With your permission, Mr. Speaker, I would like to make a statement regarding developments in financial markets to bring the House up to date.
The events in America over the last few weeks and in Europe over the last few days have again demonstrated the global nature and the sheer scale of the problems affecting the global financial system. What started in America last year has now spread to every part of the world and the disruption in global financial markets has intensified, especially over the last few weeks.
People are rightly concerned about what is happening, and I have made it clear that we will do whatever is necessary to maintain stability. Along with Governments across the world, I have a responsibility to support a stable, well functioning banking system. Financial transactions are at the heart of everything we do. They allow people to buy goods, pay for services, buy homes, save for pensions and invest, so it is essential that we take action to support the banking system as a whole, as well as being ready to intervene in particular cases where it is necessary to do so. It is not a case of doing either one or the other. Both general support and individual intervention are necessary.
We need, too, to work with other countries to tackle the causes of those problems, as well as dealing with their consequences. Let me briefly remind the House of what we have done to stabilise the banking system as a whole. Since April, the Bank of England, with support from the Government, has introduced the special liquidity scheme providing funding to the banks. The Government have made available in excess of £100 billion of long-term funding to be lent through the scheme, and the Bank of England has extended it until January. I am willing to make further resources available as necessary and the Governor has made it clear that
"in these extraordinary market conditions, the Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity".
The Bank of England has also continued to inject substantial funds into markets through its normal operations, and it will continue to do so. Tomorrow, it will put in another £40 billion, taking in a wider range of security, and those operations will continue into November.
We also need to deal with specific problems as they arise, to maintain stability. In February, we took special powers to bring Northern Rock into public ownership—now seen by most people as the right thing to do. I can tell the House that Northern Rock has now paid back more than half the taxpayers' money that was lent to it and it continues to repay its loan ahead of schedule.
In August, I announced that the Government would swap up to £3 billion of outstanding debt for equity, if required, to strengthen Northern Rock's capital position. In September, we amended the competition regime to allow the interests of financial stability to be considered in the proposed merger between Lloyds TSB and HBOS. We took that exceptional measure because financial stability had to come before normal competition concerns.
Ten days ago, we had to deal with the problems at Bradford & Bingley. We transferred the savings business, the branches and the related jobs to Abbey Santander, protecting savers, and took the rest of the company into public ownership. We acted decisively to protect savers, and also the interests of taxpayers, ensuring that the financial sector bears its share of the costs.
I have made it clear on many occasions that our priority is to maintain stability and protect the interests of depositors, and safeguard the interests of the taxpayer. I want to set out what we have done so far here at home and also to deal with developments in Europe over the weekend.
The Financial Services Authority has announced a further increase from tomorrow to the compensation limit for retail bank deposits to £50,000 per depositor, which means £100,000 for joint accounts. That measure will ensure that 98 per cent. of accounts are fully covered. The FSA is consulting on whether to increase that limit further to ensure that arrangements here continue to be comparable with international best practice.
I have always been clear that each country needs to do whatever is necessary to deal with its own particular circumstances. However, I also believe that, wherever it is possible to do so, countries should work together and act to maintain stability. This afternoon—in the last hour—all 27 European Union member states have reaffirmed the need to take whatever measures are necessary to maintain the stability of the financial system, whether through liquidity support, action to deal with individual banks or enhanced depositor protection schemes. But in the light of what has happened over the weekend, it is especially important that EU member states work far more closely together. So tomorrow I will meet European Finance Ministers in Luxembourg to discuss further how we bring stability to the system and protect depositors.
This demonstrates that every country in the world—Europe included—is being affected by these problems. In the United States, Congress has now approved measures to support its banking system, which we welcome. Our approach has been different, but what has happened in America emphasises yet again the need for countries to take whatever action they believe is necessary while also working closely together not just to resolve these problems, but to try to prevent them from happening again.
Later this week, I will attend the G7 and International Monetary Fund meetings in Washington. Our aim is to reduce uncertainty and to improve confidence in financial markets by increasing the openness of financial institutions' exposures. We also want to change and improve the effectiveness of credit rating agencies. These measures are now being implemented, but I believe that we need to move far more quickly.
Here at home, a number of specific steps are necessary. First, the Bank of England will continue to do whatever it takes to make cash available for banks to lend. Secondly, the banking Bill will be introduced tomorrow, building on the special powers we took in February to allow us to intervene quickly and decisively. It will also give the Bank of England a statutory role to maintain financial stability, to complement the role of the FSA.
Thirdly, just as at an international level, lessons need to learned. We need to ensure our regulatory system here is up to the mark. It is not about light touch against heavy-handed regulation; it is about making sure that we have the necessary rules in place and that those rules are enforced effectively. I have asked Adair Turner, the new chairman of the FSA, to make recommendations for reforms. As recent events in the financial markets have shown us, regulation should be about liquidity as well as capital. That is why the FSA is considering changes to the liquidity requirements. It is also looking at remuneration structures in the institutions that it regulates.
Fourthly, we must do everything we can to ensure not only that banks have the confidence to lend to each other, but that lending is maintained to the mortgage market, businesses and individuals. I shall publish Sir James Crosby's recommendations on options for improving the functioning of the mortgage finance markets shortly.
