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Financial Markets

Volume 695: debated on Thursday 11 October 2007

My Lords, I shall now repeat a Statement made in the other place by the Chancellor of the Exchequer. The Statement is as follows:

“Mr Speaker, with permission, I would like to make a Statement on Northern Rock plc.

“As I said in my Written Statement on Monday, Northern Rock got into difficulty following the problems triggered in the US mortgage market which have gone on to affect the financial markets in countries all around the world. In early August, when the markets realised the extent of the problems in the US sub-prime market, they also began to have doubts about the value of other asset-backed securities. Uncertainty over which institutions were exposed and to what extent meant institutions lent to each other at much higher rates, and in some cases stopped lending to each other altogether. The result was a large reduction of money in the market generally and an increase in the cost of borrowing, not just for those with exposure to sub-prime mortgages, but for all institutions.

“These developments have had a global impact affecting major US mortgage lenders, a major French bank and banks in Germany. The availability of credit has increased the past few weeks, so we can be more confident, but we cannot be certain when the current instability will end. Britain entered the global turbulence with a stable economy and a strong banking sector that has experienced rapid growth with well-capitalised balance sheets. British institutions have less direct exposure to sub-prime assets, and our sub-prime market share, at 5 per cent, is much lower than that of the US.

“However, Northern Rock, because of its business model, faced particular problems: it has a large share of Britain’s mortgages, but they are primarily financed through the wholesale markets, including a significant proportion from securitisation. This meant that Northern Rock was particularly vulnerable to the virtual closing of this market over the summer.

“On 14 August, the Financial Services Authority told the Bank and the Treasury about its concerns on Northern Rock and its vulnerability in the current market circumstances. During August it became increasingly clear that Northern Rock was having difficulty getting access to the financing it needed and that the cost of doing so was increasing. The general situation and Northern Rock’s position in particular were monitored on a daily basis. On 5 September, the Bank announced £4 billion of extra support to provide increased liquidity to the wider market. As Northern Rock’s position deteriorated, it became clear that specific support was likely to be needed for it.

“On 13 September, the Governor and the chairman of the FSA recommended that I authorise the Bank to provide special liquidity support, and I agreed because I believed that that was justified. There are clear principles governing such support that are set out in the memorandum of understanding between the Treasury, the Bank and the FSA which was first signed in 1997: such support should be undertaken only where there is a genuine threat to the stability of the financial system and in order to avoid a serious disturbance in the wider economy. That was the case here. The provision of this support was announced on 14 September.

“Although the FSA had assured the public that Northern Rock was solvent and that if depositors wanted to get their money out they could do so, it became clear that further assurance was needed. So on 17 September, again on the advice and with the agreement of the FSA and the Bank of England, I announced that during the current instability in the financial markets, and should it prove necessary, I would put in place arrangements that would guarantee all the existing deposits in Northern Rock. This undertaking was explained and extended on 20 and 21 September.

“The Treasury, the Bank and the FSA continue to work intensively with Northern Rock with a view to helping it resolve the situation. Any future solution must lie with the company. The Government have provided appropriate help, and we will continue to do so. As I reported to the House on Tuesday, I have extended the Government’s guarantee arrangements to all new retail deposits, for which Northern Rock will pay a fee, while the Bank has provided an additional loan facility which replaced that of the lender of last resort. I have today written to the chairmen of the Treasury Select Committee and the Public Accounts Committee setting out more details, and I am publishing this letter and placing a copy in the Library of the House.

“There are clearly lessons to be learnt from what happened to Northern Rock and the wider instability across the world. The responsibility to minimise risks and prevent problems happening in a particular bank lies first and foremost with the directors acting on behalf of its shareholders; that is their clear duty. It is the job of the financial authorities to set the policy and regulatory framework in which institutions and markets work. Let me remind the House of the responsibilities here. As the House knows, the Bank of England has complete independence in monetary policy. Its second core purpose is financial stability, a role that it discharges on a daily basis. The FSA, also independent, is responsible for the supervision of individual firms such as Northern Rock. And because of the importance of the financial system for the stability of the economy as a whole, and the potential impact on the Exchequer in ensuring that stability, the Government are rightly also involved. The Treasury is responsible for the overall legislative framework, and I am accountable to Parliament.

