Government said that their banking policy would

“ensure the flow of money to small businesses and families”.—[Official Report, 20 October 2008; Vol. 481, c. 30.]

In January they said that their banking policy would

“get lending going in the wider economy”.

Perhaps they believe that they have succeeded, because Lord Myners has been telling everyone today that there is no problem with credit in the economy. Will the Chancellor confirm that the latest evidence shows that the flow of lending to businesses has now fallen for the seventh consecutive month, and the money supply is now shrinking at the fastest rate since records began?

The Chancellor again tells us of his changes to the banking system. He promises yet another banking Act, but the verdict of the Governor of the Bank of England is simple: there has been “little real reform” under this Government. Meanwhile, credit and confidence remain in desperately short supply, and still the Chancellor and Prime Minister have no plans to provide either. Indeed, as Treasury questions have just demonstrated, they do not have the simple answer to the simple question of why Britain is still in recession while the rest of the world is in recovery.

That is the truth about this Government. They went around boasting that they had saved the world, but they are still trying to save the British banks, and they have not got on to saving the British economy.

The hon. Gentleman raises several points, to which I will reply—but what I find difficult to take is the impression that he gives that somehow he is against these measures, whereas his deputy was on television today saying that he agreed with what we are doing. Indeed, the hon. Member for Fareham (Mr. Hoban) was asked by the BBC interviewer,

“would you have not done this?”

and he went on to say:

“it’s worth reminding people, no bank here has collapsed, no individual, no business, had all of their savings wiped out and that is because of what the Government did”.

[Interruption.] No, it was not the hon. Member for Fareham who said that. What he said was, “Absolutely”. He agreed with what was being said, and he went on to say that he supported the measures that I am announcing today. [Interruption.] I will answer all the points that the hon. Member for Tatton (Mr. Osborne) made, but the House should be aware that the Conservatives’ position at the Dispatch Box is rather different from the position that they take outside the House.

The hon. Member for Tatton went on about what “everybody’s saying in private”. I remind him that what everybody is saying in private, and increasingly in public, about him is that he tends to play politics rather too often on issues that are far more important than that.

The hon. Gentleman asked about the break-up of the banks. To argue that we have been against that recently is nonsense. I said in the Mansion House speech in June that one of the things that we had to do as we stabilised the banking system was to get more competition in the system. The hon. Gentleman also mentioned what I said last year about Lloyds-HBOS. Yes, we did support that merger, because at that stage financial stability was important. I remind him that he agreed with that as well, and he went out of his way to say that he had spoken to the people involved on both sides and assured them of the Conservative party’s support. There is not too much between us on that point.

As for the point about bonuses, it is not true to say that our position is the same as his. I remind him that on Sunday night, when he put out his press release in anticipation of the statement on bonuses, he said that it would apply to British retail banks. By Monday, when the wind started to blow the other way, there was a subtle change and the investment banks were included. It was still only British banks though, while our measures affect all major banks based here. With RBS and Lloyds, we have gone further than any other country in restricting the amount of bonuses that executives can receive, and that goes far further than he or anyone else has suggested.

The hon. Gentleman asked some specific questions about RBS. Yes, it is a large sum of money—there is no doubt about that—but RBS was one of the largest banks in the world. Indeed, by some measures it was the largest in the world. Unfortunately, however, it got itself into huge difficulties—partly, as I said, because of the acquisition of ABN Amro, and partly because, frankly, parts of its operations had taken on risks that it could not manage, and it did not have enough capital. As he correctly recognised, our choice is whether to support it. If we did not, however, not only would RBS fail, but the knock-on effect would be catastrophic. I appreciate the point about these being large sums of money, but they are unavoidable.

As for the £25 billion, I went out of my way in my statement to break down how the figures are calculated, so that the House could see what the position is. The hon. Gentleman is right to say that the £8 billion contingent capital is new—that will only happen if the core tier 1 ratio falls below 5 per cent., or there is a severe downturn—but stress tests have been carried out, and the FSA believes that the £25 billion that we have put forward today is sufficient.

