Financial Stability

With permission, Mr. Speaker, I shall make a statement on the proposals that I announced this morning. I hope the House will understand that it was necessary for me to issue a statement this morning ahead of the opening of the markets, for very obvious reasons. Before I return to that, let me tell the House that the announcement made by the Bank of England half an hour ago of its intention to cut interest rates by half a per cent. to 4½ per cent. will help our objectives of maintaining stability and rebuilding the banking system. As I said in my statement to the House on Monday, the disruption in the global financial markets has intensified over the last few days and weeks. I also said that the Government were ready, with the resources and the commitment, to do whatever was necessary—in terms of liquidity and capital—to maintain stability in the banking system. That is why today I put forward measures designed to restore confidence in the banking system and to put banks on a stronger footing. There are three strands to what I have outlined today: first, to provide sufficient liquidity now; secondly, to make available new capital to UK banks and building societies to strengthen their resources and to restructure their finances, while maintaining their support for the real economy; and thirdly to ensure that the banking system has the funds necessary to maintain lending in the medium term. My proposals today, as well as supporting stability in the financial system, will protect depositors, safeguard the interests of taxpayers and play an important part in the international response to this global crisis. That, in turn, should help people and businesses, as well as support the economy in these extraordinary times. Let me set out for the House further details and the purpose of our measures. First, the Government and the Governor of the Bank of England will take whatever action is necessary to ensure that the banking system has sufficient funds, or liquidity, to function properly. That crucial measure is needed to allow money to flow through the banking system. To that end, I have agreed further immediate liquidity measures with the Governor. Until markets stabilise, the Bank of England will extend and widen its injections of funds into the system to build on the £40 billion that it put in yesterday. The Bank of England will continue to lend those funds to banks, in both sterling and dollars, by taking a wider range of security in exchange, and today I have increased the amount available to the Bank of England to lend through the special liquidity scheme to a total of at least £200 billion. By injecting that short-term funding into the system, the banks will be better able to conduct their daily business with their customers. Importantly, that form of funding, which allows banks to swap assets for Government securities, keeps the risk of losses with the banks and not the taxpayer. The Bank of England will next week bring forward its plans for a permanent regime underpinning banking system liquidity, including a discount window facility. The second step is to help the banking system to become stronger, so that it can better deal with the current turmoil in global financial markets. Banks will do that by raising the level of capital that they hold. A healthy banking system is the cornerstone of the economy. Strong banks underpin a strong economy, but many banks, all over the world, do not have sufficient capital and banks need adequate capital, so that they can keep on lending to people. That is why today the Government have established a bank recapitalisation fund to allow UK banks to increase their capital position. The eight major UK banks have today announced that, in aggregate, they plan to increase their capital by £25 billion. Banks can raise that capital in the open market, in the usual way, or they can raise it through the newly created bank recapitalisation fund. Other eligible banks and building societies can also take part. Through the fund, the Government stand ready to buy preference shares in the participating banks. Preference shares rank above the stock of ordinary shareholders. The Government will receive a fixed regular payment for holding those shares and will get better protection against any future losses. In addition to that, the fund will be ready to provide at least another £25 billion of capital to strengthen the balance sheets of any interested bank. The taxpayer, therefore, will be fully rewarded for that investment. Additionally, the Government are also prepared to consider standing behind the issuance of new shares by any bank taking part in the recapitalisation fund. The fund will cover a wide range of financial institutions, from UK-based multinational banks to high street branches and regional building societies. Through those measures, UK banks will be strengthened to above the standards required by international conventions. It will put the banks on a stronger footing, making them better able to deal with future shocks and more willing to lend to people, families and businesses. That brings me to the third element of the Government's proposal today. The root cause of today's problems is that, because banks all over the world are worried about each other's positions, medium-term lending between them has frozen up. Many banks have simply lost confidence in each other. If banks do not lend to each other, they will also not lend to people and businesses up and down the country. To free up bank lending and reduce dependence on overnight lending, I want to remove one of the key barriers by offering a temporary underwriting for any eligible new debt issued by banks. That means that participating banks can start having confidence in each other again, because they will know that the Government are standing firmly behind them when they want to issue new debt. That guarantee aims to unblock the system, so that banks can go about their business of lending to people and businesses, and because it will be priced on commercial terms, taxpayers will be rewarded for the risk that they take on. The guarantee is expected to cover an amount of around £250 billion but we will keep this total under review. Over time the cost of lending between banks should fall, reducing the need for such a guarantee. The freeze in global markets is a problem for all countries. Yesterday, at the meeting of European Finance Ministers, we agreed to work together to rebuild confidence in the banking system. I believe that the measures that I am announcing today are an important part of that. I shall be having further discussions with Finance Ministers and when I go to Washington tomorrow, I will be discussing with my colleagues there the extension of these proposals, as well as continuing our work towards strengthening the system of international supervision. The Prime Minister, as he has just said in Prime Minister's questions, has agreed with other major countries on the need for a meeting of Heads of Government. I believe that these measures are essential for the economy, but let me deal with the implications for the Government and, of course, for the taxpayer of those new proposals as well as others announced on previous occasions. When we nationalised Northern Rock, the Government had lent it around £30 billion. It has now paid back more than half of that ahead of schedule. When we nationalised parts of Bradford & Bingley, it was clear that we would run off its assets in an orderly way and get back as much as possible of the money that we provided to cover depositors. The injections of liquidity through the special liquidity scheme to which I have just referred simply allow banks to swap securities with the Bank of England, so the risk remains with the banks and not the taxpayer; in other words, we get our money back. For all the operations of the recapitalisation fund announced today, we will be charging the banks on full commercial terms. We will hold a capital stake as part of the investment and that will include a payment of dividends on shares and the appropriate charges for the use of the guarantee ensuring that the taxpayer is appropriately rewarded. The implications for the public finances as a result of today's announcements will be exceptional and mostly temporary and, in fact, will protect taxpayers by ensuring stability in the economy now. In return for this offer to invest in banks I will need to be satisfied that the banks have the appropriate policies in place; policies to prevent the irresponsible behaviour that we have seen in some parts of the global banking system. The public are entitled to share in the upside of these proposals, so in return for our support, we will be looking at executive pay, dividend payments and lending practices, particularly to home owners and small and medium sized enterprises. I want to say something about the three Icelandic banks; Landsbanki, its UK subsidiary, Heritable, and Kaupthing, which was put into liquidation within the last hour. The Financial Services Authority decided yesterday that Heritable could not continue to meet its obligations and today it has taken exactly the same decision for Kaupthing. I have therefore used the special powers that I have under the Banking (Special Provisions) Act to transfer most of their retail deposits to ING, the Dutch bank, which is working to secure business as usual for its customers to protect its savers' money. The rest of those Icelandic businesses have been put into administration. On icesave, we are expecting the Icelandic authorities to put Landsbanki, which owns icesave, into insolvency. Despite the fact this is a branch of an Icelandic bank, I have in the exceptional circumstances that we see today guaranteed that no depositor loses any money as a result of the closure of icesave and I am taking steps today to freeze the assets of Landsbanki in the UK until the position in Iceland becomes clearer. Those actions demonstrate my strong commitment to protect UK retail depositors in these exceptional times. The purpose of these proposals is to get lending started again and to get the economy moving forward. It is one of a number of measures that we are taking to deal with specific cases as well as providing general support. We are ready to do more whenever it is necessary. Failure to act would have meant far greater risks to the economy and to the public finances in the future. I have made it clear that we will do whatever it takes to maintain stability, to protect savers and to rebuild the confidence to help businesses, people and the wider economy. I commend this statement to the House.