“I believe that it is right that the Bank and the FSA should continue with those responsibilities. This is a model that others around the world are now following. However, we do need to review how the framework has operated and put in place whatever practical improvements are needed. As the FSA has said, it is reviewing for itself its own lessons. I look forward to its conclusions early next year.

“We need to make more reforms to prevent problems happening internationally and in Britain. First, when the Financial Stability Forum reports at the G7 to Finance Ministers in Washington next week, I will urge faster rapid implementation of international agreements on solvency, accelerated work on international standards for regulating liquidity, more transparent information on credit ratings, and action to improve the transparency of off balance-sheet vehicles.

“Secondly, I will propose an IMF and FSF early warning system to strengthen financial sector surveillance, identify risks to stability and coordinated regulatory responses to them. Thirdly, I can report European agreement this week to strengthen arrangements for ensuring financial stability in Europe and increased cross-border management.

“It is important that regulators focus on liquidity as well as solvency. Here at home, the FSA will shortly set out proposals for a review of the UK liquidity regime. As the Governor has said, all central banks face problems in providing support to banks in difficulty in a world where markets rightly expect high levels of disclosure and transparency. So I can confirm that if it proves necessary to clarify in Europe the legal and practical issues surrounding the way in which such support is provided and disclosed to protect financial stability, we will work with other European countries to provide that certainty. We will now review whether rules about the swift takeovers of banks need to be changed.

“However, when problems do occur, we need to have a system in place that is clear and reassures depositors. We will introduce legislation in the next Session to establish a new regime. Together with the FSA and the Bank, I am proposing in a discussion document published today the principles for this new regime. This new regime would mean depositors are insulated from a bank that has failed, greater compensation for them and certainty that their compensation can be paid out quickly.

“As a first stage, the FSA has decided that the Financial Services Compensation Scheme is now covering 100 per cent of deposits up to £35,000. However, I have made it clear that that is just an initial step towards a more comprehensive change. We will work closely with the banking industry, consumer groups and others to agree this new regime. I hope that there will be cross-party consensus on it.

“We must all—internationally and domestically—consider what lessons there are to learn from the summer's events, and if needed I will take action. The changes we make will strengthen our reputation as the world's leading international financial centre and be founded on our commitment to maintain a strong and stable economy. I commend this Statement to the House”.

My Lords, that concludes the Statement.

My Lords, I thank the Minister for repeating the Statement that the Chancellor made in another place. I know that the Minister has no say in the content of any Statements that he has to repeat. He has my sympathy, for this Statement showed no understanding that the Government in general and the Chancellor, and his predecessor in particular, have something to answer for.

I never thought that I would witness a run on a bank. I thought runs on banks existed in history books or, as the director-general of the CBI so succinctly put it, in banana republics. The Government therefore do have something to answer for. This was the first test of the tripartite arrangements that were put in place when the Government placed banking supervision in the hands of the FSA. The tripartite system failed, but the Statement gives no account of the causes of failure. Why do the Government think it failed and what should be done differently in future?

It has been reported that the tripartite arrangements were subjected to a dummy run for avian flu but not for a full-blown financial markets crisis. Is that true? If so, it is pretty incredible, and can the Minister explain that? If it is not true, the dummy run should certainly have surfaced the legal problems outlined by the Governor of the Bank of England to the Treasury Select Committee in another place. What testing has actually been carried out? Has that testing revealed the legal deficiencies? If it did reveal the legal problems, why was nothing done about them?

We also need to know who is supposed to be in charge when a crisis arises. The Governor of the Bank of England failed to answer that question when it was put to him by the Treasury Select Committee, and the FSA was no more forthcoming when it gave evidence earlier this week. Who does the Minister think was in charge? Whoever was in charge failed—that is a fact—so who was it?

Are the Government satisfied with the role played by the Bank of England? Do the Government agree with the Bank’s view on moral hazard preventing action the week before it U-turned and provided £10 billion? Do the Government believe that the role of Sir John Gieve, the deputy governor with responsibility for financial stability and the link man with the FSA, was effective?

When the Government drafted the Bank of England Act 1998 they specified in some detail the Bank’s monetary policy role, but the Act is silent on the Bank’s other activities, including its financial stability role. Do the Government think that there is sufficient clarity about the Bank’s financial stability functions?

