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Here I completely take issue with the noble Baroness, who uses this as another occasion on which to say that Europe is inevitably a failure and that, by implication, the UK should be setting a standard that other grateful nations might follow. The truth is that, if we are to deal with a major crisis such as this, with international flows of capital, there will need to be much greater international co-operation. The place to start is Europe. I therefore urge the Minister and his colleague in another place, when they meet tomorrow, to have a sense of urgency about the importance of European co-ordination and to go beyond the photo opportunity of Saturday and make a commitment to long-term working together to put new rules in place at a European level.
The noble Baroness went on to talk about bank capitalisation. We agree with her reluctant acquiescence to the concept of recapitalising the banks based on government support and part-nationalisation. There are other ways of doing it, which she described, but the scale of the emergency and the need for speed suggest that this will be the most effective way of getting the banks back into some kind of order.
Before I move on to my last major point, I must again take issue with the noble Baroness, who gave us a lecture on the evils of credit and bank excesses. We on these Benches have talked about the likely problems of excess borrowing for a very long time. We have done so as a lonely voice for much of that time, so it is interesting and strange to hear the noble Baroness take that line of argument today.
We have necessarily concentrated today on the availability of credit rather than its cost, but it is clear that we now face not just a financial crisis but a crisis that will hit the whole of the real economy. It is now a question not of whether we are in recession but of how deep it will be and how long it will last.
In getting out of a recession or reducing its severity, interest rates will play a major part. Although we on these Benches have been strong supporters of the
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As I said at the start of my comments, the Government have regularly used the mantra that they will do whatever they have to do. When the Chancellor first said a few weeks ago that we were facing the worst economic crisis for 60 years, I think that many thought that it was a bit of an exaggeration. It is now clear that it was not. The Government are committed to doing everything that needs to be done and it is clear that bold action is required. The Government must now take it.
4.28 pm
Lord Davies of Oldham: My Lords, I am grateful to both noble Lords for their contributions to this short debate on the Statement. I think that the House will appreciate the offers of support for those strategies which prove necessary for the Government to pursue. I hope and anticipate that that will extend to the banking Bill, which is critical to the future of banking in this country and which is subject to time constraints. I am grateful for indications of support in those terms despite the fact that the tone of the contribution of the noble Baroness, Lady Noakes, was at times excessively critical. It was critical in hindsight: I cannot recall any of the prescriptions advanced from the opposition Benches today having been advanced during the past few months or years. If ever there were a case of being wise after the event, it is in some of her comments today.
One of the noble Baroness’s big charges was on the consequences of unilateral action. The Government, of course, took early unilateral action on Northern Rock last year. I was able to report, as the Chancellor has in today’s Statement, the progress made in that area. But it is clear that we have moved on beyond the immediate issues that confront the British economy to a worldwide tsunami. The crisis that has hit the American banking and mortgage industry dwarfs that of all other parts of the world and is bound to have the most profound implications for our banking sector and financial sector and create very real worries about the real economy. That is why the Chancellor has included in his Statement a clear recognition that there has to be international action. The international financial system requires a number of quite significant reforms, and the Chancellor in his Statement—which I had the privilege of repeating a little earlier—itemises the areas in which reform is necessary.
In addition to that, the charge is being made that the European position is fragmented. There is clearly a danger in that; if it were every country for itself in this situation, there could be the most deleterious effects across the economies of all. That is why it is necessary that discussions take place in Europe on the illustration
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My right honourable friend in the other place clearly indicated why he puts such an emphasis on international action. However, that does not alter the fact that, as each individual issue arose, starting with Northern Rock last year and going on in more recent weeks to the Bradford and Bingley and HBOS issues, the Government dealt with those issues expeditiously and effectively. We recognise that there are exceptional aspects to these arrangements, but they have helped to stabilise the position of these very significant institutions, inhibit the possibility of a chain reaction that would be so damaging to us all and, at the same time, give some security to these institutions while protecting depositors and the interests of taxpayers.
We have taken action in the particular. We recognise the necessary action in the general, both in Europe and in relationship to the wider economy in which the United States is bound to feature so largely. The noble Baroness says that it is a pity that Parliament was not recalled. I hope that Parliament would have something a bit more constructive to say than what she managed today, if the Government are going to benefit from the support that the Opposition are offering.
4.35 pm
Lord Barnett: My Lords, perhaps I may follow the Official Opposition’s new supportive line, as followed by the noble Baroness, which I did not note as being as supportive as my noble friend found. He told us that the Chancellor said in his Statement that the Bank of England is willing to take on a wider range of assets. I do not know whether that is to include toxic—so called—assets, which I hope he will agree are not always easy to value, given the multiplier effect of many of the doubtful mortgage debts that were apparently being bought and sold until recently. I do not know whether they still are. In fairness to the accountancy profession, it is impossible to value them as nobody is willing to buy them these days. Will he accept that that is the case? Therefore, the case for guaranteeing all deposits is not really made; indeed, it might have the reverse effect on the stability the Government are rightly seeking by reducing the credibility of the banks themselves, which is pretty poor anyway.
