Banking Reform — Statement

– in the House of Lords at 4:08 pm on 3 November 2009.

Alert me about debates like this

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury 4:08, 3 November 2009

With the leave of the House, I would like to repeat a Statement made by my right honourable friend the Chancellor of the Exchequer.

"Mr Speaker, with permission, I would like to make a Statement on the banks in which we have shareholdings. This morning the Treasury, Lloyds and RBS issued market notices in the usual way.

In October last year, I set out a range of measures designed to prevent the collapse of the banking sector. These measures are working, and countries across the world took very similar steps over the following weeks. But the uncertainty in global financial markets had a very serious impact on confidence, resulting in a world recession. This, in turn, worsened the outlook for our economy, leading to higher losses for UK banks.

It was clear that further action was needed to strengthen the banks, and in January we announced the asset protection scheme to prevent a further shock to confidence and ensure that lending could continue. We continued to support the economy through fiscal and monetary policy and co-ordinated a global policy response at the London summit in April. These measures are working, too. Fears of a global depression have receded and market confidence has started to return. As a result, we are now able to achieve our objectives on financial stability and banking reform at a lower overall cost to the taxpayer.

The asset protection scheme that I announced in January has played a vital role in supporting confidence in financial markets. Let me remind the House of the key features which I set out then. It provided insurance against losses arising on a pool of bank assets and, in return, the banks paid a fee in the form of shares. The effect of the scheme is to strengthen the capital position of any bank in the scheme but, of course, this carries a risk of exposure for the taxpayer. The scheme was open to all major UK banks. In the event, improved market conditions meant that only two banks decided to participate. Since then, further improvement in market conditions means Lloyds has been able to develop a better plan. It does not now need to participate in the scheme, which will significantly reduce the cost and exposure for the taxpayer.

I will now explain in detail our proposals to better restructure the banks and make them stronger. I turn first to Lloyds. Following the recapitalisation last October, the Government owned 43 per cent of the bank. In March, we reached an agreement in principle with Lloyds on its participation in the scheme. This would have increased, through the fee, its capital by over £15 billion, increasing the cost to Government and increasing our stake in Lloyds to 62 per cent. We agreed then in principle to insure £260 billion of assets, giving us a very large contingent liability. But now that market conditions have improved, we have agreed a better proposal for Lloyds, to bring in substantial private capital and reduce taxpayers' exposure.

So, Lloyds has announced today that it will raise £21 billion in the open market. This capital raising is fully underwritten by commercial banks. As a shareholder, the Government have the option to take up part of the newly issued equity. If we did not do so, the value of the existing taxpayer shareholding would be diminished. So, to protect the value of our shares, we have decided to take up our share of the new capital, investing £5.7 billion net of an underwriting fee.

By raising capital in the markets, Lloyds will begin its transition from state support to private finance, and no longer need the insurance of the asset protection scheme. Because Lloyds has benefited from the existence of the scheme since March, it has agreed to pay the Treasury a fee of £2.5 billion and to reimburse our costs.

Today's decisions make Lloyds a stronger bank and provide better value for the taxpayer, ending exposure through the insurance scheme, with a substantial fee in return for the insurance provided to date and a substantial capital contribution from the private sector, while maintaining our shareholding at 43 per cent.

I turn to the Royal Bank of Scotland, which is a bigger bank than Lloyds, with a more complex balance sheet, and greater exposure to losses, mainly due to its purchase of the Dutch investment bank ABN Amro. Under February's agreement in principle, the Government would insure £325 billion of assets through the asset protection scheme, as well as providing an additional capital injection of £13 billion, a second tranche of capital amounting to £6 billion, and a further £6.5 billion worth of capital support through additional shares issued to pay the fee. Together, this would have increased RBS's capital by £25.5 billion, taking the Government's stake to 84 per cent.

Before we could reach a binding agreement, we needed to carry out due diligence on the assets, and ensure that the final terms were consistent with emerging European Commission guidelines. The restructuring guidelines were published in July, following extensive work with the UK and other countries. We and the FSA have now also completed due diligence work on the RBS balance sheet. As a result, we are making a number of changes to the terms of the scheme, which will improve incentives and better share risks with the private sector.

While market conditions have improved, RBS still needs to do more to be able to stand on its own feet, so we will continue with our plan to invest £25.5 billion of capital into RBS, but there are three key changes. First, there will be a £43 billion reduction in the pool of assets covered by the insurance scheme, reducing the Government's contingent liability. Secondly, the first loss on these assets—payable by RBS—will be increased from £42 billion to £60 billion, further protecting the taxpayer. Thirdly, in return, RBS will pay an annual fee of £700 million for the next three years and £500 million per year thereafter, giving it an incentive to leave the scheme as conditions improve, and when it does leave the APS, it must have paid a minimum fee of £2.5 billion or 10 per cent of the actual capital relief received.