Are the Government satisfied with the role of the FSA? Was the FSA close enough to the detail of Northern Rock’s business model and financial risk profile? If so, why did it relax Northern Rock's capital requirements in June? Are the Government confident that the FSA can analyse and spot problems early enough?

Will the Minister also explain the Government's policy towards failing retail banks, particularly the announcement on 9 October that results in the taxpayer giving an open-ended guarantee for all Northern Rock’s depositors? On 20 September the Treasury clarified the original 17 September guarantee and said that an extension to new accounts would be unfair to other banks and building societies. Do the Government now consider that the 9 October extension to all deposits is fair to other banks? Will the Minister quantify the contingent liability that taxpayers now have to stand behind?

The Chancellor has today announced consultation on protecting depositors. It might as well be entitled How the Treasury can use 21 Pages to Say Not Very Much. Do the Government have no proposals, no ideas and no clear sense of the way forward? Are the Government not going to provide any leadership in this area? The document does not deal with an issue which arises from how the Government handled the Northern Rock case—that the public will assume that if anything less than 100 per cent protection is written into the new financial services compensation scheme, the Government will step in to protect depositors, as they have for Northern Rock’s depositors. That is a problem entirely of the Government's making. Do the Government believe that they can in future escape being seen as the de facto underwriter of all retail deposits in our banking system, and if so how?

I have many other questions, but I shall finish with just one. I asked the Minister yesterday during Oral Questions about the Governor of the Bank’s view that the market abuse directive had prevented a covert support operation for Northern Rock. The Minister did not answer then, so I am going to have another go. The Minister will be aware that the Commission has hotly denied that the directive was the source of the problem, so did the Governor get it wrong or did the Government goldplate the market abuse directive when they implemented it and thereby create a barrier to dealing with banking crises in the time-honoured way? What are the Government going to do about the problem?

My Lords, for many people, the saga at Northern Rock is particularly sad. Going back, Northern Rock has had a very fine tradition as a respected regional mutual institution, one of the financial institutions of the north-east. It has been a major employer and continues to be so, and it has had an impressive record as a funder of charitable activities in the region. In many ways, it was looked up to as one of the more successful businesses in that part of the country. Yet we have seen laid bare during the past month the most extraordinary activities, both on the part of Northern Rock and in the way that it has been dealt with by some of the authorities.

I find it slightly sad that the Government seem to think of this, or wish to portray it, as a matter of international financial market instability—that is the name of the Statement on the annunciator screens now. It is actually a Statement about Northern Rock which, in my view, has two principal components. The first relates to the business model of Northern Rock. The truth is that during the first six months of this year, Northern Rock doubled its mortgage lending and has done so on the basis of extraordinarily aggressive practices and marketing. That is the most reckless way for any bank to behave. It was a disaster waiting to happen, and it has.

Can the Minister confirm that the Bank of England has already lent £11 billion and guaranteed another £23 billion? Does he accept that Northern Rock is still today following the practices that have helped get it into such difficulties? Within this week, one of my colleagues rang Northern Rock to ask about taking out a mortgage and was told that he could borrow up to 127 per cent of the value of the property at five times his income—30 per cent of that would be unsecured. That was not just happening six months ago; it is what was happening this week. Does the Minister believe, given the history of Northern Rock over recent months, that that is a prudent way for the bank to continue its operations? What is his view of the status of the management of the bank? For most normal mortals, it seems extraordinary that the people who have got Northern Rock into this tremendous mess are still there. That relates not just to some of the executive members. One wonders, for example, about the chairman of the risk committee, one Sir Derek Wanless. What is his view of the risks that the bank took at the time and what is his view now? I hope that the Treasury Select Committee will ask him to explain his advice to the bank in that capacity over recent months. Surely the chief executive and his staff must have played a major part in the fiasco that we have witnessed. I for one find it surprising that they are still in their positions.

Moving on from the bank itself, we come to the FSA, which has the principal responsibility for policing the bank's activities. Can the Minister confirm that the FSA as a matter of course has reviewed the market strategy and the business strategy of banks such as Northern Rock as a general principle once every three years, and that until a couple of months ago the next review of Northern Rock was not planned until 2009? Does he consider, in rapidly moving financial markets where you have banks and building societies pursuing aggressive growth models, that a three-year gap between the FSA even formally looking at something is an adequate way forward?