These are exceptional times, and I am in no doubt as to the size of the task facing us and Governments across the world in bringing order to the financial system. The process of change will necessarily take some time to work through, and because we are dealing with international institutions and international markets, it will require not only action at a national level here, but concerted international action.
It is right that we look at every aspect—liquidity, capital and regulation—with other countries and of course with the financial sector itself, but it would be irresponsible to speculate on the specifics of future responses. Indeed, providing a running commentary could add uncertainty in already febrile market conditions. But I want to make it clear that all practical options must remain open to us. I have made it very clear that the Government are ready, with the resources and the commitment, to do whatever is necessary, and I will keep the House informed.
Our priority, at home and abroad, is to bring stability to the financial system, to ensure that depositors and savers are protected, and to defend the interest of the taxpayer. I commend this statement to the House.
Copy and paste this code on your website
As we see again from today's markets, these are times of great instability for our economy and of great anxiety for the people we all represent. Families are deeply worried about their savings, their homes and their jobs, and it is up to us to try to work together to get the country through this current crisis. I do not think that the British public would thank us if they saw happening here in this House of Commons what everyone saw happening in the American Congress. That is why we offer to look constructively at any proposals brought forward by the British Government.
For let us be blunt about it: if the banking system fails, it is not just the banks that go bust—businesses fail, families cannot get mortgages, and people lose their jobs, not just in the banks, but across the wider economy. The Prime Minister said that we would never see a return to 15 per cent. interest rates. This week, one of our high street banks has written to many of its small business customers, increasing their interest rate to 15.8 per cent. All of us need to work together to stop Britain sliding from a banking crisis into a deep recession.
Of course, constructive support does not mean that we are suspending our critical faculties. We will return at a later date— [Interruption.] Oh yes. We will return at a later date to ask how on earth Britain found itself, at the end of this age of irresponsibility, with more personal and public borrowing than any other advanced economy in the world. But today I want to ask the Chancellor about the immediate issues facing the banking system: the issues of confidence, liquidity and capital.
The Chancellor mentioned the banking Bill. Will he confirm that it will create the Bank of England resolution regime that we think should have been used to deal with Northern Rock and Bradford & Bingley? As I told him last week when we met, the Bill will have our support. We also welcome the decision to raise the limit of protection on retail deposits to £50,000. We have been proposing that from the Dispatch Box for almost a year, and it is clearly the right thing to do. Even so, events are moving fast, with the broader guarantees issued first by Ireland and Greece and then by Germany, Denmark and others. Will the Chancellor confirm that none of those countries informed the British Government in advance, and does he agree that it is not helpful for European leaders to call for international co-ordination at summits and then, hours later, to act unilaterally? As he implied in his statement, their confusion is adding to market anxiety today. He is going to ECOFIN tomorrow. What reassurance can he give us that we can avoid descending further into a beggar-thy-neighbour approach that will, in the end, help no one?
Let me turn to the issue of liquidity. The increasing reliance of our banks on the overnight money markets is creating a hair-trigger effect which leaves individual institutions more and more exposed to events. That must clearly be undone, so we all support the Bank of England's decision to extend funding to the banks from tomorrow—it should address the urgent liquidity problem—but let us be clear about what is happening here. The Bank of England is becoming not just a lender of last resort, but the lender of only resort. Does the Chancellor agree that, in the medium and the long term, that is unsustainable? We need to address not just the symptoms of the crisis but the cause, and that brings me to the issue of capital.
The cause of this crisis is that we built an economy on a debt-fuelled bubble. Now the bubble has burst, and the debt is being called in. That leaves banks under-capitalised and their balance sheets weak. There are steps that can be taken now to stop, for example, the mark-to-market accounting rules adding to a downward spiral of falling asset values and restricted lending. The Chancellor's immediate reaction when we proposed that was to say that it would make "no difference". Many, many banks disagree with him, and so do many European countries. If he will not accept our argument, will he at least engage with theirs?
That still does not address the central challenge: the need to recapitalise the British banks. Does the Chancellor agree that that must, in the first instance, mean shareholders' accepting their responsibility? As I said to the Conservative conference, banks that pay out dividends instead of rebuilding balance sheets should be held to account by regulators.
I know the Prime Minister said when he went to New York that he wanted to handle the crisis on a case-by-case basis, but events have moved on. Does the Chancellor accept that the ad hoc approach is running out of road? No one is expecting the Chancellor to stand up here and speculate on every single option available, but he himself confirmed yesterday that big steps were being considered by the Government. Would it not be irresponsible not even at least to consider more dramatic measures to help our banks, including support from creditors and Government injection of capital? Of course there would have to be very strict conditions to protect taxpayers and ensure that they benefited first from any gain, and we could not contemplate taxpayers' money being used to prop up the kind of salaries and bonuses that we have seen in recent years. We must make sure— [Interruption.] The Chancellor can ask his new City Minister in the House of Lords about that.
We must make sure that in return for any support the banks start lending again, but in the end, for all the risks to taxpayers involved, there is one thing worse than Government action, and that is inaction in the face of this crisis—for then the far greater risk to the taxpayer and the country is a long and lasting recession. Boom has turned to bust; now bust must not become something worse. That is why Conservatives stand ready to help.