To reflect the increase in the first loss, amounting to £18 billion more payable by RBS, we will no longer require RBS to give up its tax losses, which it estimates at between £9 billion and £11 billion. In the unlikely event of a severe downturn, it may be necessary to provide up to £8 billion of contingent capital, but this will only be triggered if there is severe stress, taking its core capital ratio below 5 per cent. Again, in return for this, RBS will pay an annual fee of £320 million for as long as the contingent capital is available.

In the case of RBS, the overall level of government support will remain broadly the same as announced in February, but this revised deal is better structured, with better risk sharing and greater incentives to exit. There is a higher first loss payable by RBS of £60 billion, up from £42 billion. There are better incentives, with a fee of £700 million for three years and £500 million thereafter, and fewer assets to be insured—£282 billion instead of £325 billion. I will also provide the House with full details of the operation of the scheme when the final agreement is signed and approved by the Commission.

As part of these restructured deals, we are pushing forward with reform at these banks with improved lending and remuneration policies. Both Lloyds and RBS will be in a stronger position to continue lending. Lloyds will increase lending capacity this year and next, with an additional £11 billion for businesses and £3 billion for homebuyers in each year. RBS will continue to meet its lending commitments of £25 billion this year and next. Both will publish customer charters on good practice on SME lending, increasing transparency and improving loan conditions for business customers.

On pay, all major retail and investment banks in the UK need to meet the G20 principles and FSA rules, so that bonuses have to be: transparent, variable, and with no multi-year guarantees; between 40 and 60 per cent deferred over a number of years, not paid immediately; and subject to claw-back, to ensure pay is aligned with long-term performance. However, we have agreed with RBS and Lloyds that they will go further than this. For this year, there will be no discretionary cash bonuses except for staff earning less than £39,000 a year. In addition, the executive boards of both banks will have their bonuses deferred in full until 2012. This goes much further than any G20 agreement and further than any other banks in the world.

I will continue to strengthen the supervisory regime, building on my proposals in July by adopting the recommendations of the Walker review on corporate governance for banks, reforming the mortgage markets, and legislating to make banks put in place "living wills", as well as enhanced powers and objectives for the FSA, to further strengthen regulation.

I believe these steps are better for the taxpayer, better for the banks and better for the economy. As a result, the likely cost to the taxpayer and the risks faced by the public finances have reduced markedly. The total assets protected have reduced by over £300 billion, there is more private sector investment and the fees received are better structured. I also expect, subject to wider factors, to revise downwards the provision for financial sector interventions in the Pre-Budget Report.

As I said in my statement in July, our second objective is to encourage greater banking competition in the high street and for small and medium businesses. Since the financial turmoil started in 2007, the banking industry has become more concentrated in most advanced economies. But over the course of the year we have been working with the Commission to agree on how to restructure the banks while meeting state aid rules. For Northern Rock, I have already set out my intention to split the bank into two separate companies, and we now have Commission approval for this. This will mean less capital support is needed to keep Northern Rock lending, and when the time is right, it will facilitate a return to the private sector. Lloyds will sell Cheltenham and Gloucester, the Intelligent Finance internet bank, the TSB brand, Lloyds TSB Scotland, and some Lloyds TSB branches in England and Wales—altogether more than 600 branches by 2013. RBS plans to sell its insurance businesses, including Direct Line and Churchill, as well as its commodity trading arm and its card payment processing operation. It will also divest more than 300 branches across the UK by 2013.

Together, these businesses could potentially amount to about 10 per cent of the retail banking market in the UK, and in each and every case we will insist that these institutions should not be sold to any of the existing big players in the UK banking industry. So, Lloyds and RBS will each be required to sell their retail and SME businesses as a single viable package to a smaller competitor or new entrant to the market, and this, together with Northern Rock, will potentially create three new banks on our high street in the space of five years. This will increase diversity and competition in the banking sector, giving customers more choice and better service.

The financial services sector will remain an important part of our economy. Yesterday's job losses, announced by RBS, are a reminder that for many employees these are very difficult times. We will do everything we can to work with the banks to help find new jobs for those affected. I believe my proposals today will ensure that we have a strong and vibrant financial services sector in the future. This will mean stronger and safer banks better able to support the recovery and more competition and more choice for the people who use them. I commend this Statement to the House".

