Skip to main content

Financial Markets

Volume 706: debated on Monday 19 January 2009


My Lords, with the leave of the House, I will now repeat a Statement made in another place by my right honourable friend the Chancellor of the Exchequer.

“The House will, I hope, understand that it was necessary to issue a market notice this morning, in the usual way.

In the past few months, our priorities have been, first, to prevent the collapse of the banking system; secondly, to support the economy; and, thirdly, to ensure we get lending going again. This is also a problem faced by Governments across the world—and it is therefore necessary to achieve the maximum degree of international co-operation. We are taking steps not just to support the banking sector but, importantly, to safeguard the millions of jobs that could be put at risk by the continuing difficulties in the international financial system.

Restoring the banks’ ability to lend is an essential part of the economic recovery so today I am proposing further measures to meet two objectives: first, to begin to replace the lending capacity lost by the withdrawal of foreign banks and other institutions; and, secondly, to remove the barriers preventing UK banks expanding their own lending.

I want to set out these new measures in the context of the strategy we have put in place to steer the country though the worst global economic crisis for generations. Over recent months, banks have faced increasingly difficult conditions, as we have seen everywhere around the world, with Bank of America rescued last week; Citigroup, one of the world’s largest banks, broken up; Anglo-Irish nationalised; Commerzbank rescued in Germany; and, today, the Royal Bank of Scotland reporting substantial write-offs.

Last October, faced with the potential collapse of the banking system, we recapitalised the banks, strengthening their position. As a result, the Government took temporary stakes in two British banks but, as I said then, we have a clear view that British banks are best managed and owned commercially and not by the Government. That remains our position. As a result of the action we took, no savers in UK banks have lost money.

In the Pre-Budget Report, I announced substantial extra help for people and for businesses—lower income tax, more capital investment now and lower VAT—which, hand in hand with interest rate cuts and lower inflation, will support the economy and jobs. There is a clear international consensus that putting money into the economy now to counter the recession and to help people is the right thing to do. The cost of doing nothing would be substantially greater.

In almost every country, fiscal expansion policies have now been agreed—including in Germany only last week. In the US, President-elect Obama has already signalled the scale of their fiscal expansion. But, as the President-elect said only yesterday,

‘restoring the economy requires that we maintain the flow of credit to families and businesses’.

In the UK, the total amount of lending available still falls short of meeting the needs of the economy. Over the past 10 years, lending by foreign banks and non-bank institutions accounted for more than half of new corporate loans and 45 per cent of new mortgages here. A significant amount of lending capacity—by these foreign-owned banks and specialist lenders for example—has been withdrawn or has returned to their home markets, demonstrating again the need for co-ordinated international action.

On top of that, in the past few weeks, the world economic downturn has intensified everywhere—in the US, in the euro area, and now spreading to Asia, including China—all seeing weaker production, companies in trouble and fewer jobs. As we go into what will be a difficult year, dealing with this global financial crisis will need continuous effort.

There is no single remedy; there is no instant solution. We will need a range of measures designed to support lending, help businesses and protect jobs. Together, my measures today remove uncertainty and accelerate a resumption of lending—a necessary precondition for recovery here and around the world.

There are three measures to address the capacity reduction in the banking sector. First, because of current conditions, companies are finding it harder to get loans. So the Government have today authorised the Bank of England to create, for the first time, a new £50 billion fund, which will help increase the amount of funding available to companies by purchasing corporate assets from the banks, enabling them to invest. This will help large companies and complement the substantial measures announced last week by my right honourable friend the Secretary of State for Business, Enterprise and Regulatory Reform to support small and medium businesses. This fund will buy assets from banks, financial institutions and financial markets, with finance provided by the Treasury. The Treasury is also supporting the fund with an indemnity. It will initially purchase high-quality private sector assets, like corporate bonds, commercial paper and syndicated loans, which companies use to finance their business. The assets purchased by the Bank of England will be good-quality investments which will eventually be sold so that taxpayers’ interests are protected. This will enable larger companies to get the funding they need at a lower cost.

