My Lords, I beg leave to repeat the Statement on financial stability made in another place by the Chancellor of the Exchequer.

“With your permission, Mr Speaker, I should like to make a Statement about this morning’s announcement by the Bank of England to improve conditions in the financial markets. The scheme has been developed following extensive discussions with the Treasury and the Financial Services Authority.

“I also want to report on the recent G7 meeting in Washington on restoring financial stability to financial markets. I will also report on measures we are taking here at home to strengthen the stability of the banking system, as well as to help homeowners with their mortgages.

“Before I set out in further detail the Bank of England’s special scheme, let me remind the House of the background against which it has been developed.

“The financial markets throughout the world remain turbulent, following the problems that arose in the US housing market last year. Functioning financial markets rely on banks and building societies being able to raise finance from each other—and from other investors—including through securitisation markets and inter-bank lending markets. These funds can then be used to finance lending to businesses and consumers, including for the provision of mortgages.

“But global financial markets are not currently functioning normally. Across the world there is a lack of confidence in credit markets—most notably mortgage-backed securities. That lack of confidence was prompted by the downturn in the US housing market and in particular by the problems associated with sub-prime mortgages there. Banks are reluctant to lend to each other, and as a result lending to customers is more expensive and more restricted.

“Along with other central banks, the Bank of England has over the past few months made additional funding available to the markets through its regular market operations. The UK financial system remains fundamentally strong and the Bank of England’s action has helped to take some of the pressure out of the system by giving the banks additional liquidity to continue their usual banking operations. Last week, it made a further £15 billion available, over three months, as part of its open markets operations. And the governor has said that he is committed to providing the liquidity assistance that the system as a whole needs to function normally.

“Here at home, the economy continues to grow. Last week’s figures confirm that unemployment remains low and employment high. That and the recent interest rates cut will provide wider support for the housing market and the wider economy.

“As banks here and across the world disclose their losses and strengthen their financial positions, which will help to rebuild confidence, the Bank of England can now take action to ease conditions in the financial markets, particularly in relation to mortgage-backed securities.

“The special scheme announced by the Bank of England today is a further step towards tackling these problems, which have become more evident in recent weeks, with the increasing cost and decreasing availability of lending by banks and building societies.

“Under the new scheme, for a six-month period, the banks and building societies and other institutions that are eligible for the Bank's standing facility will be able to enter into agreements with the Bank of England under which they exchange high-quality asset-backed securities for Treasury bills. They can then hold these bills or trade them in the markets. Each exchange agreement will be for a maximum of a year, but can be renewed at the Bank’s discretion, so that the exchange could ultimately be for up to three years.

“The arrangement is available only for assets existing at the end of December and does not apply to new lending since then. At the end of the scheme, the banks will return the Treasury bills to the Bank of England, and will receive back the securities which they had provided as collateral. This means that the banks will continue to hold the risk on the securities they provide, so it is them rather than the Bank of England that will be exposed to any fall in value.

“At all times, the banks must provide as security to the Bank of England assets worth significantly more than the Treasury bills they receive in return. If the value of their assets falls, the banks must provide more assets to the Bank of England or return some of their Treasury bills. They will be charged a commercial rate, so there is no subsidy to the banking sector.

“The Bank of England expects the initial take-up to be £50 billion. It will monitor the position daily, both to check new bids from the banks and to track the value of the assets exchanged as collateral.

“The Treasury is supporting the scheme announced by the Bank of England by lending to it—at a commercial rate—the Treasury bills that they will then exchange with the banks and building societies. As the House will know, the Government stand behind the Bank as its sole shareholder and we are making this clear by providing an indemnity. The Bank of England believes that these measures will support the banking sector during the present period of uncertainty and will help to restore the stability that the financial markets need, both now and in the longer term. This will help alleviate the problems that have seen banks reluctant to lend to each other, and in turn support the provision of new mortgage lending.

