Financial Markets

With permission, Mr. Speaker, I would like to make a statement on this morning's announcement about the implementation of the proposals that I announced to the House last week. Again, I hope that the House will understand that it was necessary for me to issue a market notice this morning ahead of the opening of the markets. In my statement to the House last Wednesday, I outlined the principles of the Government's proposals to restore confidence in the banking system and put banks on a stronger footing, which are essential steps in helping the people and businesses of the country and supporting the economy as a whole. Since then, there have been intensive discussions with UK banks and institutions, and I can today tell the House how the principles set out last Wednesday are now being applied. I shall first remind the House of the three key elements of the measures that I outlined last week: first, to inject sufficient liquidity into the financial system now; secondly, to make available at least £50 billion of capital, should it be required, to recapitalise the UK banking system, and thirdly, to provide a guarantee on eligible new debt to support medium-term lending between banks. Those measures are aimed at unblocking the inter-bank lending system and strengthening UK institutions, so that banks can start lending to people again. That is necessary both to stabilise the banking system and to support the wider economy. No country alone can solve this global problem. At the weekend, at both the G7 Finance Ministers meeting and the International Monetary Fund, it was clear that the three elements of last week's proposals will be essential parts of a global recovery plan. Yesterday, my right hon. Friend the Prime Minister had discussions with European Union leaders, and they too agreed that this was the right way to stabilise and rebuild the banking system. Today—indeed, in the last hour or so—many European Union Governments have announced how they plan to support their financial systems. It is increasingly clear that the measures that I am announcing today form the basis of an international consensus on the right response to events. I shall set out to the House the detail of today's announcement, which covers both liquidity and capital. I turn first to the funding of the banking system, or liquidity. The Bank of England will continue to supply sufficient short-term funds, which from today will include unlimited dollar funds available to banks to be swapped for sterling funds, and continued loan operations through the special liquidity scheme. Additionally, I have announced today the details of the Government guarantee scheme for new lending between banks, an essential part of banks' resuming lending to people and businesses. The guarantee under the scheme will be provided by Her Majesty's Treasury directly. It will be temporary, covering new lending issued during a six-month period, but that period is renewable. It will be priced on commercial terms, which can be varied at the Treasury's discretion but will initially be set at a premium of 50 basis points above the recent average cost of default insurance for each of the participating banks. In other words, it is risk based. The guarantee scheme will be available only to those banks and institutions that participate in the Government's recapitalisation scheme, as I made clear last week. The banks taking part in the scheme are given the option of raising capital in the open market, in the usual way, or through the Government's bank reconstruction scheme. When raising capital through the reconstruction fund, the participating banks receive an investment from the Government in return for shares. Let me outline, in turn, the position of each of the eight major UK banks and building societies that agreed to the recapitalisation proposals last week. Santander has agreed to transfer £1 billion of capital to its UK operations. Barclays will raise more than £10 billion by next spring through a combination of preference and ordinary shares raised from private sources and other measures. HSBC announced last Friday that it will raise £750 million of new capital for its UK operation in the open market. Standard Chartered has announced that it has already met its agreed capital requirements, and Nationwide building society has announced that it will increase its capital base by £500 million. Let me now outline how HBOS, Lloyds TSB and RBS will be recapitalised through the bank reconstruction fund. Subject to take-up by existing shareholders, the Government will take significant shareholdings in these banks—in one case, a majority stake—and in line with normal commercial practices, the Government, on behalf of taxpayers, will have appropriate representation on their boards. These shareholdings will be managed on a fully commercial basis by an arm's length body with a precisely defined remit to act in the interests of taxpayers. Government support in respect of these three banks is tied to conditions covering executive pay and dividend policies, and conditions have also been agreed with them on the level of lending to small businesses and home buyers. We are making it clear that there will need to be a strong focus at these recapitalised banks on making available lending for small businesses and home buyers. These conditions are set out in the individual agreements with the banks, copies of which will be