The operating remit of this scheme will be set by the Government but it will be run on an independent basis by the Bank of England. When purchasing these assets, the Bank of England will ensure the total amount of money in the economy does not increase. In future, the Monetary Policy Committee will keep under review whether this facility could be used as an additional way for meeting the inflation target, in line with similar operations at the US Federal Reserve. In such circumstances, I will decide the overall scale of the scheme and I will also keep the House informed.

Secondly, in order to maintain some of the capacity being lost in the mortgage market, I have decided that Northern Rock will no longer pursue a policy of rapidly reducing its mortgage book. In addition, looking at when the housing market recovers, I am considering whether—and, if so, how—Northern Rock or other UK lenders can best support prudent lending to creditworthy customers who will need mortgages but can only afford deposits less than 25 per cent.

Thirdly, in order to ensure that RBS, which owns NatWest and a number of other banks, can continue to support lending, I am taking action to strengthen its position. When the Government purchased their stake in the bank in December, a new management team was put in place. The company has announced further losses today, many of which are associated with its investments in the US following its takeover of a Dutch bank, ABN, in 2007. So I have agreed to its request to convert the Government’s stake of preference shares into ordinary shares. The Government could now own up to 70 per cent of RBS. In return for this, we have agreed with it an extension of lending commitments to large companies and an increase in lending of £6 billion in the next 12 months.

As well as taking action to maintain lending capacity, I want to remove some of the barriers and uncertainty preventing the existing banks lending further. In return for this, we intend to negotiate with each bank a lending agreement. These agreements will be specific, covering both the quantity and type of lending made available to people and businesses across the country, just as we have done with RBS today. These commitments will be binding and externally audited.

In return, banks will get access to support measures. First, under a new scheme the Treasury will insure certain bank assets for a commercial fee against losses on banks’ existing loans. The purpose of the protection is to allow the expansion of lending, so the pricing has to be fair and reflect all our objectives. The banks’ problems stem from uncertainty about the value of their assets. Faced with this uncertainty, individual banks are reluctant to lend to businesses and companies. This will reduce the banks’ exposure to risks and give them the room they need in order to lend more. We will insist on the highest international standards of public disclosure and transparency in the operation of the scheme. Countries all over the world are considering similar proposals. We will work with them to take action together.

The second step towards removing barriers to lending is an expansion of the funding capacity of financial markets. The credit guarantee scheme I announced in October will be extended beyond its current end date of April this year. Instead, it will run until the end of 2009, subject to state aid approval. This scheme guarantees new unsecured borrowing. So far over £100 billion of these guarantees have been taken up. These guarantees have been successful in helping bring down the interbank lending rate from 6 to 2.25 per cent. To complement this, the Bank of England will continue to provide similar types of liquidity support when the special liquidity scheme expires at the end of this month. Until recently, up to half of UK mortgages were funded from the wholesale markets. At the time of the Pre-Budget Report I accepted the recommendations in the Crosby report on mortgage finance markets. I have announced that the Government will provide up to £50 billion of guarantees, initially on new mortgage lending and eventually on other assets. Overall, the liabilities taken on will be backed by financial assets and fees will be charged for guarantees and insurance, safeguarding the taxpayers’ interests.

Thirdly, the Financial Services Authority has today set out its policy on capital requirements. It has set out the level of capital that individual banks need to keep on their books to allow them to withstand the slowdown and maintain lending. It will be a key signal that banks should allow their capital to be used to absorb the losses from investments, while not unnecessarily restricting their lending.

The regulation of capital is fundamentally an international matter and tomorrow I will present our plan to European Finance Ministers in Brussels. I hope we can agree similar proposals there. Because this financial crisis is affecting every country in the world, it is crucial that other countries also take steps to support their banking sectors. We cannot risk a damaging worldwide spiral of weakened confidence and national-only policy decisions. Stronger international collaboration will be strengthened with the arrival of the new US Administration. We must not give way to financial protectionism which could be every bit as damaging now as it was to trade in the 1930s. Instead, we must look at the causes of this international financial crisis. We must strengthen the supervisory and regulatory system here and internationally. I shall publish proposals on the regulatory framework for the banks in the spring together with the FSA’s own review. Internationally, we will be actively pursuing this as part of our presidency of the G20 through 2009. Our objectives in the G20 will be to continue to take action jointly to support the world economy, to act together to restore the flow of credit and to improve the international regulatory regime. This is a continuing effort. Countries all over the world are united in supporting their economies, maintaining lending and protecting jobs. We are ready to do whatever it takes”.

