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Northern Rock

Part of Topical Questions – in the House of Commons at 3:31 pm on 19th November 2007.

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer 3:31 pm, 19th November 2007

With your permission, Mr. Speaker, I should like to make a statement to update the House on the current position with regard to Northern Rock. The House will recall that last week I said during the Queen's Speech debate that I would keep the House informed of developments. I also said that I expected to publish a statement of principles underpinning the Government's approach to proposals received by Northern Rock with regard to its future. I published that statement this morning, prior to the markets opening, in the usual way. Copies are available in the Vote Office and the Library of the House.

It is important to be clear about the respective responsibilities of the Northern Rock board and the Government. The board is legally responsible to its shareholders for the future of the company. However, the Government have a wider public interest in maintaining financial stability, which is why we agreed to lender-of-last-resort support in September and subsequent lending by the Bank of England. The Government also have an interest in protecting the interest of the taxpayer. Because of this, the Government have, as a major creditor, a direct interest in the future of Northern Rock. The Government therefore have to agree to any proposals for the future of Northern Rock.

Before turning to our approach, let me deal first with the position on the guarantee arrangements to Northern Rock depositors provided by the Government and, secondly, with the loan facilities provided by the Bank of England to support Northern Rock and to maintain financial stability in general. First, we have made it clear that the guarantee arrangements already announced for depositors in order to safeguard their position will remain in place during the current instability in the financial markets. These guarantee arrangements were absolutely necessary. They have not had any cost to the taxpayer because these deposits covered by the guarantee arrangements remain in the bank. As I have said before, savers are free to take their money out if that is what they want to do, but they have no need to do so. The guarantee arrangements ensure that savers' deposits are safe. The guarantee will not be removed without proper notice being given to depositors.

Looking ahead, I have made it clear that the Government will legislate for a new regime for protecting bank depositors. As the House knows, we have published a discussion paper on this legislation, and I very much welcome the offer of cross-party support for it. But it is important that we get it right. There are many examples, both here and in other countries, of legislation having been rushed through only to be regretted later. The current consultation finishes on 5 December. I will bring forward proposals in the new year when I have also had time to consider the outcome of the Treasury Committee's work, as it has requested.

The second element of support is the Bank of England loan facilities. It is important to remind ourselves of why this support was provided in the first place. Northern Rock got into difficulties because it was almost totally reliant on getting very substantial sums from the securitisation and money markets on a continuous basis to do its business. When that lending became ever more difficult, it had no option other than to go to the Bank of England. Because of the possible impact on the stability of the wider financial system, it was right that I authorised the Bank of England to intervene. That, too, had cross-party support.

While international financial markets have shown signs of improvement since the sharp credit squeeze in August and September, following the problems that arose in the American housing market in the summer, there clearly remains continued uncertainty in the markets. The rates at which banks are willing to lend to each other also remain high in all the major currencies. It is therefore vital that we do everything we can to maintain stability internationally, as well as here at home. As the House knows, we are taking steps at an international and domestic level to improve the regulatory regime and to provide greater transparency. That was the subject of the discussions of G20 Finance Ministers that I attended in Cape Town over the weekend.

The continuing support of the Bank of England has also given Northern Rock an opportunity to consider its strategic options. I am very clear that this is also the right thing to do and, indeed, when I announced this, it enjoyed support from both sides of the House. I know that there has been interest in how much support the Bank of England is giving. The Bank publishes its balance sheet every week. However, in common with other central banks, it does not provide details of any operations because it believes that doing so would undermine its ability to provide such support. I understand the frustrations that that can sometimes cause, but to provide what would, in effect, be a running commentary on any operations would be likely to have adverse affects that none of us would want.

Having said that, I can tell the House that Bank of England lending is secured against assets held by Northern Rock, which include high-quality mortgages with a significant protection margin built in and high-quality securities with the highest quality of credit rating. The Bank is the senior secured creditor. The Financial Services Authority has said before, and continues to say, that Northern Rock's main asset base—its mortgage book—is strong and sound.

As with any lender on this scale, we have ensured that the Bank's lending is subject to significant conditions and controls to ensure that our interests are protected, and, in return for that facility, Northern Rock has agreed a number of controls, including not declaring, making or paying any dividend without the prior written consent of the Bank of England, and not making any substantial change to the nature of its business.

I now turn to the next stage. It is in the interests of everyone that the situation with regard to Northern Rock is resolved as soon as possible. That was why Northern Rock asked for expressions of interest in purchasing the business. As the company announced earlier today, as part of its review of its strategic options, it has received indicative expressions of interest, covering a range of options for the business. It currently expects to receive further expressions of interest in the next few days.

It is essential that the public interest is protected. That is why I have published today the principles that will underpin the Government's approach, when assessing proposals from Northern Rock regarding its future. As I have already said, the Government have to agree to any such proposals. The principles make it clear that the Government have a clear duty to protect the public interest, and we will do so. However, I think that the whole House, and particularly Members representing the north-east, will want us to do everything we can within the constraints on us to resolve a very difficult position for Northern Rock.

Let me therefore set out our approach. First, we must protect the interests of the taxpayer. Substantial sums have been lent, and that money has to be repaid at an appropriate time and rate. The Government will consider proposals with a view to reaching the best outcome for the public purse. Secondly, we want to protect depositors. It is essential to do everything we can both to safeguard their interests and to maintain the service provided to them. Thirdly, we will maintain wider financial stability.

As I have made clear all along, the Government will now assess proposals from the company consistent with the approach that I have set out, and we remain closely engaged with the company as the best outcome for its future is assessed. As the company has acknowledged today, any proposals would have to be approved by the Government and, importantly, any proposal can be vetoed by the Government. In that way, the Government can ensure that the public interest is safeguarded. As I have told the House on previous occasions, any outcome must meet EU state aid rules.

It would be quite wrong to dismiss any option now without proper consideration, as some have suggested we do. I continue to believe that it is right to use this time to explore the best outcome for the company and the public interest. I agreed to Bank of England support because I believed it was right to do so. I agreed to continue support to allow Northern Rock the time it needs to consider its strategic options because it was right to do so.

I have set out today the approach that the Government will take as they assess proposals from the company to ensure that we will approve a solution only if it safeguards both the public interest and the specific interests of the taxpayer. That work is being done now and will be concluded as quickly as possible. I will, of course, continue to keep the House informed in the coming weeks. I commend this statement to the House.