There has been much discussion about the respective roles of the Treasury, the Bank of England and the FSA in recent weeks, and some suggestions that the basic structure is wrong and that supervision for banking might somehow return to the Bank of England. Does the Minister agree that the main lesson to be drawn from the Northern Rock saga is not that the Bank of England should necessarily resume the functions of the FSA, but that the FSA should not be asleep on the job? It needs to have a major review of how it deals with the banks.

Finally, on the international aspects of all this—because there are clearly some international aspects—I reiterate the point made by the noble Baroness, Lady Noakes, about the market abuse directive. Can the Government explain whether, in their view, European legislation has played a major part in making this whole exercise more difficult and, if so, will they do something about it? I have a suspicion and a sense that the old-fashioned way of dealing with things in the City, which was a covert way, is no longer fit for purpose. I was interested that the Governor of the Bank of England thought that by covertly getting the chaps together they might be able to sort it out without anyone knowing. Do the Government share that view and, if not, what do they plan to do about it?

Like other noble Lords, I have barely seen the consultative document. It strikes me as slightly surprising that so much attention is being paid to various international matters when what is required is a more satisfactory and robust method of dealing with things in the UK and the major responsibilities that lie domestically. We require a combination of two principal things. First, we need senior management in important financial institutions who themselves behave prudently within a board structure that acts to ensure that they do. Secondly, if there is any indication that a bank or any other financial institution may not be behaving like that, can the Minister assure us that he will put pressure on the FSA to adopt a much more robust and rigorous view of its central purpose?

My Lords, I am grateful to both noble Lords who have contributed to this short debate and asked pertinent questions, but I want to rebut what I think underpins both contributions—that somehow the Government are being complacent about the issue and feel that there is no need to answer for the difficulties that have obtained through August and September with regard to Northern Rock. I hope that it will be recognised that the moment that he was able to do so—in the first week of the resumption of Parliament—the Chancellor has made a Statement to the House: both the Written Statement and the Oral Statement today, which I have had the pleasure of repeating. It will be recognised that within that Statement are constructive proposals on how we learn lessons from the problems that have clearly emerged during those months and necessary action for the future.

I am grateful to noble Lords, who identified some of the questions that need to be addressed. Let me assure the House that the Government are all too well aware of those questions. That does not mean that there is an immediate and straightforward answer. If there were, the questions would not be apposite, but they are apposite because they relate to a difficult situation. We are concerned to establish consultation on how we amend the process. As the House will recognise, during the Recess both the Governor and the chairman of the Financial Services Authority were present before the important Select Committee in the other place to respond to some of those questions and identify their preliminary answers. Their answers were bound to be preliminary. I want to refute straight away that this tripartite system, which has been in existence for the past 10 years, has never had a test. It has had significant tests produced by financial problems which have had to be resolved. We are all aware of banks which may not have failed in quite the same way as Northern Rock, but we all know of substantial financial institutions which were in great difficulty a decade or so ago and that international terrorism produces real problems for the financial markets. The structure in this country has stood these shocks to the international system and their impact on the British system. It has withstood them in a very able way helping to ensure that over the past decade London has become the financial centre of the world, and the basis of the British economy has gone from strength to strength. The Government intend to sustain the tripartite system described in the Statement. We are aware that the individual actors in the system know that they have questions to answer on the process of consultation and how performance can be improved.

Some of the questions can be exaggerated for obvious reasons. I am pleased that the noble Lord, Lord Newby, has not been in close alliance with the noble Baroness, Lady Noakes, and her very heavy emphasis on the financial directive and matters European being automatically within this framework—if one can identify that a great deal of the responsibility and difficulty is because of the way in which Britain has handled its relationship to Europe, that will please her Back-Benchers in this House and in the other place.

My Lords, for clarity, I raised the market abuse directive because there appeared to be a difference of opinion between the Governor of the Bank of England and the Commission. I was not seeking to make any comment about our general relations with Europe on this occasion.

No, my Lords, but the emphasis placed on it is scarcely merited by the role that the directive plays in these terms. We do not consider the directive to have been a crucial factor in the reaction to these issues as far as the authorities in this country were concerned, although we will discuss with our European partners aspects of the directive. We are aware that similar problems occurred in Germany and France as well as in the United Kingdom.