My Lords, that concludes the Statement.

My Lords, I thank the Minister for repeating a Statement made by the Chancellor in another place. I also thank the Government for finally recognising, de facto if not in terms, that their action last October was far from sufficient to save the banks, let alone to save the economy or, to use the Prime Minister’s memorable phrase, “to save the world”. The Government accompanied their October announcements with a lot of fierce words about banks resuming lending. The banks did not do so. The lack of credit in the economy is accelerating the depth and length of the recession in which we find ourselves after a decade of irresponsible and reckless economic management. Of course there is a global banking crisis but the way that it is hurting our economy is a direct result of economic management, or indeed mismanagement, of the last decade. So we start with an economy that is not well prepared for a downturn and this has been exacerbated by a lack of credit to support it. Instead of concentrating on credit, the Government embarked on futile gestures, such as the VAT reduction, which has had absolutely no impact. So we must be grateful that the Government are now focusing on the real issues.

We support much of what has been announced today, though with some provisos. We have argued for a long time that the use of preference shares carrying a coupon of 12 per cent was counterproductive in the original package. It positively worked against increasing lending. At least the RBS will now be freed from that. The Minister said nothing about the similar millstone around the neck of Lloyds TSB/HBOS. Will he do so? Is it that Lloyds TSB does not want any more equity shares to be held by the Government, with which we could have some sympathy? If so, what will that mean for Lloyds TSB’s lending?

What impact will today’s Statement have on government borrowing and debt figures, which are already at record levels? To put it another way, how much more taxpayers’ cash will be paid to the banks? The asset purchase facility appears to involve further borrowing of £50 billion. How much else is involved? Related to that, will the Minister say more about the Bank of England asset purchase facility? We are told that this is to buy high-quality corporate debt, but investment-grade borrowers have access to finance at the moment; the problem is borrowing below investment grade. How will this affect the borrowing for corporates that are below investment grade?

The first £50 billion will be funded by Treasury bills, but this morning’s announcement opens the way for the MPC to use asset purchases for monetary policy purposes. Will the Minister confirm that this means that the Government are opening the way for quantitative easing, or, in ordinary parlance, for printing money? We can see that, in extremis, quantitative easing may be necessary, but it will be the most damning indictment of the Government’s handling of the economy if it comes to that.

Secondly, how is the MPC involved in this? The committee has no control over the Bank’s printing presses. Do the Government intend to change the monetary policy remit of the Bank of England? If so, how, and when will they do so? What mechanisms will be involved, and, more importantly, what involvement will there be for Parliament?

On the contingent liabilities that will come with the Statement that the Minister has repeated, will he say how much is at stake for the taxpayers in a worst-case scenario? There are virtually no figures in the Statement. The Chancellor denied on the radio this morning that this was a blank cheque, but how do we know, because the Government will not give the figures? Is there any limit on the amount that will be exposed in the economy as a result of this Statement?

We have concerns about the open nature of the plans that have been announced today. I have some detailed questions for the Minister on the asset protection scheme. The press release that was referred to this morning talked about information on the assets being made available to the Treasury, but no mention was made of such information being made available to Parliament, and since this is an open-ended commitment, it is important that proper information is set up. We have called for a full and independent audit of what the taxpayer is now being asked to ensure. What is being done to value assets before their risk passes to the taxpayer?

The vehicle for the asset protection scheme may well be an entity that is established or designated by the Treasury. We have seen with UK Financial Investments how the use of a special vehicle that is set up by the Treasury lacks a specific statutory accountability framework, which means that what happens within that organisation can be very difficult for Parliament and others to track. Will the Minister commit to ensuring that full accountability of that body to Parliament is established? The Statement this morning was not stuffed full of detail; nor was the Minister’s repetition of it. It is clear that much still remains to be decided. When will full details of this scheme be made available?

