Banking: Financial Stability

My Lords, I thank the Minister for repeating the Statement made in another place by the Chancellor. We welcome the fact that the Government are taking action, and my party commits itself to work constructively with the Government in their attempts to deal with the turmoil in financial markets. While we have seen only the barest outline of the Government’s package, we give it our broad support. We do not know whether this is the right package because we have not been part of the discussions and analysis with the regulatory authorities and the banks concerned so, for us, the key issue is whether this package works at an acceptable cost to the taxpayer. The key initial test is whether liquidity returns to the UK banking system and banks return to their essential activity of providing finance to the business sector and the mortgage markets. Will the Minister say how the Government will measure success? How much liquidity is expected to return to the markets and at what cost? What can we expect in terms of additional lending to help to get our economy going again? Put simply, we are potentially committing another £500 billion of taxpayers’ money to the UK banking system. What can taxpayers expect in return? We do, of course, have some detailed questions for the Minister. The Chancellor’s press release this morning stated that the Government will be taking into account dividend policies and executive compensation practices. Can the Minister explain how that will work? If I am one of the banks named in the statement this morning, what sort of commitments will I have to give? Is this going back to a form of dividend control? The one thing we learnt from Labour’s previous dividend controls is that they are fundamental unworkable, except in the very short term. On executive pay, are the Government proposing something different from that which was outlined by the Chairman of the Financial Services Authority a week or so ago? The press release also stated that the Government, "““will require a full commitment to support lending to small businesses and home buyers””." We fully support the desire to get funds directed to those areas, but are there not difficulties in practice in making banks lend to particular sectors? Is this just a statement of intent or is there some measurable substance behind the words? More broadly, the banks will be coming to the new bank recapitalisation fund for new capital and for guarantees of wholesale borrowing. Is this a new body, or is it a division of one of the tripartite authorities? Is it a real body or a virtual one? This morning’s press release referred to, "““a specifically designated Government-backed English incorporated company””," that will issue the guarantees. What is the relationship between this company and the recapitalisation fund and how will it work? Can the Minister explain the relationship between the fund’s new approach to agreeing capital ratios with the participating banks and the normal role of the FSA in carrying out its regulatory supervision of those banks? I hope that the Government are aware of the dangers of supervisory complexity, if it returns to our financial system. The Chancellor's Statement does not explain the effect of the proposals on the measurement of public sector borrowing and national debt. Can the Minister do so? The special liquidity scheme will presumably remain as a financial transaction on the Bank of England’s balance sheet, but how will the extra £50 billion of capital and any other amounts paid out by the recapitalisation fund be scored? I turn to the guarantees of deposits, which we have already discussed this week in your Lordships' House, and to which my noble friend Lord Hamilton referred earlier today. We welcome the fact that the Government are prepared to act as they have in the case of the Icelandic banks, but we are getting increasingly confused—as, I am sure, the depositors are—about what gets protected and why. Can the Minister explain the detail of the Icesave guarantee? The Chancellor said that no depositor would lose money. Does that protect depositors holding more than £50,000? Does it, for example, protect local authorities which, I am told, had large amounts of money invested in Icesave? What does that do for moral hazard, given the evident risk premium that was being paid on Icesave accounts? Who will pay? Do the Government expect the financial services compensation scheme to cover that, because it is not ordinarily covered by the scheme? We now have a patchwork of protection. The banks which take guarantees from the recapitalisation fund will be able to gain 100 per cent guarantees for their wholesale borrowing. Their retail deposits, however, will be protected only to the extent of the rules of the financial services compensation scheme. Other retail depositors, for example in Northern Rock or Bradford & Bingley, are fully protected. I do not think that the man in the street can understand the distinctions. Can the Minister say whether the Government recognise the confusion and will take action? At the very least, will they make a clear statement of their policy? Finally, we welcome the action taken by the Bank of England, in line with other major central banks, to cut interest rates by 0.5 per cent; the business community has been asking for that for some time; but the European credit markets, at least at lunchtime today, are so far unconvinced, with markets not moving in line with the rate cut because they continue to see liquidity, not the cost of money, as the issue. Stock markets, including our own, are also down. At the end of the day, markets will determine the success or failure of the Government's package. We wish these measures well because it is the health of our economy, not the health of our banks, which is at stake, and we hope that the package will succeed. We wish that we could be confident that it will.