Photo of Baroness Noakes Baroness Noakes - Shadow Minister, Shadow Minister 4:22, 3 November 2009

My Lords, I thank the Minister for repeating the Statement made by the Chancellor in another place. The Minister made it sound like some sort of triumph for the Government, but the truth is very different. A year ago the Government came to Parliament to say that they were injecting £37 billion of taxpayers' money in order to recapitalise RBS and Lloyds. In their usual hubristic way this was presented not only as saving the banks but also saving the world. Thirty-seven billion pounds was an almost unbelievable sum of money last year. Since then, of course, we have become almost inured to the scale of the banking bailout against the background of government debt scheduled to rise to £1.5 trillion, with £175 billion to be borrowed this year alone. But today the Government pop up to say that, "By the way, we are putting another £39 billion of taxpayers' money into these two banks". That is £13 billion more than the worst case provided for in this year's Budget Statement. Even more taxpayer cash for the banks is the true story of today's announcement.

Another story is muddle and confusion around the asset protection scheme first announced last January. We were told that both Lloyds and RBS would participate in it and that it would cover nearly £600 billion of assets. As the months passed it became increasingly clear that the Treasury's grand design was not roadworthy. It cost too much, was too complicated and involved too much extra government equity. Lloyds has been trying to wriggle out of it for some time and today's announcement confirms that it has succeeded. Who could blame it? The release fee of £2.5 billion might sound like a large sum of money but Lloyds made it very clear today that it was fantastic value for money compared with staying in the asset protection scheme.

Poor old nationalised RBS did not have the flexibility available to Lloyds and it has been stuck with putting £280 million of assets into the scheme and increasing the government shareholding to 84 per cent. I know that the Minister likes to pretend that RBS is not nationalised, but in my party we believe in calling a spade a spade. On the other hand, RBS appears to have done rather well out of its negotiations with the Government. It has completely renegotiated its terms of entry into the asset protection scheme. It has managed to get its tax status revised, whereby it now looks as if the taxpayer will not see much in the way of corporation tax receipts for some time to come. Can the Minster give further detail about this tax deal? Why did the Government agree to it and what is its cash impact?

Much of the rest of today's announcements show that the Government have been playing catch-up with my party. A week or so ago, my honourable friend George Osborne proposed that the banks owned by the taxpayers should not pay out cash bonuses except for lower-paid staff and with a cap of £2,000. Mr Liam Byrne, the Chief Secretary to the Treasury, gave an extraordinary response and said that our policy would,

"water down the rules we've put in place", and that it was "unworkable". Even more extraordinary is the fact that today's announcement shows that the Government are adopting our policy. The Evening Standard is even reporting—based, I am told, on government briefing—that the bonuses will be capped at £2,000. Will the Minister confirm that and will he say what brought about this damascene conversion?

We welcome the competition measures which are a part of today's announcement. Our clear policy has been to ask the Competition Commission and the OFT to carry out a review of the impact of consolidation on competition in the banking sector.

Mr Stephen Timms said last April that my party was,

"isolated and on the wrong side of the argument".

This morning, the Lobby briefing reported that the Chancellor told the Cabinet that there was not enough competition among banks. Well, all I can say is that I am glad that the Government are now on the right side of the argument. Will the Minister now admit that the Prime Minister was wrong to promote the Lloyds/HBOS merger and that the Government were wrong to bypass competition law at the time?

The sad thing is that the Government have not come to this position by themselves. They have had it imposed on them by a Commissioner in Brussels determined to make her mark in the dying days of the current Commission. For our part, we are not convinced that it is enough, and our policy will remain that a competition review for the UK banking sector remains essential.

Of course the Statement makes the usual obeisance to restoring lending with a few embellishments such as a customer charter, but businesses, particularly SMEs, are clear that banks either do not want to lend to them or will do so only at a high cost. The banks have been trying to present the lack of lending as a lack of demand, but that ignores the evidence to the contrary from small and medium-sized businesses the length and breadth of our country.

The plain fact is that the Government have failed to restore sufficient credit to the economy. The latest evidence is that the flow of lending to the business sector has fallen for the seventh consecutive month. It is no surprise that our economy, uniquely among the major economies, remains in recession when our businesses cannot get the credit that they need.

The Government's bewildering array of schemes has also delivered little. What is the point of a £5 billion scheme to deliver trade credit insurance if it provides only £13 million? What is the point of a £2.3 billion automotive support scheme if nothing actually gets paid out from it?

Indeed, the question that really cries out to be answered from today's Statement is: what is the point of this Government?