The test of this package will be whether credit is restored to the economy, but it is important that lending is realistic and not of the reckless variety that helped the banks to get into the mess that they are in. Most commentators believe that the valuation of the housing market has not yet reached its trough. To what extent is it not reckless to encourage individuals to start borrowing again when values are still going down? The Statement referred to Northern Rock starting to lend again. I am not at all sure that using a state-owned bank that was not known for prudent lending practices is a particularly good vehicle for that, but will the Minister say what instructions the Government are giving to Northern Rock on its lending criteria and how much they will allow it to lend?

More generally, allowing mortgage-backed borrowing by the banks, as recommended by Sir James Crosby, will be acceptable only if it means meeting the standards of transparency and quality that the Government set out today. The Minister said that £50 billion will be available. How does that compare with former volumes of mortgage-backed securities? What impact will this have on the market? We would be concerned if this scheme were so large that it led to a return to the price inflation and lending criteria that got the banks into this mess in the first place.

Lastly, the Statement referred to the FSA’s separate statement on capital ratios. Will the Minister explain the reference in that statement to amending the variable scalar method of converting internal credit risk models? Will this allow the banks to reduce their risk-weighted asset requirements, as commentators have suggested, and hence to reduce the amount of capital that they are required to hold? Does that not leave the way open for our banks to become even riskier than they are already?

My Lords, I am grateful to the Minister for taking time out from the Banking Bill to repeat the Statement. It is, however, a very depressing Statement, because it makes it clear that the banking system is in even greater crisis than was apparent in the autumn, that it is creating a real economic crisis of alarming and growing proportions, and that the first bail-out was completely inadequate. We obviously hope very much that this bail-out is more successful. The Statement, however, gives rise to as many questions as have been answered, and I hope that the Minister will not mind if I ask him a few questions now.

The Minister points out quite correctly that there has been a dramatic fall in the capacity of the banking system because the foreign banks have largely withdrawn their lending. Have the Government assessed the quantum of lending that has disappeared from the UK financial sector, and has that figure informed the amounts by which they are now asking the banks to increase their lending?

Secondly, will the Minister confirm that the £50 billion of net assets that are being available will be funded by an increase in government borrowing? As the noble Baroness, Lady Noakes, said, this is another £50 billion to add to the ledger. When he says that the Monetary Policy Committee will keep under review whether this facility could be used as an additional way of meeting the inflation target, can he explain what on earth that means? Again, as the noble Baroness asked, can he explain whether we will need an amendment to the Bank of England Act to change the MPC’s formal remit to do that?

We welcome the fact that Northern Rock will no longer pursue a policy of rapidly reducing its mortgage book. Does that mean that it will carry on reducing its mortgage book, or will it seek to increase it, given that the Government will encourage it and other lenders, in a manner about which we are yet unclear, to make mortgages available to those who can afford deposits of less than 25 per cent?

The Government now own 70 per cent of the RBS. Does that not mean in effect that it is a nationalised bank, and would it not be more straightforward to turn it into a state bank so that the borrowing and lending policies that it pursues can explicitly follow public objectives? The RBS is in a slightly bizarre situation in that the Government are directing it to make specific policy changes to its lending while professing more generally, and certainly in the context of the Banking Bill, that when they take shares in banks—and particularly when they take over a bank—they will do so at arm’s length. They profess this; yet we have a detailed proposal from them on how the RBS will extend its lending activities in the future.

On the other banks covered in the Statement, the Government have undertaken to negotiate a lending agreement with each bank. Will all the banks agree to such a lending agreement? What will the sanction be if they do not? There is a problem in reaching these agreements and putting in place the new scheme to insure, as the Government coyly put it, “certain bank assets”. How do you value these bad assets? Values in, for example, commercial property are still plummeting. When the Government say that countries all over the world are considering similar proposals around bad assets and that we will work with them to take action together, are they seeking to find a common basis for valuation? Or are they just going to have a chat with all the countries doing similar things?

On capital adequacy, it seems that the FSA and the Government have accepted that the current capital adequacy rules are inadequate. Are they in effect tearing up the bar rules unilaterally, or is the Chancellor going to Brussels tomorrow to ask that they be revoked, set aside temporarily or replaced? It is not clear from the Statement.