“Maintaining economic and financial stability is the Government’s key priority. In addition to the Bank of England’s announcement, I confirm to the House that the Government will take further action, at home and internationally, to restore stability in financial markets. It is important that banks continue to make full disclosure of their exposure to losses and do so as soon as possible. That is why, at the G7 and IMF committee meetings in Washington, we agreed that banks should be as open as possible, as quickly as possible, in order to remove the continuing uncertainty as to their true positions. This process has started throughout the world, including here in Britain, with banks disclosing their losses and making proposals to rebuild their capital positions. Transparency is an essential part, along with other steps we are taking, of stabilising financial markets.

“In Washington last week, the Financial Stability Forum agreed a range of actions, some to be implemented in the next three months, others in the longer term. We agreed to strengthened oversight of risk management, including capital and liquidity; clearer standards for valuation and transparency; and changes in the role and use of credit ratings. We will strengthen international co-operation, so that we are better able to prevent crises and deal with problems that occur. We are also working with the IMF to allow it to play a greater role in providing an early warning of threats to financial stability, so that the relevant authorities can take early action to prevent these actions in the future.

“Here at home, we are about to finish consulting on the reforms to the banking system that I announced in January. These reforms will make it easier to intervene in the event that a bank gets into trouble, in order to protect depositors and maintain the stability of the financial system. Because it is important that we get this right, I will continue to hold further discussions with the industry on the detail of these proposals before bringing forward legislation. We will also make changes to the Bank of England to emphasis its role in maintaining financial stability. The responses we have received so far to the consultation have made it clear that, given the importance of these reforms, it is crucial that we have further discussion. Once that is completed, I can confirm that it remains our intention to introduce legislation this Session to strengthen financial stability and depositor protection. The legislation needs to be on the statute book early next year, when some provisions of the Banking (Special Provisions) Act are due to expire.

“Finally, we are determined to do everything we can to help homeowners, so I am meeting the Council of Mortgage Lenders, the Finance and Leasing Association and major lenders tomorrow, along with the Chief Secretary to the Treasury and the Housing Minister. Since 2004, mortgage lenders have been required by statute to treat their customers fairly, and at our meeting I will be discussing how banks and building societies can help people whose fixed rate mortgages are coming to an end, as well as helping people who may get into difficulties in repaying their mortgages. Banks and building societies have a duty to treat their customers fairly and, in the light of everything we are doing with them, I want to discuss with them how they can pass on the benefits of falling interest rates, as well as wider government support to mortgage holders. The Government will continue, along with the Bank of England and the Financial Services Authority, to do everything they can to maintain stability.

“The announcement by the Bank of England this morning will help to resolve the problems in the wholesale financial markets, with their subsequent impact on the retail markets—so helping business, individuals and, in particular, the mortgage market. I commend this Statement to the House”.

My Lords, I thank the Minister for repeating the Statement made in another place. We support the principle of the Bank of England making greater liquidity available to banks. My honourable friend George Osborne has been calling for the use of a wider range of securities within Bank of England facilities, so this move is welcome.

It has taken the Government and the Bank a long time to get to this position. The US Federal Reserve Bank liberalised its collateral requirements over a month ago, and in the UK the various attempts to date to inject additional liquidity have achieved little, and LIBOR has remained stubbornly high even when the bank rate has been reduced.

In general, the UK has been behind the pace in dealing with the credit crunch as it has unfolded. The Minister will need no reminding that the Government’s dithering over Northern Rock was in large measure responsible for the end result; a nationalised bank with a £100 billion balance sheet underwritten by the taxpayer. We have no timetable for the so-called temporary ownership to end that, so the taxpayer will be standing behind that balance sheet for some time to come.

I mention Northern Rock to put today’s announcement of a further £50 billion in context. It looks rather modest. Furthermore, I understand that the total amount of bank and building society debt that needs to be refinanced this year could be as high as £750 billion, so there has to be a serious question over whether today’s move will be sufficient. The Statement implies that the £50 billion facility may be increased. Under what circumstances will the Bank of England extend the facility beyond the first £50 billion? What will trigger this? Will Parliament be informed?