Just before we rose for the Summer Recess I asked my noble friend a straight question—was it government policy to guarantee that all banks would never go bankrupt? His answer was no at that time. Is he now saying, as the assumption must be, that the answer is really yes? Will he accept that if the answer is yes now, it would help the stability the Chancellor is rightly seeking?
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Lord Davies of Oldham: My Lords, the issue, as my noble friend knows only too well, is how we increase and restore confidence in a system that has been badly battered in recent months. He will appreciate that, within this framework, of course the Government are not going to underwrite every asset of every bank. Nor have we acted in such a manner. We have been careful about the guarantees we are giving. He will recognise that we are not guaranteeing all deposits; we are increasing the guarantee to £50,000 per deposit account, which covers 98 per cent of depositors, so we are giving that assurance. No Government could dream of being in a position to underwrite the totality of every banking failure but, where effective action can be taken to safeguard the interests of depositors and protect the interests of taxpayers, it ought to be taken because it is in the interests of the whole of our community that the financial system is restored to health. I merely sought to emphasise in my reply to the opening statements from the Opposition that the Government had acted with precision and effectively with regard to two banks that were in trouble. Therefore, I think that my noble friend will appreciate the effective action that has been taken thus far.
Lord Higgins: My Lords, the noble Lord says that the new compensation scheme will cover 98 per cent of depositors. What percentage of deposits will it cover, since it is important to protect the interests of large savers as well as small savers if we are going to deal with this problem?
It is confusing to deal with the Northern Rock and the Bradford and Bingley situations, as they were special cases. The first was in trouble because it gave excessive valuations and the second because it relied too much on self-certification of income. That is not the same as dealing with the banking system generally. Is it not clear from the taxpayers’ point of view that, if we are going to help to recapitalise the banking system, we are far better to do it by taking an interest in a particular bank or banks, preferably by way of preference shares, rather than to buy dud assets which may be worth nothing or varying degrees of nothing? It is not a good idea to follow the American model.
Having said that, the Government’s borrowing requirements have escalated beyond belief in the light of the various measures they have taken. Is the Government’s policy to fund that borrowing from the non-bank sector? There would otherwise be an enormous escalation in the money supply, with a delayed effect on inflation. Whatever balance one hits now between inflation and recession, one must take a longer, as well as a short-term, view on the problems that we face.
Lord Davies of Oldham: My Lords, first, I agree with the noble Lord on the importance of taking a longer view on such significant issues. The Government will do so. We will shortly be reporting on public finances in the Pre-Budget Report. The noble Lord will recognise how significant these issues are, and we will make a full report to Parliament on the situation. He will have to show a little patience there.
As for large savers, I fully understand what the noble Lord says. It would no doubt be ideal if every bank liability were underwritten, but there are obvious
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I accept what the noble Lord says about co-ordinated international action. Although we want it, we are concerned that our ideas form an important part of the debate upon it. I agree with him that following the American model would not be wise for this country, which is why we have followed a different path. We recognise the rights of other Governments to have different strategies, but if we are to come out of this crisis successfully together there must be co-ordination on the basis of international agreement, in which my right honourable friends the Prime Minister and the Chancellor will undoubtedly play an important role.
Lord Oakeshott of Seagrove Bay: My Lords, does the Minister agree that the safest place for British savers in a troubled world is a big British high-street bank or building society? I have not had a moment’s worry about my savings in Bank of Scotland or HSBC, but if my cash were in an Icelandic bank I would be very worried indeed: the currency has collapsed, interest rates are sky high and bank liabilities are hundreds of thousands of pounds for each Icelandic citizen. Would the Minister be happy if his savings were in an Icelandic bank? What is the position of the 100,000 or so British savers with £5 billion in the icesave product, who would have to claim the first £16,000 from the Icelandic compensation fund? What are the assets of that fund? Can it pay out? What happens if it cannot or will not pay out? Countries can go bust when they run out of foreign exchange and this country shows every sign of doing that.
Lord Davies of Oldham: My Lords, I came fully briefed on the British responsibility but not on the Icelandic one. I do not have too many notes on which to fall back but I shall trade on the noble Lord’s comments. British high-street banks and building societies are safe and secure. That is why the Government have no compunction about underwriting savings in those banks up to the point that I mentioned.
As regards the international position, the noble Lord will recognise that in these tumultuous times countries are likely to face particularly difficult circumstances. It is not for me at the Dispatch Box to judge whether it is safe to invest in Icelandic banks. However, the safeguarding of their position will depend on co-ordinated action in which this country must play a leading role.