Finally, what in broad terms does it mean when the Government say they will publish proposals on the regulatory framework for the banks in the spring? Might they, for example, be contemplating a Glass-Steagall approach, or is this just a raft of technical issues?

My Lords, I gave up counting the number of questions asked in 13 minutes and doubt whether I will be able to answer them all in the customary seven minutes that remain. I will do my best. This is an important announcement, following the announcements made in October that were highly effective in reassuring customers and depositors of British banks of the strength of those banks and their ability to honour their commitments.

Contrary to the comments of the noble Baroness, Lady Noakes, banks have continued to increase their lending in a number of important areas. In the various meetings I had over the weekend with most of the chairmen or chief executives of our British banks, a number expressed considerable confidence about the outlook for lending in the United Kingdom. This is in the light of action taken by the Government—in both the Pre-Budget Report, as a consequence of lower interest rates and, importantly, because of the measures we announced this morning.

The noble Baroness questioned whether we were in a strong enough position economically to cope with these extraordinary changes. I remind noble Lords that these are global challenges. As I and the Chancellor of the Exchequer have said, there is no economy in the developed world, or indeed in the major developing economies, which is not now experiencing significant contraction in output and demand. Yet in six of the past seven years the United Kingdom was either the strongest growing or second strongest growing economy in the G7. Over the past 10 years, we achieved the highest growth in GDP per capita in the G7. We approach these challenges from a position of considerable strength after the achievements of the past decade.

The noble Baroness asked about the Lloyds Bank Group and the “millstone” of preference capital. The preference capital was agreed with the board of Lloyds. It may well reflect on changed circumstance and wish to talk to the Treasury and the UKFI. If it does, those representations will be received.

On the impact of today’s Statement and in particular the amount of cash that is going to the banks, the strong feature of this announcement made by my right honourable friend the Chancellor of the Exchequer is that it involves little cash. The exchange of preference shares for ordinary shares is a non-cash item. The attachment of guarantees in accordance with Crosby is a non-cash item. The extension of the discount window facility at the Bank of England is a non-cash item. The extension of asset protection through an insurance scheme is a non-cash item at first. It may be a cash item in due course; that would depend on the experience of the insurance policy and would have to be offset against the premium received.

The noble Baroness asked whether we are giving a blank cheque to the banks. That is not the case. On the contrary, establishing the asset protection scheme will take six to eight weeks. It will involve a huge amount of data analysis. I envisage well over a billion items of individual data reviewed for each bank that approached us in that connection. We will be drawing on the support of external advisers—accountants, actuaries and lawyers. We will determine appropriate attachment points based on value-at-risk calculations and ensure that the premium reflects the risk, taking into account the lending commitments we would receive from the bank as a consequence.

The Bank of England asset purchase facility will involve investment-grade bonds. The noble Baroness lives in a different world from me in her assertion that investment-grade corporations have no difficulty obtaining loans. That is simply not the case from the contact I regularly have with the finance directors and chief executives of major companies. The appetite for banks to lend to major corporations has deteriorated substantially. The measures we have taken will address that.

This is not a prelude to quantitative easing, but it creates the architecture that would be needed for that. If the Bank of England and Monetary Policy Committee conclude that that is the right thing to do, an appropriate framework will be set in place. That would include an exchange of letters between the Chancellor of the Exchequer and the Monetary Policy Committee. The noble Baroness does not reject the concept in certain circumstances—presumably at a point where interest rate reductions no longer have the effect they otherwise previously did at higher levels. There will not be a need to change the Bank of England Act.

There were observations about the lamentable record of Northern Rock management, disregarding the fact that the management of Northern Rock has changed. The current instruction to the board of Northern Rock is that it should no longer regard its asset book as in run-off.

The noble Lord, Lord Newby, asked for data on the extent to which foreign banks’ withdrawal is impacting on the availability of credit. It is quite significant in particular sectors of the market. The withdrawal of the Icelandic and Irish banks, the ending of securitisation and a general retreat to home which tends to happen in these circumstances have meant a serious reduction in credit availability. This programme is designed to address that.