The hon. Gentleman asked about the asset protection scheme rules. He is right to one extent: they were not consistent in January with Commission rules—but that is because there were no rules from the Commission in January, because this is all new territory. The Commission has had to work up rules during the course of this year. While those were being worked up, obviously we found out more about the assets, and the Commission found out more about what is going on in other banks in other parts of Europe—and yes, that has developed.

The hon. Gentleman asserted that in America there is no public money. Tell that to the US Congress! The then American Administration had no end of difficulty in getting the legislation through, because it involved public money. It is simply not true, therefore, that America is managing to do this without involving the public. That simply is not right at all.

The hon. Gentleman also asked about lending. It is important to consider closely what is happening in the economy. In September the stock of gross lending to businesses was £492 billion, which compares with a gross stock flow of £478 billion in September two years ago—just before the crisis. So money is being lent. At the same time, however—this is the point that Lord Myners made in the interview on “The World at One”—undoubtedly one thing that happens during recessions is that businesses repay their money as well. At the same time as more lending, therefore, money is also being repaid. That said, everybody agrees that there are still problems with lending and cases of businesses not getting money when they probably should get it, and that there are still problems with pricing. The difference between the Government and the Conservative party is that we propose to do something about it.

In conclusion, I very much welcome the support of the hon. Member for Fareham for what we are doing, and I hope that at some point during the day he can have a word with the shadow Chancellor. Then perhaps we will see universal support for what we are doing, because I think that that is the right way forward.

I thank the Chancellor for giving us good notice of this statement, but may I check the numbers involved? We have the £25.5 billion for RBS, the £3.3 billion after the fee for Lloyds, the £8 billion contingent capital commitment and the £282 billion insurance for the RBS toxic assets. Why did he not also mention that—as I understand to be the case—RBS has been given an additional £10 billion in tax write-offs, which were not previously accounted? Can he explain that?

On remuneration and bonuses, will the Chancellor explain in simple terms why state—or state-supported—banks are still paying bonuses at all? A bonus is surely a bonus, whether it is paid now or in three years’ time. Why do he and the Conservatives think that it is a great discipline and hardship for the bankers to be asked to wait three years for their Ferraris? The Walker report on remuneration says that banks should declare their remuneration packages. Given that the Government have adopted that proposal, will the Chancellor be clear about whether that will be compulsory or voluntary?

On lending, is it not true to say that if we take into account net lending, which the Chancellor has just mentioned in relation to repayments, the banks are falling well short of their obligations to lend to solvent British companies? Is it not also true that Lloyds has been trying to wriggle out of its lending obligations by opting out of the asset protection scheme? Can the Chancellor therefore clearly explain the nature of the banks’ lending obligations? Are they binding and what sanctions are applied if the banks fail to meet them?

Finally, I want to raise the issue of the breaking up of the banks through the sale required by the European Commission, which I welcome, in order to stop the process by which banks have long been ripping off their customers. Is it not true that the break-up relates purely to 10 per cent. of the banks’ assets? The one issue that neither the Commission nor the Chancellor has dealt with, but which the Governor of the Bank of England has raised, is the continued existence alongside each other of retail banks and the large speculative trading operations—the so-called casinos.

The Government have set their mind against implementing the advice of the Governor and have opted for a more gradual regulatory approach. However, is it not right that private banks that continue to benefit from those guarantees should compensate the taxpayer for the considerable benefit that they thereby derive? We should not today simply be discussing transferring public money from one pocket to another, but discussing how the remaining private sector in the banking system continues to benefit enormously from the guarantees that the Government continue to give it, in the event that it should fail.

Let me deal with the hon. Gentleman’s questions in turn. First, I explicitly mentioned tax losses in my statement. [Interruption.] He is kind enough to acknowledge that.

I take a slightly different view on bonuses from the hon. Gentleman, in that I do not think that they are wrong in themselves. There is everything to be said for rewarding good behaviour or ensuring that the interests of the executives are the same as the public interest, which is what we are trying to do by ensuring that they cannot get bonuses for three years. Also, there is a distinction to be made between, on the one hand, somebody who is paid large sums of money and, on the other, the many bank employees who work in branches or back offices who are not on large salaries, and who in some cases are paid pretty modest incomes.