I welcome the shadow Chancellor's offer of co-operation and help, especially as he appears to have changed his tune somewhat about what remedies he now thinks are appropriate. I hope that he will now recognise that it is necessary for Governments to play an active role in trying to resolve the problems that we face, in order to produce greater stability as well as to help depositors.
I disagree with the hon. Gentleman in one respect in particular. Our position is not that one has to choose between generalised measures of support and looking at particular cases case by case. When we were confronted with the problems at Bradford & Bingley 10 days ago, for example, we had to deal with that specific case, because the problems were peculiar to that bank—it was the same for Northern Rock, and different particular issues arose in relation to Lloyds TSB. In addition to dealing on a case-by-case basis, it is necessary to have an overall approach. That is why the special liquidity scheme, which the Bank of England operates, was put in place, and there will be other measures, too.
I am glad that the hon. Gentleman welcomes the Bill, and I hope that we will get support for the measures in it. I very much welcome the fact that he and Dr. Cable, who speaks for the Liberal Democrats, are anxious to ensure that we try to get the legislation on to the statute book by the middle of February next year, when the provisions we made to take Northern Rock into temporary public ownership will expire. That would be extremely helpful and useful.
So I welcome the support of Mr. Osborne, although I notice that his tendency to lapse into points-scoring and party politics did not take long to reappear. I must make this one point to him in passing: our interest rates are 5 per cent. now, and while people obviously have their views on that, they compare rather favourably with the 15 per cent. interest rates that we had some 15 years ago.
The hon. Gentleman went on to raise some perfectly pertinent points, which I want to deal with. First, in relation to guarantees and what happened over the weekend, as far as I am aware no Government—nor the European Commission—was made aware of what the Irish Government were proposing to do last week. I took up that matter with Brian Lenihan, the Irish Finance Minister, and he explained that they did that because, in their judgment, they needed to take action because of what was happening in Europe. I understand that, but it demonstrates the problems that arise when member states take unilateral action, because, of course, it has a knock-on effect for other member states. Similarly, Germany announced action yesterday. As I understand it, Germany has made a declaration that is not legally binding; it is a political declaration about guarantees.
This emphasises the need for us all to work together, which is why from last night we have been working with the French presidency to get a declaration from all member states—a pledge to work together, to act together. As I said, that statement was finally agreed just an hour ago. I very much hope that when we meet in Luxembourg tomorrow we will agree that, whatever is done, European member states act together. That is very important; otherwise, we will end up with a situation that is confusing not just to depositors, but to institutions themselves.
On the hon. Gentleman's points about accounting rules, the European Union is looking at that. On Friday, the International Accounting Standards Board said that it would look at the lessons to be drawn from what has been happening in markets, to see whether any changes ought to be made and also to make sure that we do not find that European and American rules start to diverge. However, I say to the hon. Gentleman that it would be a huge mistake to assume that changing the accounting rules would sort out the problem. Especially at this time, markets want to know exactly what is going on, and they do not want to think that the situation has apparently improved simply because the ways in which things are accounted for are different. That issue is not somehow a "get out of jail free" card; it needs to be looked at, but it does not provide the answer that the hon. Gentleman might have been suggesting.
Finally, on capital, I said in my statement that we stand ready to look at the issues of liquidity, capital and regulation. They all need to be looked at, and we are ready to do whatever is necessary. I also went on to say—here, I agree with the hon. Gentleman—that we saw from what happened in the United States that nothing is worse than coming forward with a plan that is not sufficiently developed and about which questions cannot be answered, which resulted in some $1.5 trillion being lost over the 10 days that followed. I am determined that when we take action, we take it quickly, we take it decisively and it works. That is what I am determined we will do.
I thank the Chancellor for his statement. I do not think that any of us envy him for the very considerable weight of responsibility that rests on his shoulders, and we are going to have to work together in the common interest. There will be a time to decide who made mistakes, but the issue now is: have we moved forward?
The Chancellor said that he will do whatever he has to do in the financial crisis. He is right, and I hope that he will, but there are some issues that need clarifying. In the wake of the apparent German decision to give a complete guarantee for all deposits in the German banking system, it seems to us that the British Government will indeed have no alternative but to give a comparable assurance to people in the British retail high street banks. We all know that our bank deposits are safe. Some of my own modest savings are in the Bank of Scotland and some are in the Royal Bank of Scotland, so I am more than usually dependent on both the Chancellor and the Prime Minister and on the First Minister of Scotland not to let me down. However, there are anxieties. People have anxieties about specific questions such as merged banks, large deposits during house sale transactions and small independent businesses, and there needs to be more clarity about the guarantees than the Financial Services Authority has currently given.
Secondly, the Chancellor said in his statement that he is pursuing a case-by-case approach. He is right, and we have no quarrel with what he did in relation to Bradford & Bingley and HBOS-Lloyds—that seemed to be the right approach. However, we are now in a different situation, where banks are being picked off one by one. I set out proposals yesterday, and the Conservative leader said something rather similar this morning— [Interruption]—about the need for recapitalising the banks with a form of partial nationalisation. I hope that the Chancellor will confirm that those specific ideas are under active discussion.
