Banking (Special Provisions) Bill

My Lords, full consideration was given to that proposal. It did not meet all the Government’s requirements and that is why it was turned down. We are entering temporary public ownership because we have rejected bids that had undergone much longer consideration than the Lloyds proposal, which was never a firm proposal put to the Government but an outline of what might be possible. We have rejected firm bids that had involved considerable work and expenditure because they did not meet the needs of the taxpayer. The Government have borne that consideration in mind throughout. Of course, we wanted to make sure that the problems with Northern Rock did not increase financial instability, which was a danger, but at the same time any action that we took had to meet the obvious requirement of safeguarding the interests of the taxpayer. The House will recognise that this Bill is being introduced in exceptional circumstances. We have introduced this legislation only because the Government need to take Northern Rock into temporary public ownership. I think the House will understand that it is in everyone’s interest for that to happen as quickly as possible. That will avoid any uncertainty or unnecessary delay that could destabilise the bank, allow customers and staff to know where they stand and give Ron Sandler the certainty that he needs to develop his business strategy for Northern Rock and to ensure that business can continue as usual and that value is protected. However, the House must, of course, have the opportunity to debate this legislation in detail and to provide scrutiny and that is why we are considering Second Reading today. The Committee stage and other stages of the Bill will be taken tomorrow. I believe that the arrangements strike the right balance between the need to resolve the position of Northern Rock as quickly as possible and the need for proper parliamentary scrutiny. The Bill has been deliberately drafted so that banks or building societies could be acquired only in very special circumstances. The power to acquire them will last only 12 months. These powers are not intended to anticipate the longer term reforms on which the Government are currently consulting; rather they will in time be replaced by provisions in the proposed banking reform Bill that will seek to achieve broadly similar ends. In the mean time they provide additional scope for action, if it is needed. As is customary at Second Reading I shall outline the crucial elements of the Bill. But first I draw the House’s attention to issues that have arisen in recent days, not least at yesterday evening’s helpful meeting with Peers when a number of issues were identified. First, I shall address Granite, Northern Rock’s securitisation programme; secondly, the legislation as it relates to building societies; thirdly, give my initial reaction to the important report of the Delegated Powers Committee of this House, which we received only today; and, fourthly, deal with concerns about the impact of Northern Rock on other banks and reassure noble Lords about the competitive impact of this. Questions have been raised about Granite, Northern Rock’s securitisation programme. It may be helpful if I clarify the key facts about this structure. Granite is a special purpose vehicle, a trust, whose sole purpose has been to provide Northern Rock with a cost effective form of financing for its business. Northern Rock sold mortgages to Granite and used the proceeds to fund its business. The Granite vehicle funded the purchase of these mortgages by issuing bonds in the capital markets. This kind of structure is a common feature for many high street banks and building societies. No new mortgage assets have been transferred to Granite since the Bank of England started providing ongoing financial support to Northern Rock. Secondly, as the Chief Secretary to the Treasury made clear during the Second Reading debate in the other place, Granite is an independent legal entity owned by its shareholders. Northern Rock has no shares in Granite. Granite and Granite only is liable to its bondholders under any scenario. There would be no benefit to the taxpayer in seeking to bring Granite into public ownership. The existence of Granite is no barrier to the onward sale of Northern Rock. Thirdly, contrary to some suggestions, the Financial Services Authority advises that Northern Rock’s mortgage book is of good quality and its assets exceed its liabilities. The Government’s loan and guarantee arrangements are secured against the high-quality assets on Northern Rock’s balance sheet to which Granite and its bondholders have no access. The Government have not provided any guarantee arrangements for Granite bondholders. Fourthly, it is a matter for the new management team to assess their commercial relationship with Granite going forward and to decide whether they wish to maintain the arrangement or let it run off in an orderly way to be replaced by alternative funding sources. This decision would ultimately have no impact on the taxpayers’ exposure. Finally, Granite is a privately-owned company. Her Majesty’s Revenue and Customs has a legal obligation to maintain taxpayer confidentiality. Therefore, it will be appreciated that I am unable to offer comment on the tax affairs of named individuals or organisations. I appreciate that the House has sought further details of Granite’s structure, which are set out in the attached technical note.