That is why we said that people earning less than £39,000 could get bonuses, but individually we are talking about several hundred pounds, or perhaps up to £2,000, which is nothing like the large figures that are commonly thought of as bank bonuses. That is especially important at a time when, as I said in my statement, there are many bank employees who are understandably worried about what is happening, but who never got the great bonuses. I am thinking of the many constituents of mine who were employed by RBS and, in particular, HBOS who were paid in shares that are now worth an awful lot less. We must ensure that we treat people on lower, modest incomes properly.

On Sir David Walker’s recommendations, which we will get at the end of this month, I have said that we will legislate to implement them. We will have to see what he comes up with at the end of the day, but I hope that we can accept his recommendations.

The hon. Gentleman mentioned lending. He has said again today—and on the “Today” programme at 10 to 9 this morning—that Lloyds has got out of its lending conditions. No, it has not: as I said in my statement, both Lloyds and RBS have to stick with the lending agreements that they have already reached. I do not want to labour the point that I made about lending, because I accept that there are still problems, but it is important to look not just at the net position, but at what is happening in lending and accept that during a recession it is understandable that businesses with big exposure to the banks might want to reduce that.

On the breaking up of banks, the hon. Gentleman asked the wider question of whether we should divide retail banks and investment banks, which we have discussed before. The best illustration of the difficulties in that is this. For obvious reasons, we had to step in and save Northern Rock, which was a very narrow, conventional retail bank that lost money in pretty conventional ways. However, let us take Lehman Brothers, on the other hand, which was at the more exotic end of the market and had no retail depositors. The then American Government tried out what the hon. Gentleman suggests and let it go down, and look what happened: the entire world’s financial system almost followed it down the same hole, which is what led to the action now being taken by Governments.

That split does not work in practice. However, the legislation that we are going to introduce to require larger banks to make what are colloquially referred to as “living wills”, whereby the banks look at their businesses and see how they could separate them out in a crisis, so that regulators and Governments can decide what to do if they got into trouble, is a much more productive way forward.

I hope that I have answered all the hon. Gentleman’s questions, because they are perfectly sensible questions to ask, but I think that we have taken the right decision.

Order. Twenty-three Members are seeking to catch my eye, and we have another statement after this, followed by the Committee stage of an important constitutional Bill, so, as always, I am looking for single, short supplementary questions and for economical replies.

Is not the story here that RBS is in a worse state than everyone thought last February, and that the Bank of Scotland aspect of HBOS was a basket case? The message is that capital injection is necessary in order to stabilise the banks and to ensure potential returns for the taxpayer, but the Chancellor will be aware that lending is still a problem. I get hosts of e-mails and messages from people saying that the demand is there, but the banks are holding on to the capital. Does my right hon. Friend agree that the lending agreements should be made transparent, so that we can monitor and track the lending in this country?

I agree with my right hon. Friend on that point. It is important that we get to the bottom of all these lending problems, and I am sure that he, like me, will know from constituency cases that it is helpful to understand the difference between what a bank is saying and what a customer is saying. The more openness there is, the better, and I have already referred to the charter that the banks have signed up to.

My right hon. Friend’s general point is also a perfectly good one. For all the bluster on the other side, this is a necessary step. There are huge lessons to be learned, on the part not only of Governments and regulators but of bank boards. The boards really must understand what they are doing, and it is manifestly obvious, certainly in relation to HBOS and RBS, that rather too few questions were asked in those boardrooms.

Why have the authorities lurched from boom regulation, involving too little cash and capital for excessive lending, to bust regulation, which wants too much cash and capital for too little lending?

I hope that we can avoid that sort of thing. We have to ensure that there is adequate capital, and it is the FSA that has to assess the adequacy of capital in each case.

I think that there will be a broad welcome for the restructuring of the individual deals and of the banks themselves, because this will benefit consumers and taxpayers, but is the question of lending not absolutely crucial? Will my right hon. Friend assure me that, when the banks are restructured, the retail side that is set up anew will have the capacity to lend to small and medium-sized enterprises? If that is not to be the case, what measures will he take—including introducing transparency—to ensure the continuity of lending and open commitment implications that have already been agreed? Perestroika is all very well, but we need a bit of glasnost too.

My right hon. Friend is right. It is important that new entrants to the market lend not just to the mortgage market but to the SME sector. That sector is critical to the future of this country: it employs the most people, we are likely to see a lot of growth in that area, and we must ensure that credit is flowing there.