The responses thus far have been effective. Criticism has been made that there is considerable risk to the taxpayer. At this point, the taxpayer has not made any contribution to the Northern Rock issue. The support is guaranteed against its existing assets, which the House will know clearly depends on how the bank survives and its future arrangements. It ill behoves anyone in the House to be wholly pessimistic about that. On the existing management at Northern Rock, are noble Lords opposite suggesting that it should have been fired by a government decree?

My Lords, that is taking interference in the market a little further than the whole House may wish. It is a matter for the shareholders of Northern Rock, to whom the management is responsible, and not for government action. On whether Northern Rock should continue to trade, it is being charged a commercial fee from the public resources it receives, so it has no competitive advantage because of that. However, it is the responsibility of the authorities to seek a solution to the problem of Northern Rock as early as possible.

Our intentions are clear. Of course, there are lessons to be learnt, which the Governor of the Bank of England made clear when he appeared before the Select Committee in another place. The Financial Services Authority also recognised that there were lessons to be learnt from this situation. We need to consult on this. The lessons may lead to legislative change. We will consult and ensure that we have a reasonable period of time for that consultation in order to draft appropriate legislation, but it should be recognised that the structure is secure. It has served this country for well over a decade. It is in position to effect the necessary corrective on this occasion. The risk to the taxpayer is severely limited. I refute the suggestion that taxpayers have been involved in any significant cost.

I very much appreciate the contributions. I hope that the noble Baroness and the noble Lord will recognise that the Chancellor in his Statement hoped that, because this is an issue of considerable importance to Britain, our economy and financial stability, and to the role of London as a leading financial location in the world, we need to get the legislation right. We need to learn the correct answers to the problems that have arisen from these developments. I hope that we can look forward therefore to an all-party consensus on doing what is right to remedy the difficulties we have had in the recent past.

My Lords, although I accept that seismic incidences in North America have sent shock waves across the Atlantic and that a great deal of the problem emanates from that source, has not Northern Rock been the architect of its own difficulties to a great extent? Am I right in assuming that, before the Treasury took what I regard as a very bold, decisive and proper course in underwriting the deposits of Northern Rock, the Government made a careful analysis of the situation of the company over the previous 12 months? First, had it been indulging itself in allowing mortgages at 125 per cent of the value of the real property used as collateral? Secondly, were mortgagors encouraged to make their own assessment, not only of their current incomes but of future incomes? Thirdly, was there an over-indulgence in so far as borrowing short and lending long was concerned on the part of Northern Rock?

It seems that no Government could possibly have taken the wholly fundamental decision that they took—rightly—without having analysed those situations and come to some meaningful conclusion concerning them. What were those conclusions? What is the factual situation? Far from suggesting that the Government should be responsible immediately for dismissing errant directors, I wonder whether they have obtained some form of undertaking from the company that such disciplines will be looked to?

My Lords, the answer to the noble Lord is straightforward. The Bank of England did not support Northern Rock because of the deserts of that company. Every noble Lord as well as everyone in the market was palpably aware of the exposure of Northern Rock to the collapse of liquidity in the wholesale markets and its vulnerability. It is a private company which takes responsibility for its judgments, and having seen the initial catastrophic collapse of its share price, we are all too well aware of the price that is being paid for incompetence. But the Government have two responsibilities. They certainly have a responsibility to the ordinary, relatively low-scale depositor—men and women in the street who trusted Northern Rock as an institution and whose funds were at risk—and it was right for the Chancellor to make clear the underwriting of the position to guarantee those deposits.

The second responsibility is in regard to the international liquidity position. It was the judgment of the Bank of England that excessive turbulence in the market could lead to a serious impact on the economy. We are by no means outside that turbulence at present, and none of us would be sanguine enough to suggest that there will not be some difficult months ahead. But it was the Bank of England’s judgment that increasing liquidity to a limited extent at this point would offer a degree of stability and help to ensure that there are no repercussive effects from Northern Rock on other institutions. That is a judgment made by the Governor and for which the Chancellor is ultimately responsible in terms of support from the elected House. But let us remember that the Governor is charged with the responsibility of sustaining stability in the markets as far as he is able through his actions, and he was fulfilling that remit.