Lord Lea of Crondall: My Lords, does my noble friend agree that there is a danger of people shedding crocodile tears about the lack of co-ordinated action
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Lord Davies of Oldham: My Lords, I agree with the sentiment expressed by my noble friend in his latter remarks. As regards co-ordinated action, we were all somewhat shaken by the position adopted by the Germans over the weekend. However, I think it will be recognised that the European Community has sought to take steps to address the matter. President Sarkozy sought to bring together Finance Ministers and the Prime Ministers and Chancellors of the leading countries to initiate effective action. We are all aware that it is difficult for Governments to act in time when things happen so suddenly. However, the delays are greater in the case of the European Community as it needs to achieve much greater consensus and has a much smaller capacity for taking executive action. Nevertheless, we should not underestimate the overall intention to ensure that co-ordinated action is initiated to address what everybody recognises is not just a Europe-wide problem but an international one.
Lord Elystan-Morgan: My Lords, I add my support and welcome to that expressed for the Statement, but is the action of the Government of the Republic of Ireland in giving a full and unreserved guarantee in relation to depositors’ funds legal as regards the competition laws of the European Union? If not, what is the worst scenario that could happen in that context? I respectfully suggest that that should be considered.
Lord Davies of Oldham: My Lords, I do not have detailed knowledge about the legal position but I imagine that in the present circumstances the Irish Government are postponing consideration of questions of legality until a later date. In the mean time, they consider that they are taking action to address the immediate crisis. Legal questions may not have figured too largely in their consideration. However, such unilateral action could have, and may be having, repercussions on other economies. That is why we need a co-ordinated response rather than the individual stance which the Irish have adopted.
Lord Tebbit: My Lords, does the Minister agree that today we might have some thoughts for the unfortunate Mr Leeson, whose misdemeanours now look quite trivial against those of his elders and betters more recently? Secondly, will the noble Lord give some consideration to an inquiry into whether there has been any element of false accounting in any of our financial institutions, in view of the way in which they have swung from what appear to be vastly inflated profits into enormous losses in recent times? Finally, does he further agree that many of the problems that we are now witnessing on both sides of the Atlantic have their origins, on both sides, in the growth of government debt and of money supply at about four times the rate of growth in the economy?
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Lord Davies of Oldham: My Lords, I imagine that the noble Lord’s recollection of Mr Leeson is somewhat greener than mine, as he had greater responsibility at that time than I had for the consequences. Perhaps not, but certainly the noble Lord was very active in public life when the Leeson issue broke.
The Leeson issue was dealt with in a fairly condign way. It ought to be the case—the whole country is clamouring for it, and no noble Lord on either side of the House does not think this—that if people have been involved in anything close to fraudulent or reckless activity, certain prices ought to be paid for that. That is why I emphasise that the Financial Services Authority will take into account the question of levels of remuneration when it looks at the status of any institution that it needs to examine.
On the more general issue, the noble Lord, an outstanding exemplar of deregulation, ought to show a little reticence at this stage, when so much of the claim is that certain people were acting in an unregulated fashion.
Lord Shutt of Greetland: My Lords, on 1 April 1967, I first went to work in the town of Halifax and, until coming to this place, that was where I spent most of my working days. I was aware at that stage of the mighty umbrella that was the Halifax Building Society, and even today there are 6,500 jobs in that town, including that of my esteemed son-in-law.
Yorkshire is a financial centre; we have Halifax, Leeds and Bingley. We have been proud of having the biggest building society in the world, but where are we now? What is happening to the mantra of a mortgage business—lending long, borrowing short in diversity—with this new mantra of lending long and borrowing short in bulk?
Clearly, there is government influence around at present, and there are 50 points in the Statement. Where is regional policy in this and who is batting for Yorkshire? We have a Prime Minister, a Chancellor and a First Minister of Scotland. We hear about the Bank of Scotland every day and about preserving jobs in Scotland. I have no desire to talk down Scotland, but I want to talk up Yorkshire. Edinburgh is the second city as far as financial services are concerned, but what assurances can the Minister give that someone is speaking up and looking after those jobs and the financial services sector in Yorkshire? The Minister has said that the Government have acted expeditiously and effectively on HBOS and Bradford and Bingley, but where is the work in making certain that they are looking after jobs in Yorkshire?
Lord Davies of Oldham: My Lords, the whole House appreciates the strength of the noble Lord’s advocacy of the interests of Yorkshire, which is suffering significantly because of the significant growth of the financial sector in Yorkshire, particularly in the city of Leeds. This is a calamity for the area, and no one is underestimating that, but the noble Lord will appreciate the obvious fact that the issues are so profound that no corner of the United Kingdom will not be affected adversely unless we are able to minimise the impact of this very difficult situation upon the real economy.
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