The noble Lord also asked whether the Royal Bank of Scotland is now a nationalised bank. No discussions with the Royal Bank of Scotland have ever discussed nationalisation. The Chancellor was clear in his Statement to the other place that he regards our banks as best owned in the private sector. However, with the board of the Royal Bank of Scotland and other shareholders, we have commenced a programme to improve the quality of management and leadership there. Noble Lords will no doubt have seen the appointment of Sir Philip Hampton to join Mr Stephen Hester as respectively chairman and chief executive of that bank.

Questions were asked about the Crosby review and the guarantees. Again I remind noble Lords that the attachment of guarantees to residential mortgage securitisations does not involve a cash payment. It enhances the quality of the credit and is a non-cash cost. Crosby was very clear that he did not believe that this programme would create any costs for the Exchequer, but rather would be a source of income. We have also committed, as a part of this programme, to ensuring that London becomes a centre for a new form of securitisation that departs from the weaknesses and failures of the last, which did not have appropriate disclosure or risk sharing.

I hope that I have managed to respond to most of the questions put by the noble Baroness and the noble Lord.

My Lords, the accusation has been oft repeated that there was indeed a failure three months ago on the part of the Government to make the bail-out of a proportion sufficient to be effective. Is the Minister satisfied that those banks that have received massive subventions from public funds have, since the beginning of October last year, been entirely candid with the Treasury and the Bank of England with regard to their contingent liabilities? I shall put it another way. Is this latest crisis due in any way to the deliberate failure to make a full disclosure of those liabilities, or is it due to unforeseen and unforeseeable events?

My Lords, the action taken in October was not a bail-out; it was designed to put beyond reasonable doubt questions about the capitalisation of British banks. Issues around asset valuation are primarily for boards of directors and external auditors to address. Nearly all our major banks have a December year-end, and they will now be going through the process of completing their accounts. The Royal Bank of Scotland made it clear that its announcement this morning of quite frightful losses was a consequence of that work. It is absolutely incumbent on boards of directors, particularly chairs of audit committees and external auditors, to be clear on the need to be honest about the state of the assets they own.

My Lords, we are in danger of forgetting that this stems from the incompetence or even worse of bankers who, to some extent, the Government are now depending on to run the banks. The losses are so huge that frankly we do not know what they are, and indeed I am not sure that anyone knows. Certainly I am not sure that the directors of these banks, their auditors, Ministers, or anybody else can answer questions about values because we know what has happened in the past. Clean certificates were issued by auditors but, days or perhaps weeks later, billions were written off. The situation is so incredible that it is hard to believe. If we do not know the figures, is not there a real danger that guaranteeing the banks could be self-defeating in the sense that once the bad and slow payers know about it, they will become even slower so that situation is even worse, and we will see real bad debts, not possible bad debts?

The Government now have 100 per cent control of some banks and at least 70 per cent of others. We assume that that is the end of it, although one begins to doubt if it will be. I appreciate their desire to leave the running of these banks to at least some bankers, although again, I am not sure which ones. Can the Minister tell us whether any of those bankers who decided to buy ABN AMRO and now have to write off God knows what—£10 billion or £20 billion—are still going to be allowed to run their banks at arm’s length? Is it really the case that the running of banks in which the taxpayer has more than a 70 per cent interest as well as interests in the form of guarantees and insurance is going to be left to those self-same bankers? Is that really the Government’s decision?

My Lords, many of my noble friend’s questions focus on the Royal Bank of Scotland. I remind noble Lords that very significant changes have been made to the leadership of that bank. A new chairman is to be appointed and a new chief executive is in place. Two or possibly three of the executive directors have left, and there is a general agreement that the board needs to be further refreshed. Certainly, very serious questions need to be asked not only by the board of directors and the senior management of some of these businesses, but also by institutional investors who, from my recollection, voted—inasmuch as they voted either for or against the acquisition of ABN AMRO—by a margin of over 90 per cent in favour. Noble Lords will no doubt recall that a competition was held for the ownership of ABN AMRO. Barclays failed, and perhaps now regards itself as truly fortunate. In putting the performance of banks into context, it is only fair to note that, on Friday evening, Barclays announced profits well above market expectations. It would be wrong to castigate all bankers.