The Government’s spin on today’s news is that it will help those with mortgages. The Statement referred to tomorrow’s meeting between the Chancellor and the Council of Mortgage Lenders as if that will solve some of the difficulties facing lenders and borrowers. The Chancellor needs to be aware that the Council of Mortgage Lenders’ response to the Bank’s announcement this morning was:

“The recent trend of mortgage products being removed and mortgage prices increasing for new customers will be affected more by how LIBOR responds to the announcement. The improved liquidity is unlikely to reverse the trend to higher mortgage costs we have seen in recent weeks”.

No joy there, then. The Financial Times Alphaville site said:

“The spin may be about the housing market. But this is really about the money markets”.

The cost of the special liquidity scheme is linked to LIBOR, but LIBOR is part of the problem of rising mortgage interest rates. Can the Minister explain how a LIBOR-related lending facility will help the mortgage market? There is no requirement for the banks to use the proceeds from this facility to reinvest in residential mortgages, so if the Government really have an objective of supporting the mortgage market, how will they ensure that they get value for money from taxpayers’ backing of this new facility?

The “haircuts” that the Bank proposes to use are very large. In the extreme case, a fixed interest rate, 10 to 30-year own name covered bond for which no market price is observable, denominated in euros or dollars, could pick up a haircut of 35 percentage points. Haircuts are a way of expressing risk. Can the Minister explain how the Government and the Bank have arrived at their risk percentages? Does this represent a view that the mortgage market in the UK and the rest of the EU is carrying risks of up to 35 per cent in loss of value?

Let me be clear, we support the prudent use of taxpayers’ money, and if 35 per cent is the Government’s appraisal of risk, that is what should drive the haircuts; but the Government must come clean on their risk assessment. Will the Minister tell the House what view the Government have on the risks inherent in the current mortgage book of UK banks and building societies and their European counterparts?

The eligible collateral is restricted to AAA-rated securities, but the Government have been critical of the rating agencies. The Prime Minister said that we need to,

“sort out the credit rating agencies and the mistakes that they have made”.

What changes have been made to sort out the credit rating agencies to stop them making mistakes? I am not aware of any changes, so what credence can we place on the AAA ratings that are required? Is this a tacit acceptance that the Government can come up with no better way of appraising the quality of the securities that taxpayer money will be backing?

The eligible securities within the special liquidity scheme seem on the whole to be sensible, and we support the exclusion of securities linked to US mortgages, but can the Minister explain the inclusion of credit card-backed securities? Why have the Government allowed US credit card-backed securities to be included? What is the rationale for excluding US mortgages but including US credit card debts?

Will the Minister say how the Bank of England is going to make sure that this new facility is propping up sound banks and not another Northern Rock? The Financial Services Authority is responsible for banking regulation and the Bank has little information about individual banks. Will the Bank be carrying out due diligence on banks before it agrees to deal with them at the window? Does the FSA have any role in this? If it does, how can the Bank and the Government be sure that the judgments made by the FSA are sound, especially given the outcome of the report on its disastrous handling of Northern Rock?

Tackling inter-bank liquidity is important but so too is the strength of banks’ balance sheets—the Minister referred to this in his Statement. We have heard about the possible rights issue by Royal Bank of Scotland. What are the Government and the FSA doing to ensure that banks play their part in strengthening their balance sheets, whether through additional capital or retained profits? We heard in the Statement about international discussions, but what practical steps are the Government taking in this country?

This announcement is a helpful step forward. It remains to be seen whether it will have the effects that the Government desire and it raises as many questions as it answers. I hope that the Minister will answer the questions that I have put to him.