Photo of Lord Newby Lord Newby Spokesperson for the Treasury 4:29, 3 November 2009

My Lords, we are grateful to the Minister for making this Statement, particularly as it is in reality his Statement, rather than the Chancellor's. He is the man who negotiated this and, therefore, it is fortunate for your Lordships that we have an opportunity to ask him questions, because I suspect that he, more than anyone else in government, knows the answers.

My first comment on the Statement as a whole is the extraordinary scale of all the figures involved. Possibly the smallest figure involved is £700 million. After a while, one comes to believe that the figures are in the normal run of one's daily business. I suspect that in the negotiations, and more generally, the banks almost lost sight of the scale and implications of the recklessness of their previous management. We are dealing in figures which, if we were talking about health, education, aid or any other area of government, would be deemed extraordinarily large, but here they are tossed off as though they were commonplace.

The Statement is in two parts. The first deals with the Asset Protection Scheme and the way in which the banks will continue to be run, as though there were no restructuring. The second deals with the restructuring. As far as concerns the Asset Protection Scheme, the change in the detailed arrangements makes sense for RBS. I have some concern about the provision of £8 billion—again, the figure is tossed in as though it were of relatively little consequence—which it might be necessary to provide in the event of a severe downturn. This is a significant additional figure given everything else that has been done with RBS, and raises issues about the ongoing underlying health of RBS. Will the Minister tell us more about the stress tests that were undertaken by the FSA, which have caused the Government to make this significant additional figure available? It is worrying that, despite everything, RBS may still need an additional £8 billion. How likely is that, and on what basis has the decision been taken?

The Statement then talks about the lending levels of the banks, which the noble Baroness mentioned. I share her concerns. RBS is going to increase its lending capacity, but it does not say that it will increase its lending levels. The Statement says that RBS will,

"continue to meet their lending commitments".

However, RBS's briefing earlier today said that it would continue to "work towards" meeting its lending commitments. There is a big difference, because it is not meeting them. The reason that the banks give, as the noble Baroness said, is that there is no demand. The reason that businesses give is that the banks are piling on charges, fees, requirements for additional collateral and other charges and requirements that make it practically impossible for them to accept the additional lending even though they want it. The banks are still in denial about the level of pent-up demand for loans from small and medium-sized businesses.

The Statement then talks about bonuses. I know that the Minister has been fighting in the trenches on this matter. However, it is difficult to believe that what is in the Statement is a revolutionary development. All that is happening—even though it has taken some time to get to this point—is that bonuses are being paid later, or in a different form from what was originally envisaged. There is no suggestion that the total quantum of potential benefit available under bonuses is being reduced, and it is that quantum of benefit that causes so much anger among the public.

I turn to the restructuring. The Statement is a play in two acts when it deals with the main banks, but there is a little intermezzo in the middle into which Northern Rock is inserted. The Minister points out that the Government intend to split the bank into two. The Statement does not say that the Government also intend to sell off the good bit of Northern Rock, presumably under a quick timetable. We on these Benches are concerned about the pace at which the Government plan to sell off part of Northern Rock. We believe that they may not get the best deal and that the timescale is politically driven. Will the Minister reassure us that the Government have their eye on the bottom line rather than the headline when it comes to selling the good bit of Northern Rock?

With regard to the other two banks, the Government announce what they are doing as though it is a result of their decision-making. However, as the noble Baroness said, the truth is that it is the result almost exclusively of decisions taken in Brussels. Unlike the noble Baroness, we do not think that this is necessarily a bad thing, not least because in our view, if it were left to the Government, no restructuring of these banks would currently be planned. Although we have some concern about the timetable, in that the parts of the two banks that are to be hived off should not be sold too soon or in a fire sale, it seems that the Commission has beneficially stepped in here in a way that the Government might well not have done. I know that to save her life the noble Baroness cannot admit that this might be a good thing, but on these Benches we think that it is probably a positive development. However, regarding the four-year period that has been proposed before the sell-offs can take place, can the Minister assure us that there will not be any political drive to sell off parts of these banks prematurely before the election to prove a point when the Government will almost certainly get poor value for money from any sale?

Finally, the Statement does not deal with what we consider to be the most fundamental issue concerning the state of the big banks going forward—namely, the extent to which the whole gamut of activities from utility to casino can be carried on under one roof. It does not address the issues raised by the Governor of the Bank of England or the arguments that are raging about the desirability or otherwise of splitting the banks on that basis.

The Chancellor made it clear on the radio this morning that the Government remain the lender of last resort to the banking sector despite these changes today, and that, if there were another crisis, the Government would still have to step in in respect of not only, say, Barclays' deposit-taking but its entire portfolio of activities. Therefore, does not the Minister agree that it would be appropriate to expect the banks to pay some insurance premium for the cover that they are still recovering from the Government?