Finally, I would like to say a little bit about interest rates. Of course, the issue is about the availability of credit, but it is also about official interest rates and the implications for mortgage borrowers and small businesses. I have been a very strong advocate of the independence of the Bank of England; I made my maiden speech about it in this House 10 years ago. Does the Chancellor not think it appropriate, in emergency conditions, to make it absolutely clear that the mandate of the Bank of England must include responsibility for averting a meltdown in the financial and economic system? Those members of the Monetary Policy Committee who are going around saying that the problems go no further than the financial system need a line of communication back to planet earth. We do need to be thinking about radical cuts in interest rates.
I know that the Chancellor has said that my comments on this subject are dangerous, and I recognise the dangers. These are very dangerous times, and decisive decisions are going to have to be taken over the next few days and weeks to safeguard millions of jobs and homes. I hope that the Chancellor will give us the leadership that we need on those issues.
I am grateful to the hon. Gentleman and for the fact that on many occasions over the summer he indicated his support for the general approach that the Government are taking. He asked three main questions, one of which related to guarantees. As I said earlier, I think it desirable that European member states act together. If the House looks at the statement that all 27 member states signed up to earlier this afternoon, it will see that there is a commitment there to work together, and it is important that we work together. We have the FSA announcement that it will increase the amount covered to £50,000, and as I said, that covers 98 per cent. of all accounts.
The hon. Gentleman mentioned liquidity and capital. May I emphasise to him that, as I said in my statement, I believe that we must look at three elements? First, we must ensure that there is adequate liquidity in the system. That is absolutely essential, which is why I welcome what the Bank announced this week and the fact that it is looking at providing facilities for far longer than is usual. The problem is not just an immediate one. He rightly says that we need more liquidity, because without it we cannot move to the second phase. I have also said that we need to look at regulation and at issues such as capital, and we will do so; when I have proposals to make, I shall come back to the House to set them out.
Finally, on interest rates, I do not think that I ever said that the hon. Gentleman is dangerous—whatever else he is, that is not quite the right description—but I think that in this case he is just wrong. If one establishes an independent central bank, distant from government, I do not think that one should change its terms of reference just because times are difficult. I should just remind him and the House of what the Bank of England Act 1998 says. The objectives of the Bank of England are
"(a) to maintain price stability, and
(b) subject to that, to support the economic policy of Her Majesty's Government, including its objectives for growth and employment."
I do not see any need to change that remit.
There is much concern and anxiety in Halifax about the uncertain future of HBOS, which is the second largest employer in the town. Will the Chancellor guarantee that he will do all he can to safeguard these jobs and give a commitment that Halifax and other HBOS locations will be on a level playing field?
My hon. Friend has already raised with me the question of jobs in her constituency and the surrounding area. I understand that the future of HBOS and the developments at Bradford & Bingley mean that a much wider area is affected. I hope that HBOS and Bradford & Bingley will do everything possible to try to maintain jobs and to help people for whom there will not be jobs in the future to get jobs elsewhere. I have met the regional development agency and the Minister for Yorkshire and the Humber, my right hon. Friend Ms Winterton. We are determined to do everything we can to help people through what is undoubtedly a very difficult time. I know, from my conversations with them, that HBOS and Lloyds are acutely aware of the impact on employment in my hon. Friend's constituency. I am sure that she will continue to do everything she can for her constituents, as she has done ever since the announcement.
I know that the Chancellor understands the impact on the wider local economy of what has happened to both HBOS and Bradford & Bingley, and I sincerely appreciate the fact that there will be no compulsory redundancies at Bradford & Bingley for six months—that has been welcomed.
Many employees were also small shareholders in Bradford & Bingley, and many of them loyally supported their company through a recent rights issue in order to try to save the business. I understand that the business had £1.5 billion of equity at the time of nationalisation and that the sale of the savings side raised £400 million. The expected losses on the mortgage book are independently assessed to be about £1 billion. That leaves about £800 million, which, split between 1.6 billion shares, works out at about 50p a share. Does he recognise those figures? Can he give the House some idea of what might happen to those small shareholders?
The hon. Gentleman is understandably concerned about jobs in his constituency. As I said to my hon. Friend Mrs. Riordan, we will work with Yorkshire Forward and the company to see what we can do. I am glad that he also recognises the fact that we were able to provide funding to ensure that people will be employed for six months. That will help, although the situation is clearly difficult. The problem with Bradford & Bingley was that its model just did not work. It tried, as did we, right up until last Saturday to find a commercial solution—or even an approaching commercial solution—but we could not do so.
The hon. Gentleman rightly asks about shareholders. We sold the branches and transferred the deposits to Abbey Santander, and the money from that will go into the pot. However, we also had to transfer and finance some £20 billion of deposits. That amount, which is due to the Government, will be reduced in time as the assets of Bradford & Bingley are realised and mortgages repaid. I cannot say what those assets will realise, or when; it will take years to repay some of them. Some of the buy-to-let mortgages might be worth something in a few years' time, although they are not worth much just now.