My Lords, I, too, thank the Minister for repeating the Statement. I think that all noble Lords would agree that we are now in a rather bizarre situation. After years in which the banks were trying to persuade all of us to take out bigger and bigger overdrafts, the Government have now in effect created a massive overdraft facility for the banks. We are seriously concerned that in doing so the Chancellor has exposed the taxpayer to the risks of a massive bank bail-out.

As to how we got to this position, a number of things are clear. The banks have in some respects been helpful about it. By their own testimony through their representative body, the Institute of International Finance, they have been guilty of,

“major points of weakness in business practice”,

including massive levels of pay, bonuses up to 10 times basic salaries and serious shortcomings in the management of risk. They are not simply passive victims of bad luck. British banks lent too much too quickly and too carelessly. The big losses with which they are now faced must be identified by them and then covered by bank shareholders. That is the way in which trust will be restored and interbank lending resumed at acceptable levels. However, it is clear that going back to the shareholders is an extremely unpalatable option for many bank executives, not least because they fear that they may lose their jobs if they do. It is much easier to go to the Government and get a bail-out from them.

The Chancellor has pointed out that the taxpayer is protected because bank assets will be transferred at a discount. The noble Baroness asked a number of questions about this, but we need to know how big a discount we are talking about. Given that the IMF has judged that the housing market may be 25 per cent to 30 per cent overvalued, any discount of less than 30 per cent appears at face value to place the taxpayer at significant risk. Can we therefore have an assurance that the discount will be at least at that level? The Bank of England has said that it expects that the initial take-up will be £50 billion. Is there any sense anywhere of what the final take-up will be? Have the Bank and the Government in effect given an open-ended commitment that they will make available as much money as the banks need?

If there is to be any departure, as it appears there may be, from the traditional terms on which the Bank of England lends to the banks, it is only reasonable that new tough and binding conditions should be placed on the banks rather than the extremely vague assurances about future behaviour that we have heard today. We suggest three conditions for the new facility. The first is that bank shareholders, not the taxpayer, should pay for the losses from previous bank lending. This means rights issues to raise shareholder capital. It appears that the Royal Bank of Scotland is taking the lead in taking such a step, but our view is that other banks should be eligible for funding from this source only if they also commit themselves to the same course of action. Otherwise, the banks simply pocket the Bank of England’s money to boost their reserves rather than lending it on.

Secondly, the banks must be willing to sign up to a set of procedures that prevent large-scale repossessions and that are binding not only on the larger and more socially responsible banks, which would probably do this anyway, but on every bank that takes advantage of this facility. We are grateful that the Government at least now acknowledge for the first time that there may be a repossession problem, but it is important that, having acknowledged it, they work with the banks to ensure that repossessions are kept to a minimum.

Thirdly—this is a more long-term point—surely boom-and-bust lending cycles must be countered in future by more proactive intervention by the Bank of England that requires the banks to hold higher reserves during boom periods. The Government cannot prevent the current housing bubble from bursting, but they must ensure that these bursts of irresponsible lending do not happen again.

The Bank of England is giving generous support to help banks to get out of a mess that is entirely of their own making, but the banks must now take the firm action that is needed to return to sound banking practices to ensure that they do not repeat the excesses of recent years.

My Lords, I am grateful to the noble Baroness, Lady Noakes, and the noble Lord, Lord Newby, for their comments on the Statement. On this occasion, I am particularly grateful to the noble Baroness, who both prefaced and summed up her remarks by saying that she supported the Bank of England’s initiative. I will endeavour to answer her requests for reassurance as fully as I can.

The principle is important. I understand the general anxieties expressed by the noble Lord, Lord Newby, but I thought that I had made it clear in my Statement, as I will seek to do when I refer specifically to the questions asked by the noble Baroness, that the Bank is taking scrupulous care to ensure that the banks, not the taxpayer, will take responsibility for the situation in which they find themselves. The Bank of England will ensure that the collateral that is provided is in excess of the resources made available to the banks in order to ensure that there cannot be a bill at the end for the taxpayer. That is the principle on which the scheme will operate. In articulating that obvious anxiety, which the Government share and which the Bank of England has taken care in its proposals to allay, the noble Lord should accept that the risk will be taken by the banks and their shareholders and not by the British taxpayer. I emphasise that point particularly as it is the principle that underpins the scheme.