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

My Lords, I thank the noble Baroness, Lady Noakes, and the noble Lord, Lord Newby, for their contributions and observations. The noble Baroness is on the horns of a dilemma. Her comments are in many cases contradictory, and I shall point out some of them in the time left available to me. Let us remind ourselves that the Conservative Party rejected the support provided to Northern Rock: it was not willing to step in and provide that support. It was hesitant about the recapitalisation in October—it simply did not know how to react to it—and it was totally confused by the asset protection scheme. Having listened to Mr Mark Hoban on the "World at One" today, the Conservatives seem to me to remain confused by the further refinements to the asset protection scheme as announced today. We have a picture of inconsistency and contradiction.

The noble Baroness suggests that the extra money invested exceeds the amount that we indicated in the Budget as a worse-case scenario. I wonder whether she has forgotten some of her professional training at the auditing firm of KPMG, because importantly we are investing here to acquire assets, not losses. The numbers are big, as the noble Lord, Lord Newby, said, but the important numbers are coming down: the contingent liabilities are coming down; the first losses are going up but the Government's exposure is coming down. I have said that the Chancellor of the Exchequer is confident that in the PBR he will give the House good news about reduced public exposure to the losses arising from these schemes. The schemes have worked: they have stabilised the banking system. The share price of Lloyds has quadrupled since January as a consequence, and that is why we are being paid £2.5 billion for an insurance policy on which no claims have been presented.

The noble Baroness again completely contradicted herself by saying that Lloyds could not wait to get out of the insurance scheme because the pricing was punitive. If it was punitive, I make no apologies because I have always fought to ensure that the deals with the banks are done on terms which deliver good value to shareholders. The fact is that it has withdrawn from the scheme because it believes that it is in its shareholders' interests and it is able to raise private capital. Goodness me, I thought that the Conservative Party was in favour of private capital. Here we have a solution which brings private capital to bear and the noble Baroness cannot bring herself to congratulate us on securing an excellent outcome. The noble Baroness refers to Lloyds wriggling out of the scheme. Far from it, Lloyds has found an elegant way to recapitalise itself through markets which are willing to provide capital, plus an innovative scheme which we have structured with it which involves a number of novel elements and which is much admired—I hang my head in shame here—by many investment bankers.

The noble Baroness inquired about the tax deal. The tax undertakings offer taxpayers uncertain future revenues at an unknown time. We had to agree to that because RBS could not afford any other way of paying. That was why I put the tax agreement into the structure. It no longer has to do that, so removing the tax undertakings from the deal in exchange for a higher first loss, increased transparency, and a lower pool of risk assets covered has meant better value for the Exchequer and far more visibility and transparency in the scheme.

The noble Baroness chooses to take her financial information from the Evening Standard. I can assure her that bonuses have not been capped at £2,000. We have been very clear: cash bonuses for employees on the front line earning £39,000 or less and no cash bonuses for any other employees in RBS or Lloyds.

The noble Baroness seems to forget our Competition White Paper which was issued before the Summer Recess. It clearly stated that we believe that there needs to be more competition in the British high street for banking services. I remind the noble Baroness that competition has declined over 25 years since the Conservative Party encouraged the reckless demutualisation of building societies.

I say to the noble Lord, Lord Newby, that the numbers are large but they are improving. The contingent capital will earn us a generous fee of 4 per cent per annum. Again, those are excellent commercial terms for the Government. The details of the stress test were detailed by the FSA in May. It is called the 1980s extreme U test. As I have already mentioned, the lending agreements which RBS and Lloyds are continuing to maintain will provide what is necessary to support the UK economy. The banking system is stabilised, stronger, more commercial and better able to meet the needs of its customers as a result of this extraordinarily good package which we have been able to announce today.

Photo of Lord Lamont of Lerwick Lord Lamont of Lerwick Conservative 4:42, 3 November 2009

My Lords, I thank the Minister for this comprehensive and highly significant Statement. However, is the reality not as he stated in his initial remarks that the banks do not need the insurance scheme, but that they cannot afford it and that that is why they have had to restructure it? While it is indeed welcome that the pool of assets to be insured is to be considerably reduced, is there not a danger that the banks carrying a higher proportion of the risk may not recognise the full extent of the impairment of bad loans their books? If that is not faced up to, we will be left with a problem that is not being solved and with a problem with which this crisis began? Although more competition in the banking sector is very much to be welcomed, are not these measures, which are being forced on the Government, an absolutely tiny mouse compared with the elephant in the way of competition which the Government put there when they facilitated the merger of HBOS and Lloyds with disastrous results?