The value of assets, as I said earlier, is a matter for directors, who must know what the assets are worth. Valuation is not a precise exercise, as we discussed very recently in the context of the Banking Bill, but there is no excuse for failing to address valuation. When it comes to providing insurance, we will form our own views on valuation; that is, we will take a bank’s data and form our own views on how much of the risk we will take.

My noble friend’s penultimate observation was on the danger that these policies will encourage people to be even slower in making payments. We will structure them so that we take what insurers refer to as the tail risk. The first or primary risk will rest with the banks, which will also take a proportion of the tail risk. They will continue to have an equity interest in ensuring that the existence of the insurance does not in itself lead to any moral turpitude.

My Lords, I thank the Minister for the Statement and I hope that it will remove some of the uncertainty that prevents banks lending to each other. I want to ask the Minister about the insurance scheme for bad past investments made by banks. On the radio the Chancellor said that the objection to the bad bank solution has been rightly rejected because it requires evaluation of these bad debts, which would take too long. Yet here we are with a solution that is going to take time and requires the valuation of those bad assets.

Secondly, while the insurance scheme is a lot cheaper than the horrifying costs of the bad bank solution, it is not quite a non-cash item as the Minister suggested. The costs will build up over time and could be very significant. If the Minister cannot respond to my noble friend Lady Noakes about giving a cost now, will a cap and a cost be given at the point when the insurance scheme is put in place?

Thirdly, how long might an insurance scheme last? I know that the “bad bank” solution has disadvantages, but one advantage would have been that it created certainty and got the assets off the balance sheet. The insurance scheme cannot last forever, so is it not the case that it has very considerable uncertainties attached and that, because we need full declaration and certainty, it may not do the trick?

My Lords, the noble Lord, Lord Lamont, asks well informed questions. I did not hear the Chancellor of the Exchequer on the wireless, so I will not comment on what he said. The problem with the terminology “good bank, bad bank” is that it oversimplifies. The principal challenge in separating assets out into a new institution is that it would need separate funding, and there would need to be absolute agreement on the value of assets. If the Government paid too much for these assets it would be gifting value to the banks; if it paid too little, it would further diminish the capitalisation of the banks.

The attraction of an insurance proposal, as opposed to the sale-and-purchase model of “good bank, bad bank” is that there is continued equity as far as the bank is concerned. To the extent that it does not need to call on the insurance and that the value of those assets improves, and they perform better than current expectation, it will continue to retain all the interest in those assets, less the premium it has paid for the insurance. I believe that I said clearly that the insurance was a non-cash item at first. It could be a cash item later, but might not be; that would depend on the efficacy of the insurance policy.

I entirely agree with the noble Lord’s best informed comment. The duration of the policy will be important, because we need a policy that will take financial markets through this economic downturn and beyond the next cycle, so we are probably talking about a policy duration of no fewer than five years and probably no longer than eight or nine years. In terms of the ultimate structure of the policy and the scale and value of assets covered, I imagine that matter will be disclosed publicly, not least by the banks, which will, in some cases, need shareholder approval to enter into the contracts. I commit that the Government will make available details of the broad nature, scale and coverage of those policies when they are entered into, should such policies be written.

My Lords, may I return to the Royal Bank of Scotland? It may not be nationalised, but it is under national control if the Government own 70 per cent of the ordinary shares. Do the Government now guarantee the liabilities of that bank to the same extent as other government securities?

My Lords, the Royal Bank of Scotland is not under national control. It is under the control of all its shareholders and its board of directors, and no discrimination or advantage accruing to depositors of the Royal Bank of Scotland is denied to depositors with other banks in terms of the Government standing behind those deposit liabilities.

My Lords, led by my noble friend Lord Newby, I want to carry on asking for clarification about the Royal Bank of Scotland. I am specifically concerned that, to quote the Statement,

“we have agreed with them an extension of lending commitments to large companies”.

I am somewhat puzzled by that, because there is widely felt concern about small businesses and the Royal Bank of Scotland has particularly portrayed itself as their supporter. Can the Minister clarify exactly what is meant by,

“an extension … to large companies”?

Is that at a cost to the small business sector?