I also hear what the noble Lord says about the mortgage market and the difficulties that individuals are in. That is exactly why my right honourable friend the Chancellor is holding meetings tomorrow with the mortgage lenders. He will discuss with them the impact of the tightening position on credit, particularly as it affects those on fixed-term mortgages that are coming to an end. It is expected that these discussions will be fruitful on how we can enhance protection for banks and building societies so that they can offer various strategies to mortgage lenders to help to minimise repossession. The noble Lord will recognise that repossession levels are low in comparison with the housing crisis in 1991. Nevertheless, they are increasing and any increase is worrying. It is important to have strategies that reduce the likelihood of repossession. I want to assure the noble Lord on that.

The noble Baroness asked me a number of questions and made a number of statements, one or two of which I felt were a shade controversial. I do not accept that there was dithering over Northern Rock. As we discussed at the time—

Oh!

My Lords, if noble Lords opposite had been able to identify dithering, they would also have been able to produce a solution that the Government could have adopted at that time. However, they clearly did not, unless this side of the House is being asked to believe that noble Lords opposite—not too explicitly, but secretly—hoped for the early public ownership of Northern Rock, which is a contention that I find somewhat dubious, to put it at its mildest. Noble Lords opposite only ever emerged with the suggestion that Lloyds TSB had a proposal way back last August that would have solved all the problems. Such a proposal would have fallen at the first fence of state aid in Brussels. It was never realistic. Therefore, anyone who believes that noble Lords opposite, their party or their leadership in the other place have ever put forward a credible proposition to deal with the situation earlier than we did, under the terms that we have and guaranteeing stability for the bank and the wider financial system, is living in cloud-cuckoo-land. Noble Lords opposite can make those contentions but those contentions are treated outside with the derision that they deserve.

Nevertheless, the noble Baroness was right to ask me about the relationship between improved and increased liquidity, the mortgage market and the position for the ordinary mortgage holder. We have two objectives. One is to secure financial stability so that the banks can carry out interbank trading, which we all recognise is restricted in a way that is causing grievous difficulties for all forms of credit. But there is a particular problem for the mortgage market and mortgage holders, which is why the Chancellor has made it absolutely clear that he is taking additional measures on this and why we are having discussions with mortgage lenders tomorrow.

There will be a second broad outcome from these proposals beyond the improvements in financial liquidity that will feed through the system and improve the capacity for loans at lower rates. In addition, there is a specific problem for mortgage holders and a short-term problem for many as their mortgage terms come to an end, which is why we are holding discussions with mortgage lenders to seek to make provisions that take into account the short-term needs of such individuals.

The noble Baroness asked about credit rating. She will appreciate that there is no instant solution to the issue that some triple-A credit rating worldwide has looked considerably more dubious than would have been anticipated. That is why we intend to take action on credit rating. However, it is a worldwide issue, which is why what action to take is being discussed at the international level. The problem is not easy to resolve. Given that, while the noble Baroness has the right to ask me the question, she is also obliged to recognise that there is no flip answer.

So far as the Bank of England is concerned, it will be necessary for it not only to take as collateral only that which is highly rated according to existing credit rating, but in addition to become involved in further searches beyond that. The Bank cannot automatically assume that a triple-A credit rating provides the safeguard and benefit that otherwise we would have hoped it did. In other words, the Bank is all too well aware of the issue. When taking these positions as collateral, it will be obliged to examine them with the greatest care—and that applies to all the other aspects of credit rating. The noble Baroness referred in particular to credit card-backed securities. Some of those can be entirely secure, and the Bank of England will be reassured on that front. Where there are doubts, the Bank has made it clear that, when it takes more collateral, the value of that collateral will be higher than the resources that it makes available in order to safeguard the public and the taxpayer against any default.