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

My Lords, I must disagree with the noble Lord. Quite clearly, Lloyds is able to exit the APS by raising some £13.5 billion of new equity from its shareholders, plus converting tier 2 and innovative capital instruments into a contingent capital instrument which has allowed it to exit the scheme. It has done so with its own resources and with its own advisers, supported by the Government and endorsed by UKFI. It could certainly afford to participate in the APS, but it judged that it no longer needed the protection that the APS afforded. I believe that one of the reasons was that the management of Lloyds has a much better grasp of the assets that it acquired when it merged with HBOS and much better judgment about the probability of default and any loss in the event of default.

Work to support the announcement made today in respect of Lloyds and Royal Bank of Scotland has clearly required extremely detailed review by the FSA, by the Treasury and by our own advisers. I can say with a degree of confidence that we know much more about the assets of Royal Bank of Scotland than the old RBS knew about the assets for which it was responsible. There was an intolerable failure of corporate governance by that board that was a consequence of abominable leadership by the chairman and chief executive of that company. But that is now behind us—we have new management in that bank which we are supporting and a much better knowledge of the assets held. Furthermore, the underwriters to the Lloyds issue will have looked very carefully at the quality of the Lloyds asset book before entering into the largest equity underwriting that this country has ever seen. While the noble Lord raises perfectly appropriate and correct questions, I want to reassure him that there is a reality in the view that the management of RBS and Lloyds now have about their businesses.

Photo of Baroness Turner of Camden Baroness Turner of Camden Labour

My Lords, I thank the Minister for repeating the Statement. However, I am most concerned about the headlines screaming that thousands of people are being made redundant by RBS. Quite frankly, the management must surely realise that making all these people redundant is no help to the economy. These people cease to be taxpayers and become recipients of benefits. Really, management should not be encouraged in any way to get rid of staff—they should endeavour to keep them wherever possible.

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

My Lords, I am grateful to my noble friend for her observation. It is of course worth noting that had we not stepped in to support Lloyds and the Royal Bank of Scotland, those banks would have failed and there would have been no jobs. The 3,700 job losses announced yesterday by Royal Bank of Scotland are deeply regrettable. Nevertheless, it is the view of the management of RBS that the vast majority of those job losses will be covered by natural wastage and there will be little, if any, need for compulsory redundancy.

Photo of Lord Shutt of Greetland Lord Shutt of Greetland Chief Whip in the House of Lords, Liberal Democrat Lords Chief Whip

My Lords, I want to refer to the latter points in this huge document, which contains big numbers that most of us have difficulty with. Some of us can understand the idea of the three new banks and we see that the die is not yet cast. We recall Northern Rock and Cheltenham & Gloucester in their former existence as building societies. The Minister referred to the disastrous demutualisation process and the fact that every demutualised building society is no longer independent. Also in the list of names is the TSB. It is difficult to call what happened to it many years ago "demutualisation", but it was the precursor to the demutualisation. Of course, the TSB was an orphan, yet the Government took the money. It is suggested that these three new banks, which will be set up some time before 2013, will be new entrants to the market. Is there not now an opportunity for the Government to create one modern mutual out of those three new creations?

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

There is nothing that I would like more than for a new mutual to be created, but I cannot find a way to do that which would not represent a substantial subsidy from the taxpayer to the members of that new mutual. It would involve a gifting of value to the members. If noble Lords or others can come up with a constructive way to do that, I assure them that I will give it active consideration, but I have struggled to find a way in which it would be possible to create a new mutual on the scale suggested.

That said, we will of course continue to support the concept of mutualisation, as we have through recent legislation. There is a real prospect of brand names such as TSB, Williams and Glyn's and Cheltenham and Gloucester once again reappearing on the British high street. That is not just due to the EU. I salute Commissioner Kroes for what she has done in promoting competition—another great benefit that comes from our partnership as a member of the wider European community—but there are many aspects of this arrangement which the Government have required. In particular, the restriction that those businesses must be sold as a package, rather than broken up; the restriction on existing large players buying any of those assets; and a restriction on Lloyds buying any new business for the next three years have come not from Brussels, but from London, as part of our contribution to increasing the diversity, strength and range of competitive operators in the British banking system.