My Lords, the Minister said that the system has worked over the past 10 years, but he did not give any example of which particular problems had been solved in that way. The reality is that when it came to the crunch, the system devised by Mr Gordon Brown 10 years ago did not work, with the consequences we are discussing today.

I have three questions for the Minister. The first is on a point which has already been raised—the European directive. It is pretty clear that the reason the Governor of the Bank of England received advice that it could not provide a solution to the problem in the way he wished was that the directive prevented him in that regard. The European Union then said that the directive did not prevent him. The reality seems to be that it was the gold-plating of the directive that caused the problem. The Minister rightly says that we are not out of the woods yet, so do the Government propose that the gold-plating should be removed forthwith?

Secondly, in his Statement the Chancellor said that he is proposing to change the arrangements for compensation to depositors. One can certainly agree that a system to meet an immediate problem as it arises is needed, but I do not understand why there is any need to raise the limit from £35,000. It is only people who decide that they want to deposit a sum over that amount with a particular building society who would have a problem. The Minister will correct me if I am wrong, but if they spread their funds around, there will not be a problem. There is no need to increase the potential burden on taxpayers in order to cover people who allocate their assets in an imprudent way.

Thirdly, on the guarantee, there seems to be something of a mystery, and perhaps the Minister could clarify the position for us immediately. I am not clear by what authority, legislative or other, the Government gave this particular guarantee, and the contingent or possibly real charge on the taxpayer. I simply do not understand how, when a Minister decides that he will give a guarantee, that situation could arise. On the position of the directors of Northern Rock, it is quite extraordinary that the Government should give the guarantee without seeking in some way to hold the directors to account. At that point the Government are clearly in a very strong bargaining position indeed. It is extraordinary that after the guarantee had been given, the Government then decided that the company might issue a dividend. That is really quite amazing. Indeed, it continues to lend huge multiples of income. That of course is widespread across the industry, but we are going to run into a negative equity problem on a far greater scale than anything we have ever seen before if this kind of thing goes on.

I should like to make a final point. The Government have said that they are seeking to improve the transparency of off-balance-sheet finance. If that is so, one would hope that the Government will be the first to do that—they certainly are not doing so now.

My Lords, I turn to the first question about the EU directive and gold-plating. All central banks in the modern age find it far more difficult to intervene in the market and provide support against a background in which the markets expect disclosure and transparency a great deal more than was the case a decade or two ago. So there are problems in this area and that is why we intend to discuss both in Europe and elsewhere the role of central banks in dealing with this issue, and the question of the directive obtains in those terms. However, I seek to minimise the salience of the directive because in a sense European central banks have nothing to do with the directive, and they all face the same problems in how they respond to markets.

The guarantee arrangements were made under the Treasury’s common law powers and they were noted to Parliament, as is appropriate, so they followed exactly the position Parliament gives to the Treasury. The noble Lord asked whether the limit needs to be raised above £35,000. The Chancellor made it clear several weeks ago that the guarantee would be set at that figure to stabilise the position in Northern Rock, but whether the figure needs to be set higher is a proposal in a discussion document about the protection of depositors, so no decision has been taken. The Government have indicated that in order to ensure stability in such important institutions, £100,000 may be necessary to recognise the position of house purchase arrangements, but it is not a decision. Rather, it is a proposal to be discussed, and I have not the slightest doubt that the noble Lord will make his views on the issue known as well.

I appreciate the point made by the noble Lord about rewards to Northern Rock. The Government and the Bank are concerned that Northern Rock should not fold under these circumstances. It would have a catastrophic impact not just on those with resources in the company, but possibly on other institutions. We all recognise the problems that would arise from a complete bank failure, so some support has been provided. That support is limited and it is not anticipated that Northern Rock is going to remain in its present state for very much longer. If the question is whether the present directors are fit for purpose, the obvious implication may be anticipated that control in Northern Rock will potentially change in the near future. But I stress that those who have taken this role within Northern Rock are looking not towards rewards but to a catastrophic situation in their own terms.

My Lords, my noble friend is absolutely right, as are other Members of this House, that there are serious lessons to be learnt, both in this country—particularly by Northern Rock and the Bank—and in other countries. The issue, however, is much wider. Will he continue to take a firm line with those who seem to think that this was a badly handled event? In view of the circumstances, it was extremely well handled. To take lessons on negative equity from a party that managed to turn negative equity into a growth industry for homeless families’ accommodation would be extreme, to put it mildly.