The noble Baroness asked me a number of other pertinent questions. She emphasised her concern about the rise in assessments for haircuts. We all know that this is an important aspect of the scheme, so I say to her only that the Bank of England, which is used to managing these issues, will need to take great care in this area. It is the Bank’s business to do so. I emphasise that this is a Bank of England scheme in which the Bank takes responsibility on behalf of the public for the assessments that it makes on the scheme’s operation. The noble Baroness asked how the FSA can be trusted in its role, given its past record. I hope that she and her colleagues will pay due regard to the action taken by the FSA to improve the quality of its work.

I apologise to the House. The noble Baroness asked me a volley of questions, but I have exceeded my time and I must abide by the rules of the House. I therefore also apologise to the noble Baroness and undertake to write to her on the points that I have not covered.

My Lords, the Chancellor is to see the banks and mortgage lenders tomorrow, so perhaps I may raise a number of points that might be put to them. For example, should we not also be talking to the accountancy bodies? Has my noble friend noticed that the banks, which I agree should be more transparent, published accounts with clear audit certificates but within a short time of doing so wrote off billions of pounds? Can he try to find out why a clear audit certificate was given? Moreover, is he aware that mortgage lenders are charging householders up to £1,000 for renewal of mortgages? That surely seems excessive, although perhaps he should also talk to solicitors about their charges; here I beg the forgiveness of many in your Lordships’ House. There is one other point that the Chancellor may think worth considering during his discussions with mortgage lenders. The point about repossessions was made by the noble Lord on the Liberal Democrat Front Bench. Will the mortgage lenders be able to give any assurances on that front during the meeting tomorrow?

My Lords, one of the crucial issues to be discussed tomorrow is how action can be taken by mortgage lenders to limit repossessions to the absolute minimum. We all recognise that there may be circumstances in which houses need to be repossessed; we also recognise that that cuts off the flow of repayments from the individuals concerned when it is better for society for them to retain their homes and perhaps to have temporary assistance until circumstances improve and they are able to resume repayments. These issues will be discussed with mortgage lenders tomorrow.

On the more general issue of what is wrong with a range of professions and professional activity in our society, I am not sure how much of that can fall within the framework of this rather humble Statement, but I hear what the noble Lord says that part of our difficulties may have occurred from the fact that the audit of banks has been less rigorous than it might have been. I also hear that his next target may well be solicitors who arrange mortgages. But sufficient unto the day is the evil thereof. I have already indicated what action the Government intend to take on the broad issues consonant with his statement.

My Lords, would it not clarify these matters if, instead of talking about billions, the Government were to talk about hundreds or thousands of millions, or, better still, what the figure represents in any given case to an average taxpayer? As the banks cannot get rid of their mortgage-based assets because other banks do not believe what they say they are worth, how will the Bank of England decide how much collateral concerns any particular securitised package? Further, has the National Audit Office been considered for an appropriate method of valuation?

Secondly, where will these figures appear in government figures? Thirdly, as it is likely that much of the refinancing of the banks is going to come from sovereign wealth funds overseas—which may mean that the effect of this crisis is that huge chunks of the British banking system and the City of London are taken into foreign ownership—have the Government any specific proposals on policy with regard to sovereign wealth funds?

My Lords, I hear what the noble Lord says. I have some sympathy about the necessity of translating figures into those which the ordinary person in the street is rather more familiar with. He will appreciate that when we are talking about the amount of liquidity that will be made available to the system through this scheme of the Bank of England we have got to give a ballpark figure of the total sum involved. The £50 billion indicates that. It is not a fixed final limit; it is an indication of the amount of money that is likely to be made available to the banks against the collateral which they are likely to be able to provide.