I cannot say at this stage how much, if anything, will be left. I understand the position, because it is exactly the same as that with Northern Rock: people who were not big-time share dealers, but who lived locally, thought that they were doing the right thing in buying shares to support their local company, but then the company failed. We will do what is right, but at this stage it is impossible to say what, if anything, will be left at the end of the day. The bank has a lot of assets that, frankly, are not worth much at all.
I congratulate my right hon. Friend on his steady and careful approach to this catastrophic situation and on trying to avoid it becoming more of a catastrophe. I welcome his commitment to improved regulation of the City, so that people's homes and jobs are not imperilled by banks that were so stupid in making their complex arrangements that they could not distinguish between liabilities and assets; by firms of auditors that apparently did not spot that anything was wrong; and by ratings agencies that gave AAA ratings to spurious transactions, apparently unaware of the fact that the pieces of paper involved were worse than worthless. I hope that my right hon. Friend will accept my assurance, on behalf of every Labour Member, that we will support improved regulation even if the Tory party—the political wing of the banking industry—opposes it and speaks out against regulation.
I agree with my right hon. Friend that it is necessary to have a regulatory system that is robust. As I said earlier, it is not a question of light touch versus heavy-handed regulation. We will not pursue a knee-jerk reaction, but it is important that we avoid situations such as those experienced in the US—but by no means the US alone—in which banks were able to incur substantial risks, apparently without people at the top of the bank being fully aware of just how exposed they were. Nor do we want a repeat of the situation in which regulators, who were concentrating—for understandable reasons—on solvency, did not pay enough attention to the question of liquidity. Across the world there are lessons to be learned. Changes will be necessary, and I am grateful for my right hon. Friend's support in that regard.
In the light of the Bank of England's statement about the special liquidity scheme and the Chancellor's statement today, is it right to assume that the Government now accept that the Treasury must support the Bank in providing just as much liquidity as is necessary on the widest possible class of assets as security for as long as is necessary, until the money markets start to function again and inter-bank lending is resumed? It is obvious that banks will not resume lending normally to businesses or households until there has been some recapitalisation. As there is open speculation about the Government using taxpayers' money to take a stake, will the Chancellor accept that he needs to come to a decision rapidly on that issue to bring the speculation and uncertainty to an end and enable us to move towards a more normal banking system?
I agree that speculation can be harmful, which is why everyone has to be careful about what they say and when they say it. It is important that when we have proposals to make—whether on liquidity, regulation or capital—we make them as soon as possible, consistent with having proposals that are fully developed and ready to be implemented. As I said in my statement, it is also important to discuss the matter—as we did the special liquidities scheme—with the financial services industry, where appropriate, so that we ensure that whatever we do achieves what we all want, which is to begin to bring about a situation whereby we can return to sensible lending and where banks will start to lend more freely to individuals and to businesses.
In relation to the right hon. and learned Gentleman's points about the special liquidities scheme, I have always said that we have never set a cap on the amount that the Government are prepared to make available. Although the scheme will run for three years, we will keep that under review. I am determined to do everything we possibly can to stabilise the present situation and to make improvements so that we can get out of the difficulties that we face. The special liquidities scheme is an essential part of that. The right hon. and learned Gentleman can rest assured that I will do whatever it takes to ensure that it works and that it does so effectively.
Does my right hon. Friend agree that the 100 per cent. deposit guarantees by the taxpayer that appear to be on offer in some major economies—he will need to be careful with his comments on this subject—are harmful and mistaken as policy instruments in this respect? They will encourage a huge moral hazard in the banking industry unless they are backed up with incredibly intensive regulation, which will stifle innovation and growth.
As I said in my statement, it is far better—especially in Europe where so many banks have branches and subsidiaries in many different countries—that any action that is taken is taken together. I have always made it clear that countries need to do whatever they think is appropriate to look after those institutions for which they are directly responsible, but working together is very important. Ironically, the summit called by President Sarkozy in France on Saturday pledged each of the participants to working together. We need to get back to that, because it is the best way to try to resolve the matter.
I am sure that the whole House will realise the very terrible times that we are in. I remember being a lad in Ulster and the soup kitchens, the poverty and the terrible happenings that took place. We must all, in our own way, do what we can to help one another to get some way through this very dark hour for our nation. I know that there are many beliefs in this House; my belief in God is well known and my religious convictions are known. I trust that our whole nation will turn in repentance and cry to God for an intervention so that the calamity will not come on our children and on the babes in their cots.
I think that I agree with the right hon. Gentleman on the need to work together. I am not as well qualified as him to comment on whether divine intervention can help us, but I think that Governments and financial institutions both have a huge role to play. Governments can make a difference and they need to make a difference, precisely to ensure not only that we stabilise the situation but that we get through it.
Will my right hon. Friend rule out a straitjacket on the Bank of England giving long-term help to banks if necessary and if it is decided on over the course of the next few weeks, months and perhaps even years? Will he also remember that when interest rates hit 15 per cent. and above, small businesses were paying 25 per cent., which is why so many of them, sadly, went bust?