This is an international problem; it is a problem for Germany, France and, obviously, the United States. There is a question about transparency and secrecy. I welcome the decision to have a voluntary agreement by hedge funds and others to have a less secretive and more visible financial system. Maybe—and I understand this is one of the things being talked about—we need far greater agreement at the G8, the IMF and the World Bank on creating some structure as we are now dealing with a world financial system that is radically different from what it was before. A run on a bank is a serious matter that affects a number of countries, not just this one.

My Lords, I am grateful to my noble friend for providing some corrective to what on the whole have been negative comments from the Back Benches. He will also appreciate that we are all too well aware of the fact that questions have been raised during the course of these disturbing developments of the past few months. Those questions are acute enough for it to be necessary for us to address ourselves to them. The Governor of the Bank of England has made it clear that he thinks that is necessary, as did the Financial Services Agency when it was giving testimony to the Select Committee. The Chancellor has already indicated that not only does he think it is necessary, but he is concerned to produce a consultation paper in order that we can get the best possible approach across the country and across the parties to a solution to what is, after all, fundamental to our economy and financial system in which every single person in the United Kingdom has a stake.

My Lords, we know that the Government have given an unlimited blank cheque to Northern Rock, but is it undated as well? How long is this going to last for while the hedge funds circle to see if they can sort it out? What are the limits?

My second question is about sub-prime lending. In the Statement the Government said,

“our sub-prime market share, 5 per cent, is much lower than that of the US”.

What is the definition of “sub-prime lending” in the UK? If the Minister does not know, will he write to me with the official definition? I should volunteer that I am the colleague of the noble Lord, Lord Newby, who rang up Northern Rock this week and got what I can only describe as a sub-prime quote for a 127 per cent loan, which it is still offering. I shall run through it quickly: one is offered a £127,000 loan on a £100,000 house, so if you have a gross income of £500 a week, the interest payable alone would be £160 a week on that loan. That is before any deductions or any capital repayment, so what we are talking about is probably more like half someone’s income. Does the Minister agree, when he thinks about it, that at a time when house prices are falling fast in many parts of Britain, that is a toxic mortgage with “repossession risk” written all over it? If taxpayers are not underwriting sub-prime loans today, I do not know what they are doing. How can this possibly be right?

My Lords, the noble Lord is asking me an impossible question when he asks for a definition of “sub-prime”. As I understand it, it started off as an American term for a broad category of certain kinds of loan, and it has a different connotation in other countries. But we all understand that by “sub-prime” we mean “additional risk involved”. I cannot give a definition much beyond that. If the noble Lord is dissatisfied with that—and I clearly see he is—I will certainly write to him and give the best definition we can.

On the more tangible issue that he raised with me, the company asked for support until February 2008 while it considered all its options, and we have agreed to provide support to that date.

My Lords, I shall ask the Minister just one question, because he has the beguiling habit of roaming widely over the whole subject and getting away with not answering all the questions asked by the noble Lord, Lord Elystan-Morgan, or anyone else.

The FSA has the responsibility to monitor financial institutions. It has obviously been found wanting in these circumstances because it had not monitored for nearly 18 months or thereabouts. We have all been aware of this situation for at least two months, and still the noble Lord, Lord Oakeshott, is able to ring up, ask for a mortgage and get one on the terms he has so ably described to us now. Why is that still happening, what is the FSA doing about it and what are the Government going to do to the FSA about this case?

My Lords, the answer to the noble Baroness’s question is straightforward. With this additional public support under Northern Rock, to put it at its mildest, the FSA is taking the keenest and closest perspective on the developments in Northern Rock with the objective of establishing as far as possible the best possible and most secure position for those who have an interest in Northern Rock. This is not a question of control or the position of the directors—it is for the private market to decide when change occurs—but does anyone in this House seriously think, if there is a change of ownership at any time, that the existing directors will sustain?

What is the FSA doing about this? It is monitoring the position, because that is its obligation, and guaranteeing that the support that is given is within the framework of public policy in this area in order to achieve the best possible solution to what we all recognise is a fraught position for that institution.