The Government respect the independence of the National Audit Office, which will make judgments on where these figures eventually appear. What is important at this stage is that the practicalities of the operation of the scheme should be effective. The bank will need all its resources in its evaluation in those terms, together with the FSA where it has expertise to contribute. Of course the Bank of England is more aware than any institution in the country of the problems on credit ratings with regard to assets and of what the banks currently offer with a range of assets which are either unquantifiable or maybe rated much lower than the banks had hitherto thought them to be. But the Bank of England will require collateral which it can verify meets the requirements of safeguarding the interests of the taxpayer.

My Lords, I join with others who expressed their approval of the Government’s actions in this matter, and, indeed, of the motivations which underpin those actions. Can the noble Lord assure the House that the banks’ take-up of this accommodation is subject to two specific matters; first, that the moneys concerned should be hypothecated to assisting mortagees and would-be mortgagees as otherwise the whole thrust of the Government’s initiative becomes purposeless? Secondly, taking up the point raised by the noble Lord, Lord Barnett, about transparency, it is perfectly clear that a situation is developing whereby the intentions in the Companies Acts with regard to the auditing of accounts are being frustrated, either deliberately or for some other reason. Nevertheless, it should be made clear that there has to be the most candid expression of the calculation of losses that have occurred due to the collapse of the sub-prime mortgage market. Indeed, there should be a reasonable appreciation and calculation of the likely contingent losses. Otherwise, there will be a continuing loss of confidence and the whole disclosure system that the Companies Acts guarantee will have been brought into desuetude.

My Lords, it is that latter feature of the lack of confidence that this scheme is designed to alleviate; that is, the banks’ inability to lend to each other because of their lack of confidence in the collateral being offered. It is that element which this scheme seeks to remedy by providing additional resources to increase financial liquidity, thereby reducing inter-bank lending rates and in due course helping the general position as regards the total cost of borrowing. The noble Lord will appreciate that the Chancellor was at pains to emphasise that he wants to meet mortgage lenders tomorrow to discuss the very real problem that exists in the mortgage market and for ordinary individuals caught up in these very difficult circumstances. However, this scheme cannot be hypothecated to the mortgage market. It is designed on a much broader canvas than that in terms of the liquidity position of the banking institutions. I accept the concept that the noble Lord puts forward; namely, that an important issue to address is that of individual mortgage holders, as the Chancellor has recognised, but this scheme is about a broader issue than that.

My Lords, can this be the same Minister who, not six months ago, told us that Northern Rock’s mortgage book was an absolutely rock-solid asset on which funding could be provided by the taxpayer? Will he answer the key question put by both Front and Back Benches: what haircut is being taken and how was it calculated? What is the Government’s assumption about the biggest fall in house prices that can occur? We are entitled to know that, when more than £50 billion of our money is being put on the line on that assumption. Can the Minister say what the haircut will be? Can he also explain how these huge sums of money will be provided off-balance-sheet? The Statement said that the Treasury was providing a guarantee. If there is a guarantee, there is a liability. Why is that not on the Government’s books? This is Enron-style accounting which will get us into considerable difficulties.

The Minister said in an aside about those who had advocated the Lloyds TSB solution in the summer that it would have fallen at the first fence because of state aid. Lloyds TSB asked for £30 billion and for it to be secured on the loan book. If that would fall at the first fence because of state aid, why will not this scheme?

My Lords, this is an operation by the Central Bank concerned with financial liquidity. The noble Lord will recognise that the Bank of England is following patterns which have already been carried out by the European Central Bank and by the Fed and therefore the issue is entirely different from that of one particular institution, as Lloyds TSB is and was last summer when it put forward its proposal which would have raised issues of state aid. I do not in any way, shape or form resile from my position. With regard to the elaborate fiction which the noble Lord manages to portray through the sharpness of his questioning, I notice that it is not often sustained by his Front Bench as being the solution which all ought to have pursued at that time. I have not at any stage seen the Conservative Party prepared to indicate that, had they been in power by last September, the whole issue of Northern Rock would have been solved in a trice by their approach. It just will not do. The proposal was only a proposal; it never really reached first base in terms of a bid; it was vulnerable to the judgments of Europe and it did not go any further. Quite frankly that is a hare that will not run for the noble Lord. I am coming on to haircuts in a moment.