My hon. Friend is quite right on that last point. We need to recall from time to time exactly what happened in the past when interest rates went way up—the consequences were devastating. That is all the more reason to ensure that we take the right action, including supporting the Bank of England. I have made it clear, as has the Governor of the Bank, that we will do whatever it takes and whatever is necessary. We will do that because it is essential if we are to ensure that money is available in future not just to individuals, to enable them to buy houses and to invest, but to businesses. British businesses depend to a large extent on their banks, and it is important that we do everything we can to ensure that banks remain in a position to lend to them, because without that lending those businesses would be in difficulty.
I recognise that the Chancellor will have difficulty in answering a number of these questions, but I wonder whether I can return him to Germany's statement about protection for its depositors. At the Dispatch Box, the Chancellor mentioned, quite rightly, that our protection covers about 98 per cent. of all depositors, but he will also recognise that we have significantly more money on deposit than Germany does. The reality is that that 2 per cent. represents a very significant amount of money. What concerns me right now is that, given the febrile nature of the markets—watching little things and then panicking—if they see any flight of capital, even that 2 per cent., towards Germany, it could cause another stampede and another crisis. I recognise the Chancellor's problem about indicating what he may or may not do, but does he not recognise that that 2 per cent. alone is perhaps enough to tip over the markets if they saw a flight of that money to, say, Germany or even Ireland?
I make a plea to the Chancellor that, when he speaks about protecting the taxpayer and depositors, he continues to include customers or borrowers. The whole House understands the importance of helping the banking and finance industry on the grounds of stability, but the sight of the same banks calling in loans to small businesses and making many thousands of good people homeless by making their mortgages unaffordable is totally unacceptable. If we are prepared to have a lifeboat for the finance industry, it should be prepared to participate in a lifeboat for its customers.
My hon. Friend makes a perfectly good point. It is important to remember when we talk about stability and the whole financial system what it actually means to people with houses or people who have businesses who depend on the ability to borrow money. In relation to people who get into difficulty with mortgages, we have been working very closely with the Council of Mortgage Lenders and others to ensure that there is a rigorous code of conduct, so that banks do everything that they possibly can to help any customer who might be getting into difficulty. Exactly the same thing applies to businesses. Of course, one of the other things that we are doing is working with the European Investment Bank to ensure that the substantial sums of money that are made available find their way through our banks into the hands of small businesses.
This is the worst problem that any Chancellor of the Exchequer has faced for a very long time indeed, and I am sure that the whole House wants to be able to support him in whatever proposals he makes to deal with it. He has done a lot on the liquidity front, but he has done relatively little, if anything, on the capital adequacy front. I urge him to address that problem fairly quickly, because such things get worse if they are allowed to drift on. I hope that he will consider the concept of supporting direct injections of capital, as opposed to what the United States did in buying bad assets at a premium in the market, which is a complicated way of doing the same thing. However, I also urge him to take another look at the Dormant Bank and Building Society Accounts Bill, which we will debate this afternoon and which will have the effect of extracting £400 million or £500 million of the banks' safest and most solid deposits and putting the money into a reclaim fund for good causes. Could we not start by allowing the banks to convert that to some form of capital security? The reclaim fund could still hold the money and distribute it to good causes in due course. That Bill was conceived when the situation was very different from now, and I urge him that that is at least a way to start to make some form of contribution to the capital of banks and that he should propose do to that in Committee.
I understand what the hon. Gentleman is saying. Of course, the proposal on dormant assets in the Bill that we will debate this afternoon is a long-term measure, but I am sure that he will want to return to such measures, perhaps during Second Reading, and my right hon. Friend the Chief Secretary will be happy to respond.
I commend the Chancellor and the Prime Minister for their calm and authoritative leadership, but global political leaders and central bankers seem to be behind the curve, as the financial crisis spreads rapidly into the real economy. Does he agree that it is no longer simply a question of sub-prime versus prime, but about asset quality in infrastructure, businesses, commercial and other property and even car loans and so on? In addition to the special banking powers that he is taking, will he consider legislating to enable reserve powers over infrastructure—rail, vital utilities and similar things—in case they fall into serious problems, as I fear they might, so that we are not behind the curve but ahead of the game, with those powers sitting ready to be taken, perhaps involving stakeholdings, recapitalisation and other matters and procedures that might prove necessary?
I am grateful for my right hon. Friend's support, and I agree that it is important that all of us—Governments, central banks and regulators alike—keep an eye firmly on problems that might arise in future. I also agree that it is important to ensure that investment, especially in transport infrastructure, continues; I feel very strongly about that, for reasons that he will understand. That is why I am pleased that our Government have been able hugely to increase the amount of money that they are spending on transport infrastructure, and why it is important that, in what will undoubtedly be a difficult time, we ensure that investment does not suffer. Long-term investment in infrastructure is very important.
I agree with the Chancellor that we should consider every aspect of the issue, including liquidity, capital and regulation, and I would add confidence and stability to that list. I very much welcome his saying that "all practical options must remain open to us". I understand that he will not speculate on his final plan, whether it be enhanced deposit protection, a guarantee of all sterling deposits—that is our favoured option—or an extension of the list of assets against which banks can borrow. May I recommend, as a matter of urgency, that he finalises his plan and makes a firm, detailed, comprehensive statement about the actions that the Government intend to take? Otherwise, as regards confidence and stability, the Government will be seen to be buffeted by events, and to be merely reacting. I am calling for a proactive statement and a detailed plan—a comprehensive set of measures to provide stability and confidence. Will he draw up that plan, and set it out in a single, comprehensive statement?