My Lords, in October the Royal Bank of Scotland, along with Lloyds TSB and HBOS, entered into commitments related to the availability and marketing of competitively priced credit to small businesses and private borrowers. That commitment remains in place, but this effectively extends it to include large companies. I believe that although there is considerable concern about the availability of credit to smaller companies, the initiatives announced at the time of the pre-Budget review, which my noble friend the Secretary of State for Business, Enterprise and Regulatory Reform expanded upon, have considerably eased anxiety among smaller companies about the availability of credit.

As I said to the noble Baroness, Lady Noakes, there is concern about larger companies as well. That is why the Royal Bank of Scotland willingly volunteered this extension in our discussions on Sunday. I repeat my earlier comment: over the weekend a number of banks expressed a step change in their confidence toward the availability of credit and profitable lending opportunities, as a result of the steps that have been taken, here and globally.

My Lords, in asking this question I must first declare a marginal interest. Is the Minister aware that I invested my modest savings in the national Bank of Ireland? There was then a series of takeovers, and I ended up with the Royal Bank of Scotland, which I had no desire to have any connection with whatsoever. In desperation, I then left the Royal Bank of Scotland and went to Coutts, which I thought was a safe haven. The next minute, I found that Coutts was taken over by the National Westminster which, after a short time, was taken over by the Royal Bank of Scotland, so I was back where I started.

The gravamen of my question is: what will happen to those banks which, like Coutts, have hitherto had a proud record of independence? They have also had the great privilege of not only my membership but that of Her Majesty, whose interest is probably marginally larger than mine. What will happen now that Coutts bank is a wholly owned subsidiary of the Royal Bank of Scotland? What will the Minister do to safeguard the interests of the innocent who put their trust in financiers?

My Lords, I was a director of Coutts bank. I am not sure whether many of my noble friends on these Benches were directors there, but it shows what an open party Labour is when casting its net into the areas from which it captures its supporters. Coutts is one of a number of subsidiary banks of the Royal Bank of Scotland, Ulster Bank in Ireland being another, for example. I can reassure the noble Lord that Coutts is, in my experience, a fine bank to bank with. It enjoys the same protections that apply to any other bank in the United Kingdom. Regardless of whether it is a subsidiary of the Royal Bank of Scotland, it has a good board of directors—chaired by a Member of this House—and has, I believe, always exhibited cautious and conservative lending policies. No doubt that was one of the things that attracted the noble Lord, Lord St John of Fawsley, to it.

My Lords, in assessing whether these measures are now adequate to the task, do the Government have a target for the level of credit they believe is necessary to support the economy in the next year to replace the previous aspiration of banks continuing to lend at 2007 levels? It is clear from the Statement that bank credit is contracting in the economy, both because, as the Minister said, foreign banks have disappeared from the economy and because UK banks are having to de-gear their balance sheets for both capital and liquidity reasons. Some of that decrease in lending may simply reflect the fall in the value of previously overvalued assets but we are all concerned about whether there is enough credit in the economy to support the genuine needs of business. As we look at these various packets of £50 million, £100 million, £200 million and add them up, is there behind that a government view of what level of credit they are trying to achieve to support the economy and whether these measures will achieve that?

My Lords, we have given serious consideration to the quantum of support being provided through the asset purchase scheme, the asset protection scheme, the discount window and the support to securitize assets based on the Crosby model as extended and refined. We believe it will make a significant contribution. I wish I could give the noble Lord, Lord Blackwell, a more precise answer but there are a number of variables. Just as my doctor keeps telling me that there are two types of cholesterol—one of which it is all right to have and another which is not—there are two types of users of credit. There are many users of credit, for instance, in the world of hedge funds and speculation where, quite frankly, a de-leveraging of that kind of credit does no economic damage; it is the credit availability to the real economy that matters. We also need to take into consideration the global factors and the extent to which the process of banks retreating into their home markets continues to be a significant factor. The extent of credit that would need to be supported by government programmes is, to some extent, a response to certain factors that we have to take into account. We believe that a serious, comprehensive, integrated proposal is right to support the British economy in this global challenge and to make credit available to hard working British families and to British business.