asked Her Majesty’s Government:

Whether it is their policy that no commercial bank should be allowed to become bankrupt.

My Lords, it is not the Government’s policy that commercial banks should not be allowed to fail. As the Treasury, the Bank of England and the Financial Services Authority set out in their recent consultation document, Financial Stability and Depositor Protection: Further Consultation, reducing both the likelihood and the impact of bank failures is a government objective, as the disruption for consumers and the effects on the economy of failure may be large. As also explained in the consultation document, however, a no-failure regime is neither desirable nor possible.

My Lords, I think that my noble friend is saying that it is not the Government’s policy to bail out banks. I am delighted to hear that the Government have no intention of bailing out incompetent bankers, but we do not need doom-mongers to tell us that many banks are having great difficulties. Has my noble friend been around city centres recently? In Manchester, for example, large numbers of new blocks of flats are empty, presumably financed by banks, which are clearly having some trouble. He said that the situation will be regulated by the Bank of England and the FSA. It is important that he tells us precisely which is the regulator concerned. Is it the FSA under the new chairmanship of the noble Lord, Lord Adair Turner, or is it the stability commission chaired by the former Governor of the Bank of England and the present governor?

My Lords, my noble friend will have to show a little patience. We intend to produce a Bill to change and strengthen the regulation of banks and to define quite clearly the responsibility of the authorities. We will proceed with that Bill in the autumn, but we also intend to produce crucial draft clauses before the Recess to outline government proposals.

My Lords, I am relieved at my noble friend’s Answer about government policy, but is he aware that it has been widely believed—it certainly was in my time as an economist for more than 40 years—that Treasury policy is that under no circumstances should a joint stock bank ever be allowed to go bankrupt? While I am pleased by what he said today, is he aware above all, given that commitment from the Government, that there is a serious moral hazard here, as banks need definitely to know that if they take undue risks it will be goodbye to all shareholder value? I take it that that is what my noble friend is saying.

My Lords, the banks do not need government predictions on that matter; they can look at the example of Northern Rock and the costs sustained thus far by the shareholders. However, it will be clear that we intend to strengthen the supervisory regime for banks to ensure that they take the necessary measures before reaching the crisis level to which Northern Rock descended.

My Lords, the noble Lord, Lord Peston, referred to loss of shareholder value, but there are also the concerns of individual depositors for deposits over £35,000. The recent refinancings have raised levels of concern in that regard. What will the Government do to reassure those depositors?

My Lords, that is an important consideration. As the House will recognise, guarantees were given to depositors with regard to Northern Rock and to all depositors with regard to the banks. The Financial Services Authority, which takes responsibility for this level of protection, has proposed in its consultation document that the level be raised to £50,000. The debate on this matter will of course continue and will be a part of discussions on the Bill, which we will introduce later this summer, as I indicated.

My Lords, does not the fact that the Minister was unable to give anything like a precise answer to the very precise question posed by his noble friend Lord Barnett indicate that we are starting a period of highly undesirable uncertainty in a very important area of the economy?

My Lords, it will be appreciated that the Government stabilised the position during the crisis over Northern Rock. The guarantee to depositors was of the greatest significance and put an end to the threat or possibility of a run on another bank. However, the noble and learned Lord is right that we need security with regard to these issues. It is clear that the supervisory regime for banks needs to be tightened and improved. That is the burden of the legislation that we will put before the House later this year. Of course, that will be to guarantee as far as we are able that the banking system is on a secure footing, while at the same time not giving the absolute guarantee that banks can never fail.

My Lords, I am sure that the Minister will be aware that at the time of Northern Rock’s nationalisation it was envisaged that the Banking Reform Bill would come before your Lordships’ House before the summer. He will accept that there have been considerable delays in bringing it forward at a time of increased and increasing concern, among the banks and individual depositors, about the scale of the banking crisis. Can he give us an absolutely clear assurance that the Bill will come before Parliament well before the end of the spillover session when we get back in October?

My Lords, I have learnt in my short time at this Box not to give absolute guarantees about future action. However, I assure the noble Lord that what he seeks is the Government’s intention.

My Lords, on banks failing, the Minister said earlier that all banks had to do was to see what happened to Northern Rock. Does that mean that the Government will nationalise any bank or building society that appears to be in difficulty, provided that they fall into difficulty within the next 12 months, which is the time that the Government have allowed themselves for nationalising what banks they like?

My Lords, the lesson to be derived from Northern Rock is that the Government will seek to guarantee depositors against the loss of their resources up to a sum in excess of that which obtained during Northern Rock. Secondly, if mistakes are made at a catastrophic level, the costs will be borne by shareholders. Also learnt from Northern Rock is the necessity of improved supervision of the banking sector to guarantee as far as we are able that nothing like Northern Rock occurs again.