What I have done this afternoon is set out for the House what we have done so far, in order to provide the House with an opportunity to question me about developments over the summer. However, the hon. Gentleman is right: there are further things that we need to do, and I will come before the House to announce them as soon as I am ready to do so.
Does the Chancellor agree that recapitalisation when property values are falling increases the risk to taxpayers and will prove ineffective, and that we therefore need the Bank of England advisory committee to recommend a significant decrease in interest rates in its recommendations this week? In addition, recapitalisation could start the round of speculation off again, so will he assure the House that he will stand ready with plans for nationalisation of the banks, if necessary?
Some of us on the Liberal Democrat Benches anticipated at least some of the problems, and were concerned about the fact that the regulatory authorities did not clamp down on the excessive unsecured credit that was put into the marketplace; that put pressure on financial services in London and Edinburgh, and it is that pressure that is causing us so much trouble.
Moving on, may I pick up on the point made by my hon. Friend Dr. Cable? The Chancellor said that he thought that the remit of the Bank of England required no amendment, but can he really stand by that when inflation, which is the overriding concern, is outside the target? Does he not accept that it would be desirable temporarily to set aside the requirement on the Bank, so that the Government can deal with the crisis today? I campaigned for an independent Bank—he did not—and I believe that independence is right, but the parameters have to be right. Would it not be good to ensure a cut in interest rates, so that we can get the economy going and get banks lending again, and a cut in taxes to help people deal with rising costs?
The right hon. Gentleman may have campaigned for an independent central Bank, but I was part of the Treasury team that legislated to put the measures in place. To be fair, the Liberal Democrats have been consistent on the issue, and did support an independent central Bank. However, if they are to be consistent, they should not, for goodness' sake, ask for a change of rules when things get difficult.
Does not my right hon. Friend agree that the Government have acted decisively and with great expediency on the issue, and will continue to do so? On interest rates, will he confirm whether my recollection is correct: is it not right that, although it will rightly be enshrined in statute that it is part of the Bank's responsibility to maintain financial stability, it is his responsibility as Chancellor to set the interest rate? It is then the Bank's responsibility to maintain that rate through the appropriate monetary and other policies. If that is the case, as I think it is, it is still for him, as an appropriate and necessary part of his normal functions as Chancellor, to set that rate. Will he bear that in mind in the months ahead, which are bound to be very difficult?
It is my responsibility to set not the interest rate but the inflation target, which is something that is done at the Budget every year. As I said, both in the House today and on previous occasions, I think that targeting inflation is important. Inflation has been a huge problem for this country in the past, and I believe that the Bank's present remit, both in relation to its inflation target and, subject to that, to its broader objectives, is the right objective.
We have not seen a Northern Rock-type run on the banks—mercifully—but is the Chancellor aware that there is still huge confusion on the high street? There are a lot of people trying to shuffle money, and wondering whether they ought to do so, between institutions, to find some sort of safe haven. Should we not be grateful to building societies such as Skipton and the other five Yorkshire societies that have remained mutual societies? If I may make a suggestion to the Chancellor, perhaps he might talk a little less about systems, and a little more about people, because the anxiety spreads to every level of society, and the one question that they want answered is, "Is my money safe?" The sooner that he can answer that, the quicker we will get calm on the marketplace.
I agree with the right hon. Gentleman that what matters is people, and one reason why the FSA, with our strong support, increased the upper end of the compensation limit to £50,000 for an account holder was precisely to provide additional security, which is very important. He made a point about building societies, especially those that did not demutualise, and I understand why he did so, because I think that I am right in saying that all the building societies that demutualised have either been taken over or, sadly, are no longer with us.
The Chancellor of the Exchequer touched on this briefly, but may I congratulate the Prime Minister on his initiative in Paris at the weekend, in saying that the European Investment Bank should release £12 billion to £14 billion to the small and medium-sized business sector, with a further £12 billion to £14 billion coming later on? Building on the Chancellor's response to my hon. Friends the Members for Edinburgh, South (Nigel Griffiths) and for Leeds, East (Mr. Mudie), is not this sector the most important sector in the country, and can we say, building on the point made by the shadow Chancellor, that if the banks are not lending to one another, at least they should lend to that sector at reasonable rates?
I strongly agree with my hon. Friend. It is important that small businesses in particular, as well as other businesses, can get access to the money that they need. The initiative to which the Prime Minister referred at the weekend from the EIB is very important. I had discussions with its managing director a couple of weeks earlier in France, and it is important that that money is not only released, which it will be, but that businesses in this country can get it through the banking system. I hope that we will have something to say in the not too distant future that will help with that.
Does the Chancellor agree that guaranteeing all deposits, although it may well prove necessary, is at best a sticking plaster, not a cure for the underlying disease, which is that the value of loans made by banks, and even more of the collateral that they have accepted, has fallen below their obligations and their ability to meet them from reserves? If he is not to have to make that good himself, he must provide incentives for those banks to raise new reserves. Will he consider guaranteeing the proportion of reserves newly raised from this date in the event of any subsequent reconstruction in which the state is involved?