Does not the new contingent capital guarantee provided to RBS show that the Governor’s concern about the amount of moral hazard remaining in the system is still unanswered?

What it shows is that, given the nature of RBS and the fact that it may need more capital, we and the FSA believe that the £25.5 billion-worth of capital that we are putting in is the right thing to do. On the more general point, we are trying to get a safer, more stable banking system, because that is the only way in the long run to get back to a situation in which people realise that there is inevitably a degree of hazard in the industry. What we want to avoid is taxpayers being stuck with the downside when things go wrong.

Will the Chancellor confirm, on the question of lending, that the banks’ commitments are in respect of net lending only? Will he also confirm that a condition of the bankers’ bonuses is that they will be tied to their banks achieving those levels of lending?

I think that we need to develop this further. In my statement, I said that the lending commitments will continue. Net lending is a measure of how much additional lending is going on, but it does not give us the whole picture, particularly during a recession when firms that can afford to do so are inevitably paying down their money. The key point will be when the economy begins to recover. When firms start to grow, and to go to the banks for money, we must ensure that there is credit for creditworthy customers.

Why cannot the Chancellor see the looming spectre of mass unemployment in the next banking crisis, which will be even greater than that of 2008 unless he moves to prohibit the commercial banks from indulging in investment banking? His repeated references to Lehman and Northern Rock are completely irrelevant, as various commentators have pointed out.

Actually, I thought that quite a few commentators had pointed out that the comparison was relevant; as the hon. Gentleman knows, there has been quite a lot of debate about this over the past three or four weeks. On unemployment—I think that the hon. Gentleman, given his Keynesian background, would support me on this—I believe that it is up to the Government to do everything they can to try to get people back into work as soon as they lose their jobs. That is particularly relevant to quite a lot of the banking redundancies that have been announced in the past 24 hours.

Our objective must be to try to prevent such a crisis in the banking system from arising again, and I do not think that the split that the hon. Gentleman and the hon. Member for Twickenham (Dr. Cable) referred to would avoid the problem. When confronted with a Lehman or an AIG—the insurance company in America—I cannot see how a Government could simply walk away from the consequences of such a situation.

We can assess the value of the asset protection scheme as applied to RBS only if we know a little more about the due diligence that has been conducted and the sensitivities that have been applied to that exercise. Will that be published together with the other details of the scheme when it is made available to the House?

The due diligence was conducted by the regulator—the FSA—and we will publish the details once they are finalised. As the House will know, we have set up an agency to run the asset protection scheme, which will of course be subject to audit by the National Audit Office.

The original decision to merge the banks certainly reduced competition on the high street; I hope that today’s announcement on the disposal of parts of the banks’ retail networks will help return competition to the high street. However, the statement also referred to the disposal, for example, of Intelligent Finance from Lloyds and of the insurance division of RBS, which are both important employers in Scotland. May I ask the Chancellor to confirm that no disposal or sell-off of those divisions or business arms will take place without the strongest possible guarantees about employment and decision making in Scotland?

I agree with the hon. Gentleman that employment and jobs are very important. As he rightly says, there are many employees working for parts of the Lloyds Banking Group and RBS in Scotland, as I know very well. It is important to do everything that we can to protect jobs. It is worth bearing in mind that, had we done nothing 12 months ago, those two banks would have gone absolutely and there would have been huge job losses as a consequence.

When it comes to disposals, I hope that we will do everything that we can to ensure that employment is maintained in Scotland—and, indeed, in other parts of the country. The hon. Gentleman will be aware that RBS has, from time to time, said that it wanted to sell Direct Line and Churchill in particular, but for various reasons it did not do so. Inevitably, there will be restructuring from time to time, but the jobs issue is very important.

The Chancellor is asking the British taxpayer to guarantee £280 billion-worth of RBS loans. How much of that is outside Britain?

When the details are finalised, I intend to publish—I will lay a copy in the Library—the breakdown of where the loans are. My hon. Friend will then be able to see for himself. Let me make this general point. Understandably, hon. Members will be concerned about loans that are outside this country. The difficulty we have is that, as I said, RBS is one of the largest banks in the world and a lot of what it did was overseas. Unfortunately, when it comes to the stability of the bank and therefore of the rest of the system, it is not possible to make the intellectual distinction between what is here and what might be overseas. I confirm to my hon. Friend that I will publish those details.