The issue of specific haircuts, which the noble Lord asked me about a moment ago, is a matter for the Bank of England. It is going to fix those levels. That is its role and its job. What the Statement makes absolutely clear and what the Chancellor is very concerned to emphasise is that the Bank of England has to ensure that the operation of this scheme imposes no costs on the taxpayer. The Bank of England will be required to assure itself that the collateral which it takes is valid and viable. Some areas may not match the criteria needed by the Bank, but for the banking system as a whole, there is no doubt that the additional liquidity, which the Bank has been making available in any case on a shorter term basis as part of its normal operations, is of assistance in these difficult times.

My Lords, we are extremely grateful to the Minister—I think all of us are—for confirming that the Lloyds TSB initiative was cut down by European law before anyone had begun to see whether it would be a runner. That is what he said and he cannot confuse it by talking and talking and talking to try and get away from that. Is it the policy of her Majesty’s Government in this rescue—which we all applaud, of course—that those who created this problem out of greed, verality, incompetence or stupidity should not have to pay any penalty for it and can be bailed out at the expense of poor people who are having their tax increased this year?

My Lords, since we are having a few moments on Northern Rock, no one is suggesting that Northern Rock is being bailed out without any costs to shareholders or to the chief executive or chairmen. The suggestion that in their past actions the Government have been involved in a soft bail-out for those who have made mistakes is just not right in the illustration of Northern Rock. With regard to Lloyds TSB, of course it did not go before Brussels. It was never a proposal; it was not much more than an inquiry and a position put forward which would have failed at the first fence. As far as the Government are concerned, that is as far as it went. The noble Lord has to give the Government credit. If there had been an easy solution from a bank last August—a proposal that would have dealt with Northern Rock—is he seriously suggesting that the Government would have gone through six months of harassment over the issue? That just will not do.

On the more general issue, I emphasise that the banks take the risks in relation to this scheme. Risks stay with the banks. Where banks are not able to sustain their levels of lending, they are in trouble. We all recognise that. However, we have an obligation to sustain the wider financial institutions in a way that guarantees to each and every one of us and to our fellow citizens the necessary resources. Within that, the Government are acting to protect taxpayers and at the same time to increase the necessarily liquidity, which is not there at present, which is why the banks are in this mess.

My Lords, notwithstanding the gratuitous slash at lawyers by the noble Lord, Lord Barnett, it is clear to me that the lawyers are having some difficulty understanding this proposal. My noble friend Lady Noakes is absolutely correct. Both last night and this morning, long before any Statement was made to either House of Parliament, this had been widely leaked across the media. It is outrageous that the spin put on it was that those people who apply for mortgages now would find themselves in a healthier position than today. If I am a bit slow or I have not paid attention to a bit, will the Minister point me to it? I found absolutely nothing in the Statement which says that those people who are applying for mortgages today will find themselves in a better position than they were last Friday.

My Lords, if the noble and learned Lord suggests that there is Government spin on the issue, it is not present in the Statement, which I repeated to the House this afternoon, and it has not been in any of our statements. The Statement concerns financial stability. In so far as there are leaks, I regret that, but broadly the nation has been aware that this is a Bank of England scheme designed to improve liquidity for banks where credit is drying up and becoming more expensive. We all know the nature of that problem. Of course, there is an issue with mortgage holders and we all recognise the difficulties that they are facing. That is why the Chancellor is at pains to emphasise this. Separately from this scheme, he is meeting mortgage lenders tomorrow to discuss with them ways of ameliorating the problems that mortgage holders may find in the immediate situation. However, this Statement concerns the wider financial system and that is how it has been presented.