The right hon. Gentleman is right. If we look at the fundamental causes of the problem, we see that banks took on risks that either they did not evaluate or, if they did, they did not take enough steps to ensure that they could withstand any fall in assets. That is something that we need to look at, and it is something that the regulators need to look at.
Will my right hon. Friend accept my congratulations, as the constituency MP for many Halifax Bank of Scotland employees? We were grateful for the work that the Prime Minister and he did in arranging a marriage between HBOS and Lloyds TSB, but on reflection, would it not have been a better option to part-nationalise HBOS to keep its integrity and independence and to keep the jobs, rather than creating a vast monopoly—a third of the market—which will come back to haunt consumers and those of us who represent Yorkshire constituencies? The bank is, after all, the largest private employer in Yorkshire.
I am very aware of the importance of HBOS as an employer in Yorkshire, but if it is possible to reach a commercial solution to problems, that is by far the best route to pursue. A commercial decision was taken by HBOS and Lloyds TSB. Yes, we intervened to waive the competition rules that would otherwise have stopped it, but as I said in relation to Northern Rock a year ago—at that time many people believed that the best option was to try to find a commercial solution, but it did not work at the end of the day—one day even Northern Rock will have to be returned to the private sector. I do not think the Government can run banks particularly effectively, and I do not think that is desirable. If we can get a commercial solution in relation to these matters, that is far better, and it is what is proposed in this particular case.
The Chancellor told me in the summer that he had regular secret meetings with the top bankers. They seem to be coming with a begging bowl, which has been rewarded with massive liquidity. What has he got from them in return—for example, to deal with the fat-cat bonuses and pay-offs that they have had?
I do not think I told my hon. Friend that I had secret meetings with the bankers. If I did, it clearly would not have been a secret any more. It is no secret that I meet people from the banking industry on a fairly regular basis. Indeed, people would be surprised if I did not. On my hon. Friend's other point, yes, of course there is concern about the way in which employees were paid or incentivised. Many people are concerned that employees were paid bonuses to take on risks which, it turned out, did not just put the individual employer or their bank at risk, but put everybody else at risk at the same time. That must change.
Does the Chancellor agree that without in any way compromising the independence of the Bank of England, he could put into abeyance the inflation target for a period, and therefore allow the bank to take the steps necessary to prevent the present crisis from spilling over into the rest of the economy? Our experience so far has shown that the idea that financial crises could be contained is holed below the waterline, and that the inevitable consequences of not stemming overspill will be detrimental to just about everybody in the country.
I do not agree with the hon. Lady. As I have said before, the remit given to the Monetary Policy Committee is wide. It was designed for the good times as well as the more difficult times. To chop and change it would undermine the idea and principles that underpin the concept of an independent central bank.
How are the Government measuring the danger to the British economy if, when trying to pursue a policy across Europe, we find that we are, for example, the last Government to offer 100 per cent. guarantees to individual savers with deposits in British retail banks? Will he give a guarantee that we will not find ourselves in that position?
We are not in that position. I said earlier that if action is taken, there is much to be said for having a discussion about these matters and acting in a way that avoids the distortions that I referred to. That is one of the things that we will be discussing tomorrow.
The Chancellor may not know, but I can tell him that many small businesses will be disappointed with his statement today. They are facing increasing debt, including massively increased bad debt, and are under tremendous cash-flow pressures. They go to their banks, but their banks are not being helpful; in fact, they are increasing interest rates. Will the Chancellor give the small business sector some confidence today, by saying that he will go to the banks and ensure not only that small businesses get their fair share of the guarantees being given, but that banks will cut interest rates to them?
I think that I have said on a number of occasions this afternoon that there is concern in all parts of the House about the impact that the credit crunch is having on businesses. That is why it is important that banks and Governments act together to try ensure that we help small businesses, whether directly or through the European Investment Bank or other such measures. That is what I want to do.
Does the Chancellor recognise that the markets are in a panic because the authorities are seen to be losing control of events? The right place for the risks of a rescue is not the balance sheets of national Governments, which are there to help the less well-off, not the super rich. Tomorrow he must go to Europe and get a Europe-wide run-off and rebuild facility that can really bear the strain of events and put the authorities across Europe back in control of the situation, not running constantly behind.
I agree with my hon. Friend that it is important for Governments not just to deal with day-to-day events, but to anticipate them and try to restore the calm to which he referred. That said, there are some things that can be achieved on a Europe-wide level, but there are other areas where that might prove more difficult. He may be aware that the Dutch Government came up with a proposal for a pan-European solution that, as far as I can see, has not attracted a great deal of support from the rest of the European Union. However, it is important that if we can take action together, we should do so. If that is not possible, we should redouble our efforts—our Government and other Governments of like mind—to ensure that we do precisely what he suggests: to anticipate and deal with some of the problems that we know are there or which are coming towards us.
As we address such issues in this place, should we not bear in mind that the crisis has been exacerbated because, during the summer, people in high places consistently forgot that there is no situation that is not made worse by panic?