Photo of Lord Elystan-Morgan Lord Elystan-Morgan Crossbench

It must be clear to everyone here that the European Competition Commissioner must have played an impactive and substantial role in the ultimate package decided on. With his usual commendable generous candour, can the Minister indicate the distance of travel from when the Treasury came very near to a meeting of minds with Lloyds and RSB and the ultimate result, after the impactive intervention of Ms Neelie Kroes, the Commissioner? It would be of great assistance if he could give some idea of how vast that distance is.

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

The Commission spelt out its views on state aid in the late spring. When we announced the asset protection scheme in January, we said that it would be conditional on the Commission's policy position. Of course, the Commission has engaged actively in state aid in Germany, Holland, Belgium, Spain and here in the United Kingdom. We have had extensive and lengthy negotiations—I was speaking to Commissioner Kroes late on Sunday evening to cross the final "t"s and dot the final "i"s—and the outcome that we have been able to secure is very close to what we regard as good for the British system of finance, namely well capitalised banks, viable but with every prospect of new competitive entrants. That will be as a result of that outcome, but also because of new entrants such as Tesco, Metro Bank and lenders from the Far East and Scandinavia coming to the UK market and offering us the prospect of reversing a 25-year trend in competition in the high street, which started under the Government of the party opposite.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

My Lords, perhaps the Minister can help me. If the Government's position is that it is in the public interest to have more competition in the high street in the banking sector and to break up the Lloyds Banking Group, does that mean that the Government think that the Prime Minister made a mistake in agreeing to waive the competition rules to allow the merger between Lloyds and HBOS, which had such catastrophic consequences not just for the shareholders of Lloyds but also for its employees?

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

Much as I would like to help the noble Lord, Lord Forsyth, I find it very difficult to conclude that those transactions had catastrophic consequences compared with the counterfactual, which would have been the failure of those banks. Remember that back in October, we got very close to a point where the cash machines would not have operated. In HBOS and Royal Bank of Scotland, that was particularly acute.

As for Lloyds, the Government concluded, and made representations to this effect, that a merger of Lloyds and HBOS, if it was the wish of the shareholders of those two companies, would be appropriate in the interests of financial stability. However, we made it clear that that would be conditional upon any EU remedies required in connection with state aid. We understood that there would need to be remedies from Lloyds, but it was a decision by the shareholders of Lloyds to merge with HBOS. I recollect that 97 per cent voted in favour of so doing. This was not a decision made by the Government; the Government merely enabled the shareholders to make that decision if they judged it was in their best interests. They perhaps regret it, but that is where we are now.

Photo of Baroness Ford Baroness Ford Non-affiliated

My Lords, I welcome the Statement and support the action that the Government are taking in this second, very important, phase of activity. It is greatly to be welcomed that we are about to get into a period where, we hope, we can have more competition in the retail and corporate banking sectors. Given the ongoing support for the Royal Bank of Scotland implicit in the Statement, it feels as if it is still a bank that is too big to fail. Can the Minister tell us why the Government still seem so opposed to decoupling investment banking from retail banking? The Governor of the Bank of England seems to have changed his mind on that. Can the Minister tell us why the Government have set their face against it?

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

My Lords, the decoupling of investment banking from retail banking has never been achieved anywhere. There is logic to an integrated bank. The issue is how we ensure that the investment bank does not place the retail bank at risk. This is something that the Conservatives have not grasped, because last week Mr George Osborne was talking of limiting bonuses of £2,000 to retail banks. When is he going to understand that the problem did not arise with the retail banks but with the investment banks? Perhaps because he was speaking in Canary Wharf he was unwilling to be honest and upset people by suggesting it was the investment banks. I have no difficulty in doing that.

We are going to ensure that we never see a repeat of this situation by requiring much more capital behind the riskiest activities, higher liquidity and more robust regulation. I noted what the Governor of the Bank of England said in Edinburgh. I am still wrestling to try to reconcile it with what he said to the Treasury Select Committee in response to a question from Viscount Thurso, when he said that it would not be possible to separate investment banks from retail banks. He has changed his mind on that. I have not yet been able to find where he has explained why, but I am sure he has found good reasons for doing so. We do not believe that this is an appropriate and necessary line to pursue.

Photo of Lord Naseby Lord Naseby Conservative

My Lords, I declare an interest as treasurer of the Lords and Commons Tennis Club, which banks with Lloyds, as do I, and as a modest shareholder. The truth of the matter is that it was not that 97 per cent of the shareholders of Lloyds really supported the HBOS amalgamation; it was simply that the Prime Minister of the day pinned the chairman of Lloyds in the corner in the best traditions of Chief Whips in another place and said, "We need your support. We need your help. We need you to see us through this difficult situation", and he responded. Does it not short-change that bank, which now, according to the Minister, has agreed to £11.6 billion in business loans and £3 billion in private loans, to find that there is a rights issue and that the Government are getting it half-price because they are requiring Lloyds to provide £2.5 billion, which is, roughly speaking, half of what the rights issue would cost any other shareholder in Lloyds?