The Chancellor has made it plain in respect of the restructuring of Lloyds and RBS that bids will be confined to the smaller competitor or new entrants to the market. Does not that mean that a lower price will be obtained than would have been the case if the ability to bid were more widespread, so this approach will involve a loss to existing shareholders and, surely, to the taxpayer?

As I have said before, it is important that we get money back for the taxpayers. However, if all the parts of the banks that were divested by RBS and Lloyds were swallowed up by Barclays or Santander or HSBC, we should end up with only half a dozen people in the business of lending. That is not enough. We already have too few loan providers in this country. Of course, potentially, we have the building societies and some of the smaller banks, but at present, for obvious reasons, they are fairly quiet on the lending front.

Simply letting the bits be swapped from one bank to another would be wrong. Besides—this is relevant to what was said by the hon. Member for Dundee, East (Stewart Hosie)—questions would be raised over employment. I think that we are pursuing the right course, because it must be right for us to get new entrants into the market: that must be good for the whole economy.

Given that this latest danegeld to the banks will cost an extra £40 billion—in addition to the £50 billion already spent on bailing them out—why is my right hon. Friend so enamoured of this busted, out-of-control, casino-market model of banking which costs the taxpayer such gargantuan sums? Why does he not instead remutualise the three spin-offs, especially Northern Rock? That would be infinitely less costly for the taxpayer and infinitely more secure for the depositor.

I am not sure whether my right hon. Friend was in the House during Question Time, when I was asked about Northern Rock on two occasions. Let me briefly repeat what I said then. I should be very happy to see a mutual option, but whoever came in would have to come in with sufficient capital to ensure that that was possible, because Northern Rock still owes quite a lot of money to the taxpayer.

As for my right hon. Friend’s point about banking generally, he and I may disagree on this—as we have from time to time—but I think that a properly functioning commercial banking system is quite a good thing. What I want to do, though, is ensure that it is properly supervised, regulated and capitalised, and operating in a way that suits the interests of people in this country.

Does the Chancellor wish to pass on the Prime Minister’s personal apology to taxpayers for arranging the shotgun wedding between Lloyds and HBOS?

If I were the hon. Gentleman, I should be very careful before saying such a thing. He may wish to have a word with the hon. Member for Tatton (Mr. Osborne), the shadow Chancellor, who made a point of telling the country that on the day in question he spoke to those involved on both sides, and said that the Conservatives fully supported that particular merger.

Given the proud and honest record of the mutual building societies, in contrast to what has happened in the commercial sector, why are the Government not more enthusiastic about options to enable and facilitate the remutualisation of parts of the banking sector, perhaps starting with the decent part of Northern Rock?

As I said to my right hon. Friend the Member for Oldham, West and Royton (Mr. Meacher), I would certainly not be opposed to a proposal in relation to mutuality if one came along, but it would have to come with sufficient funds. The other point is that, as my right hon. Friend will recall, while it is true that most of the trouble has been visited on the non-mutual sector, one or two mutuals did get into trouble. A lot of that has to do with the management rather than the structure. I am not against mutuality—far from it. I should like to see more of it, but it does need to be funded.

Does not yet another expensive restructuring announcement highlight the weaknesses in the tripartite system for supervising banking and, indeed, monetary policy?

No, it does not. I think that the hon. Gentleman is rather missing the point. The reason RBS got into trouble was that the regulatory system needed to be tougher. It is clear that its then board did not know what it was doing.

Does my right hon. Friend agree that today’s statement from Lloyds represents significant progress towards its operation as a fully commercial enterprise? Does he agree that the payment of a £2.5 billion fee to the Treasury for trading benefits of the asset protection scheme last year represents a good deal for the taxpayer?

It represents the start of the process of ensuring that we get money back for everything that we have done. That is one of the objectives that I believe to be very important.

Does the Chancellor agree that many home owners have no choice about their mortgage providers because they have no equity, and therefore cannot switch to a more competitive marketplace? Will he ensure that if institutions such as Cheltenham & Gloucester and, perhaps, TSB in Scotland are sold to other lenders, their standard variable rates will not increase, given that there is every prospect of their being bought by an institution with a higher SVR?