placed in the Library. In the case of Lloyds TSB and HBOS, the Government will purchase both ordinary and preference shares once the merger is complete. HBOS will receive up to an £8.5 billion investment in newly issued ordinary shares on completion of the merger. The Government will also invest up to £4.5 billion in newly issued ordinary shares of Lloyds TSB at completion. At the same time, we will invest up to an additional £4 billion in preference shares in the merged institution, with £3 billion of which being invested in HBOS and £1 billion in Lloyds TSB. In return for this investment, which potentially represents around 44 per cent. of the proposed merged bank, the Government will appoint two independent board members. No cash bonuses will be paid to any board member this year. Directors in HBOS will be asked to relinquish their rights to bonuses, and directors in Lloyds TSB will receive restricted stock instead of cash for any 2008 bonus entitlements. The availability of lending to home owners and small businesses will be maintained at at least 2007 levels, and greater support will be given to people experiencing difficulties with their mortgage payments to help them stay in their homes. For RBS, the Government will take up to £15 billion of ordinary shares and £5 billion of preference shares. This potentially represents a 63 per cent. interest in the bank, in return for which the Government will appoint three independent board members. Again, no bonus will be awarded to any board member this year, and any bonus paid next year will be in stock and linked to long-term growth in the bank. Mortgage and small and medium-sized business lending availability will be maintained at 2007 levels for the benefit of people up and down the country. These steps will help to put RBS on a stronger footing and allow it to build on its core retail banking operation. These announcements represent a total recapitalisation of just under £50 billion for the eight major banks, in line with my announcement last Wednesday, and, as I said then, more capital is available to smaller institutions should they need it. The Government do not want to run Britain's banks—we want to rebuild them. The long-term future of UK banks lies in the private sector, and we will aim to sell the public share in the participating banks as soon as is feasibly possible, but our objective today is to stabilise and rebuild, and we will maintain our stake for as long as it takes to do that. I want to say a few words about the Icelandic banks. I met the Icelandic Finance Minister in Washington at the weekend, and I made it very clear that it is imperative that we work together to resolve the position of creditors in this country. Our authorities have set up an arrangement, agreed in principle, for an accelerated pay-out to depositors, and we are also working with the Icelandic authorities to facilitate claims by UK charities and local authorities on their deposits held at these Icelandic banks. In addition, the Bank of England is today providing a short-term secured loan of up to £100 million to Landsbanki, to help maximise returns to UK creditors. All the operations of the bank reconstruction fund will give the Government a capital stake—an investment—so that money we borrow is exchanged for valuable assets, and because some of these shares are purchased on preferential terms the Government are better protected and get a better return. The Government guarantee to support new lending between banks will be charged on full commercial terms, ensuring that the taxpayer is appropriately rewarded. The injections of liquidity through the special liquidity scheme and other operations simply allow banks to swap securities with the Bank of England, so that the risk remains with the banks and not the taxpayer—in other words, we get the money back. So, any additional borrowing and debt incurred by the Government as a result of these proposals will be in return for assets, charged at commercial rates or in the form of a temporary loan to the banks. Therefore, as with the temporary nationalisation of Northern Rock, the most appropriate measures of Government borrowing and debt to judge the position of the public finances will be those that exclude the Government's stake in the banking sector. The principles that I announced last week are now being adopted across the major world economies, and it is essential that Governments work together, decisively and quickly, to stabilise the system today and to take action to prevent these problems from happening again in future. That is why we must work together to improve international supervision. Tomorrow, the House will debate the Second Reading of the Banking Bill, which is a further step towards making our system more robust. Today's announcement is necessary, and it is a significant step towards restoring confidence in the banking system and making it resilient in future. These proposals fully respect the rights of existing shareholders, and, despite current market conditions, the UK banking sector can have confidence about its future. These are very turbulent times in financial markets, but I believe that these measures are essential to stabilise the financial system and help the UK economy. We are committed to doing whatever it takes to stabilise the banking system, protect savers and taxpayers and support the wider economy, and I commend this statement to the House.