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

My Lords, before I became a Minister, I was at the occasion when Sir Victor Blank raised this subject with the Prime Minister. It was an event hosted by Sir Win Bischoff, who was then chairman of Citigroup and has now gone on to become chairman of Lloyds. My recollection of the situation, and indeed of Sir Victor Blank's earlier conversations with the Prime Minister, is that he was absolutely gagging at the prospect of acquiring HBOS. There was no need to hold him back at all. He absolutely was not pinned into a corner, not least because he is about a foot and a half taller than the Prime Minister and I do not think that the Prime Minister could have pinned him into a corner.

On the terms, not taking up the rights would have cost us about £2.2 billion of diluted value. That would have been absolute folly, so I had no hesitation in advising the Chancellor that we should take them up. We own the same shareholding in a much stronger, better capitalised bank as a consequence. It is for others to express views on whether £2.5 billion was the right fee to charge for an insurance policy on which no claim had been made. I am quite content that we got £2.5 billion for the taxpayer.

N

Given the FSA, the Treasury Select Committee, the Chancellor and Mervyn King are all in receipt of a Report which evidences in great detail serious issues regarding HBOS that could impact very adversely on the share price of Lloyds Banking Group, it is surprising the Government would consider giving them additional billions from the public purse. And regardless of whether the merger of Lloyds HBOS was done due to the PM or because Lloyds were 'gagging' for it, the fact remains HBOS is a danger to all Lloyds shareholders and potential investors until such time as it has exorcized all of its ghosts.

Submitted by Nikki Turner

Photo of Lord Acton Lord Acton Labour

My Lords, I understood my noble friend to say that the Royal Bank of Scotland would divest itself of 300 branches. If I am correct, does a thread link those 300 branches and how many branches will the Royal Bank of Scotland be left with after those 300 have gone?

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

My Lords, from recollection, I believe that the Royal Bank of Scotland will be left with approximately 2,400 branches. The branches that are being divested are the Royal Bank of Scotland branches in England and the NatWest branches in Scotland—plus, importantly, a number of commercial and service centres that are necessary to provide the infrastructure to make those branches a viable business collection.

Photo of Lord Northbrook Lord Northbrook Conservative

My Lords, the Minister said in the Statement that the Government had to carry out due diligence on RBS's assets. No mention was made of similar government due diligence on the assets of Lloyds. In view of the widespread concern about the value of assets of HBOS in particular, has this been carried out and, if so, what was the conclusion?

N

Lord Northbook is entirely right to be concerned about the due diligence (or lack of) regarding Lloyds and in particular with regards to HBOS. One would be wrong to suppose the full facts about HBOS assets and...

Submitted by Nikki Turner Continue reading

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

My Lords, it was quite expensive to carry out due diligence on the APS. We have used a number of advisers but have ensured that the full cost incurred by the Government has been passed back to the banks. Indeed, Lloyds will pay its share of the work that was done to set up the APS, even though it will not participate in it. We have carried out due diligence on the assets of Lloyds TSB, as it was, HBOS and the Royal Bank of Scotland. As I said, we know more about the assets of those banks than their boards of directors did. On the question of whether Lloyds carried out sufficient due diligence before the Halifax transaction, I recollect that Mr Eric Daniels told the Treasury Select Committee that he would like to have done more but then revisited his conclusion and said that he had done enough.

Photo of Lord Whitty Lord Whitty Labour

My Lords, the Minister may recall that when we suspended the competition rules and, indeed, when we went ahead with the Lloyds/HBOS merger, I was concerned that we were limiting competition for consumers and small businesses. I therefore welcome the impact of this Statement and the fact that we will increase competition as a result of the Government's latest interventions. However, I regret that this involves a restriction on the number of high street branches.

The Minister touched on another point when he said that we now know more about the banks' assets than their boards of directors originally did. Will he expand on his plans for changes to the governance of the banks? Whether there are five, seven or eight banks on the high street, if the same kind of people with the same myopia run our banking system in the future, we will be back with very similar problems.

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

My Lords, given the very limited time available, I will say simply that I have high hopes for and expectations of the report on corporate governance from Sir David Walker later this month. He will lay down very clear calls for action from institutional shareholders. It is very frustrating that we as a Government are fighting hard on the bonus issue when the institutional shareholders are so supine in protecting the interests of their own customers, savers and investors.