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Banking: Quantitative Easing

Volume 730: debated on Monday 10 October 2011


Asked By

To ask Her Majesty’s Government what recent discussions have been held by the Chancellor of the Exchequer regarding the sale of government-held shares in Royal Bank of Scotland and Lloyds TSB, and regarding the effect of additional quantitative easing on that sale.

My Lords, Treasury Ministers and officials have meetings with a wide range of organisations. It is not the Government's practice to provide details of all such meetings

UK Financial Investments—UKFI—manages the Government’s shareholdings in the banks. UKFI aims to dispose of the shares in an orderly manner and it continues to monitor market developments and to look at the range of alternatives. The ultimate decision to proceed with any transaction will rest with HM Treasury.

My Lords, I am glad to hear that. However, last week it was reported that the Governor of the Bank of England told the Chancellor that he would not use QE to help the banks, including presumably the Royal Bank of Scotland and Lloyds, but, in fact, the quarterly review said that the Government authorised the Bank to pursue a number of activities targeted to improve the facilities of banks. Who is making decisions here: the governor or the Chancellor?

My Lords, I think we risk straying from the Question. I know that, in a masterly wheeze, words about QE were added to this Question late in the day by the noble Lord, Lord Barnett. I think that quantitative easing is one of many questions relevant to the sale of bank shares but a relatively small consideration in present circumstances. Given that the Question is about the sale of bank shares, this is one of many factors that is relevant.

My Lords, although privatisation of RBS and the Lloyds Banking Group—ideally after separating completely the retail and investment operations of the two groups—is clearly some way off, does my noble friend recognise that the immediate need is for the Government to adopt a much more hands-on relationship with them than hitherto to ensure an adequate flow of lending to small businesses?

I very much agree with my noble friend that the immediate priority is not so much consideration of the sale of the banks—UKFI will continue to monitor that closely—but to keep credit flowing. In relation to that, the Merlin agreement is critical. We treat the management of RBS and Lloyds on an arm’s-length basis, but we will ensure, as we have, that we have an agreement with all the major banks to increase lending on what it was last year and what it otherwise would have been. The third quarterly numbers will be released under the Merlin agreement shortly.

My Lords, given that the Governor of the Bank of England has said that we are in the worst financial crisis since the 1930s and, conceivably, ever, how can it possibly be sensible for the Government to be actively seeking to sell the taxpayers’ interest in Northern Rock to City financial institutions?

My Lords, we have a portfolio of banks which the Government either wholly or partly own. The Question was about Lloyds and RBS, but we also, as the noble Lord well knows, own Northern Rock and Bradford and Bingley. It is within the mandate of UKFI, which was set down by the previous Government, of whom the noble Lord was a member, to have responsibility to seek over time to realise value from the banks. That is precisely what it is exploring in the context of Northern Rock. It is following the noble Lord’s policy.

My Lords, given the downgrading by Moody's last week of the credit rating of a number of British banks, do the Government think that they will have to recapitalise RBS and Lloyds?

My Lords, the downgrading by Moody's last week was long expected by the markets. It is largely a reflection of the fact that under the Vickers proposals—the independent commission's proposals—there will be a different relationship between the banks and the taxpayer: the taxpayer will not be on the hook for the banking system in the way that it was. As a result, as expected, Moody's changed the ratings on a number of banks. Equally, it made it clear that that was not a reflection on the well capitalised state of the UK banking system. The UK banks continue, as Moody's and others have said, to be in a more robust state to withstand shocks from the eurozone than banks on the continent of Europe.

My Lords, I am not sure that I understood one of the noble Lord’s earlier answers. Does the Treasury expect to get back all the money it has put into the two banks mentioned in the Question? If so, when can we expect to see that money?

My Lords, I do not think that I touched on that point in a previous answer at all. UKFI has a responsibility, on behalf of the Government, to look, over time, at ways to create value out of the shareholdings, and that is what it will do. There is no question of any particular benchmark; we need to ensure that the taxpayer gets maximum value, subject to questions of competition and financial stability, over time, from the holdings in the banks. That is the mandate that UKFI has.

My Lords, when the moment comes for the disposal of the bank shares, can my noble friend give an assurance that the Government will make a more responsible decision than was contained in the sale of gold by the previous Administration?

My Lords, the Minister will have appreciated the fact that two of the more challenging questions have come from his own side, from the noble Lords, Lord Lawson and Lord Newby, about the future of RBS. What preparations are the Government making for recapitalisation of RBS if that proves to be necessary?

My Lords, it would be completely wrong in any circumstances to speculate on individual banks. The FSA, the Bank of England and the Treasury look at all sorts of scenarios in relation to banks and other systemically important parts of the financial system. As a result of the recapitalisation of the banks and the stringent stress tests which the FSA has conducted repeatedly, the UK banking system is well recognised by the credit rating agencies and by many other commentators and is in a relatively good situation. We now want to see stress tests carried out right across the European banking system as a matter of urgency to proper standards.