Banking (Asset Protection Scheme)

Part of Cafcass – in the House of Commons at 4:14 pm on 9th March 2009.

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills) 4:14 pm, 9th March 2009

With permission, I shall make a statement on the asset protection scheme, and the agreement in principle reached on Saturday between the Treasury and Lloyds Banking Group. My right hon. Friend the Chancellor is travelling to Brussels ahead of the meeting of European Community Finance Ministers tomorrow to discuss the G20 Finance Ministers meeting this weekend, so he has asked me to make this statement.

The asset protection scheme was announced in January. In my right hon. Friend's statement of 26 February, he gave details of the participation by the RBS Group, and he mentioned the negotiations under way with Lloyds. The approach that we adopted with Lloyds is similar to that adopted with RBS; discussion involved a large amount of complex detail and it was important to take time to reach a satisfactory conclusion. An agreement in principle has now been reached that helps to ensure financial stability, to safeguard the interests of the taxpayer and to support the real economy by increasing lending.

Under the asset protection scheme, the Government will provide protection against certain credit losses on particular assets in exchange for a fee. A first loss, similar to the excess in insurance policies, remains with the institution. Lloyds will meet all of that. The protection provided by the Government will cover 90 per cent. of the remaining loss. The other 10 per cent. will remain with the institutions as an incentive to manage the assets prudently. The Government will accept applications to the scheme for other eligible institutions until 31 March.

Lloyds announced on Saturday its intention to place £260 billion-worth of assets in the scheme, on which it has already taken impairments of £10 billion. Through the first loss mechanism, it will retain a further exposure of £25 billion. Of any losses beyond that, 90 per cent. will be borne by the Exchequer and 10 per cent. by Lloyds. The protection will cover a range of assets including mortgages, unsecured personal loans, corporate and commercial loans and Treasury assets.

Lloyds will pay a fee of £15.6 billion in new, non-voting B shares. Those will count as core tier 1 capital. The Treasury has also agreed to replace its existing £4 billion of preference shares. Current shareholders will be able to purchase these ordinary shares as part of an open offer. The Treasury will take up its pro rata share of the open offers, maintaining its minimum voting share at 43.5 per cent., and will subscribe for any additional shares not taken up by existing shareholders. If no other shareholders take up their entitlements, the Treasury's ownership of ordinary shares will increase to 65 per cent. Taking into account B shares paid as a fee, its economic ownership would reach 77 per cent.

As my right hon. Friend the Chancellor set out, the asset protection scheme is a key step to put banks on a stronger footing, to insure their balance sheets and to boost lending to businesses and individuals. As part of that deal, in return for access to the asset protection scheme, Lloyds has agreed to increase its lending by an additional £14 billion over the next 12 months —£3 billion for homebuyers and £11 billion for business lending—and it has made a similar commitment for 2010. Consistent with RBS, Lloyds will be required to present a detailed implementation plan to the Government, and to report monthly on compliance with the lending agreements. The Government will publish an annual report on these arrangements, which will be made available to Parliament. The agreements are binding and will be reflected in the performance-related pay of bank staff involved.

Another condition for Lloyds, as for any bank participating in the scheme, is a requirement to develop a sustainable long-term remuneration policy. That means reviewing policies and implementing new policies consistent with the Financial Services Authority's recently published code of remuneration practice. We have agreed that no discretionary bonuses will be paid in 2009 except to junior staff earning an average of £20,000, and that there will be no annual free share award at all.

At the heart of the current financial and economic problems around the world is a crisis of confidence about bank assets. That lack of confidence is having profound effects on UK companies and on individuals who are not able to secure business loans or mortgages. The critical obstacle to expanding lending is uncertainty about the value of banks' balance sheets, so we are acting now to enable the banks to clean up their balance sheets, making them better able to lend to individuals and businesses.

Transformation will not happen overnight, but that is the essential starting point, and it must go hand in hand with broader reform of banking supervision and regulation. Action must be taken not only here but by Governments across the world. The alternative would be a failure of the banking system here and elsewhere, which would make the recession longer and more painful and put more jobs at risk. Getting the banks to lend again is essential to economic recovery and to our fight against the global recession.

The Government are clear that British banks are best owned and managed commercially, rather than by the Government. The future of the UK as a financial centre, and the future of our economy and of many thousands of jobs, depends on being able to run banks commercially. All countries are having to deal with the same problem—how to isolate assets that are damaging confidence in the banking sector and preventing banks from lending more. Over the coming weeks, we will continue to discuss with other countries, including the United States and the European Union, how best to co-ordinate our approaches to the shared challenges that we face. As part of our presidency of the G20 this year, my right hon. Friend the Chancellor recently wrote to Finance Ministers setting out a set of shared principles for dealing with asset protection and insurance.

It is essential to restore confidence in the banks, allow them to clean up and rebuild and get lending going again. Economic recovery and thousands of jobs depend on that, and I commend this statement to the House.

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