It is important that when the disposals take place and new companies come in, there is as much communication as possible with people who have mortgages, so that they can see what the position is and what choices are available to them. For example, I know that Northern Rock is about to write to all its savers and mortgage holders explaining what is happening and people’s options. To some extent it is inevitable in any competitive market that different providers offer different rates. As we go through this process, people need to be told that they have a choice. Equally, if somebody does not want to go to a new bank, they always have the option of staying with the bank they came from. As much as is possible, people must be able to make those choices.

The country will be grateful that we have a Chancellor who puts the national interest ahead of tomorrow’s press release. Companies involved in high science and high technology are finding it difficult to obtain money from the current banking system. Will the Chancellor look into whether we need either banks devoted to that or special instruments within the banking system to guarantee access to finance?

My hon. Friend is absolutely right about a lot of high-tech investment and the need to encourage it. That is one of the reasons why I announced measures in the Budget and the Prime Minister has announced measures through the innovation investment fund to try to help to fill the gap where the commercial banks are not operating. It is very important that we support that. Regardless of whether it is done through the commercial banks or through Government help, I want to keep the issue at the forefront of what we are doing because our future depends on it.

The Chancellor did not mention Bradford & Bingley, which might indicate his lack of interest in it, but he did mention Northern Rock and measures to keep it lending and to facilitate its return to the private sector. Will he explain the following to people in my part of the world? Whereas Northern Rock was a basket-case organisation that had been taking emergency funding for months and months and is still a going concern, Bradford & Bingley, which he must admit was not in any way in as bad a shape as Northern Rock at the time, was dismantled and is being wound down.

The hon. Gentleman is not quite right about that. If Bradford & Bingley had been doing all right, it would not have reached the situation where its directors believed that it was no longer a going concern. The Financial Services Authority had to step in because Bradford & Bingley got into difficulties; I am afraid that that fact is incontrovertible. We took prompt action to ensure that the part of the bank that was viable—the front end of it—was transferred to Santander. The rest of it and the management of the mortgages is something that we will have to handle in the longer term. How the hon. Gentleman can claim that there was no need for the bank to have any assistance whatever is very difficult to fathom.

At this stage, I do not know who is likely to be bidding for these banks, but, obviously, we will need to make sure that whatever safeguards we think are appropriate are in place. I make the general point, however, that the British financial sector is what it is largely because it is pretty international and, provided we have the right regulation and supervision, that will be good for us in the long run.

The Chancellor said in his statement that before we could reach a binding agreement with RBS we needed to carry out due diligence on the assets. What was the level of write-down after, as opposed to before, in respect of RBS’s balance sheet on those assets?

I said that we and the FSA had to carry out due diligence; the FSA has carried out that due diligence. As to write-downs, they will appear in the bank’s accounts.

Canada has some of the biggest banks in the world, Canadian banks undertake both investment and retail banking, and the most robust banking system among the G20 countries during the world recession has been Canada’s. What lessons does the Chancellor draw from that?

There are a number of points that could be made in relation to the Canadian economy, but on its banking system I repeat the point that I do not think it is possible to make the neat distinction between a simple bank and a complex bank and to assume that one will get into trouble and the other will not. That is why I take the view that we have to approach these things as they are, rather than as we might wish them to be.

There certainly will be concerns in Edinburgh about what this means for jobs in my constituency and other constituencies in the city, and I welcome the assurances that my right hon. Friend has given in that respect. What opportunities are there to build on what is happening, and to strengthen and bring innovation to the financial sector in Edinburgh—for example, through the suggested re-establishment of a Scottish-based bank—as part of the restructuring of the banking system resulting from these announcements?

My hon. Friend is right: both of us represent a city that is home to very large financial institutions, many of which in the non-banking sector are doing very well; that is an important part of the Edinburgh economy. Both of us are focused on the fact that, whatever happens, jobs are very important, because for the most part these are good-quality jobs that provide good employment. As we restructure the banking system—as we make it safer and better for people—jobs must be at the front of our minds, because that is very important for Edinburgh’s prosperity.