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The Prime Minister:
I had the privilege, over the summer, of meeting many of the women Spitfire pilots, and the men and women of the Air Transport Auxiliary and I was able to congratulate people who had come from all over the country, and who had given a huge service to the country. Their contribution was in delivering aircraft between factories and airfields during the second world war. It is right, even 60 years after the war, that
the nation has now determined that it will recognise the contribution of some very brave and courageous women and what they did.
Q5.  Mr. Mark Harper (Forest of Dean) (Con): I listened very carefully to the Prime Ministers answer when he said that he often used the occasion of the IMF forecast to publish new growth forecasts. I repeat the question put by my hon. Friend the Member for Scarborough and Whitby (Mr. Goodwill): can the Prime Minister confirm that the Government agree with the IMF that next year the economy willshrink?
The Prime Minister: I said that I often forecast the path along which the economy will move forward. We publish [Interruption.] I think the hon. Gentleman has been in the House for long enough to know that it is right for a Government to publish the exact figures of its forecasts at the time of a Budget and pre-Budget report. Anything else leads to uncertainty; and, if I may say so, the hon. Gentleman betrays some immaturity in expecting that we will give a running commentary on the economy.
The Chancellor of the Exchequer (Mr. Alistair Darling): 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 4�1/2 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 necessaryin terms of liquidity and capitalto 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 Ministers 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 todays 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.
This has, of course, been another day of turmoil on the financial markets, and people watching us remain desperately anxious about their savings, their mortgages and their future jobs. That is why we continue to offer our constructive support for the package announced today, including the important steps on interbank lending that the Prime Minister mentioned at Prime Ministers questions. Of course, as my right hon. Friend the Member for Witney (Mr. Cameron) said, the real test of the success of this rescue will be if credit starts flowing again through the veins of the economy. We want to see banks not just lending to banks again, but also lending again to the small businesses that need a loan extension and to the families who are trying to get a remortgage.
So may I ask the Chancellor the following specific questions? He said in his statement that he will require a full commitment to lending to small businesses and home owners. How exactly will that commitment be enforced? Does he have a commitment that the banks, for example, will not be charging small businesses 15 per cent. interest rates of the kind that we described on Monday? Does he have a commitment that the banks will pass on to customers the kind of rate cuts that the Bank of England has just announced todayand, perhaps, will also announce in the future? May I press him again on a question that my right hon. Friend asked of the Prime Minister? Does the Chancellor have a commitment that those banks that are most in trouble and most in need of taxpayer support will not be paying bonuses this year to their senior executives? The Prime Minister did not answer that question clearly and it would be good to have an answer from the Chancellor; there should not be rewards for failureno bonuses for those who took their banks to the edge of bankruptcy. [Interruption.] Labour Members can ask the new Minister appointed in the House of Lords all about bonuses when they leave the Chamber. The Chancellor says that this is all the Financial Services Authoritys responsibility, but it is the Chancellor who is ultimately responsible for tax money, and how is he going to enforce these commitments, because while the Government can give their support now and strike a deal now, they will, of course, find it very difficult to withdraw that support once it is offered without risking further crisis, so what are the real sanctions that the FSA or the Treasury have to help small businesses?
Secondly, may I ask the Chancellor about the concerns of people with savings in Icelandic banks? They will welcome what the Chancellor says, but may I ask for
some clarification for all our constituents? He says there will be no depositor losses as a result of the closure of icesave. Does that includeI assume it doesdeposits of more than £50,000? Does it also include wholesale deposits, because, as I am sure he knows, many local authorities have large deposits with these Icelandic banks? Are their deposits protected as well? Also, where will this money ultimately come from? The FSA compensation scheme will be under considerable strain after the Bradford & Bingley deal. Is the Chancellor expecting, in the end, the industry to make a contribution? May I also ask whether the Chancellor has other plans for other UK deposits in other foreign banks that may be in difficulty at this current time?
Thirdly, will the Chancellor be using this moment to start driving through the longer term changes we need to our system of regulation? There will be plenty of time to assess the mistakes that have been made and how we got into this situation, but one thing is clear: we must ensure that in future it is the banks and their shareholders who set aside capital, not the taxpayer. The Prime Minister talked in Prime Ministers questions about the banking Bill and the Bank of Englands role in liquidity supervision, but is he going to consider giving the Bank of England new powers to manage overall debt levels in the economy, with perhaps an open letter system with the FSA?
Finally, may I also ask the Chancellor about the international front? We welcome the news of co-ordinated cuts in interest rates across the western world. He is, of course, travelling tomorrow to the meetings in the United States. What prospect is there of genuine co-ordination across western Governments on other areas of policy, such as support for financial systems, so that we can perhaps have some common approach to the guarantees that are being offered to different parts of those financial systems? On the broader economy, as we have just heard in questions the International Monetary Fund is now predicting negative growth for the UK, the biggest downgrade it has made of any major economy that it monitors.
In the Budget, the Chancellor predicted growth this year of 2 per cent. and 2.5 per cent. next year, and as the Prime Minister very helpfully just confirmed, when he was Chancellor he used the IMF meeting to set out what I think he called a broad pattern of growth, but what I seem to remember being very specific figureshe would often get out his downgrade before the pre-Budget report at the IMF meeting. Will the Chancellor be using this opportunity to predict growth, so that the country is fully prepared and aware of the very difficult economic times that lie ahead?
This is an extraordinary moment, when the British taxpayer is forced to step in and bail out the banking system, but let us be clear: we do this not to rescue the banks or the bankers, but to rescue the economy and the millions of families who depend on it. That will be the true test of whether todays package succeeds, and we all hope that it does.
Mr. Darling: I am grateful to the hon. Gentleman for his support. I am glad that I had the opportunity to speak to him and to the hon. Member for Twickenham (Dr. Cable), who speaks for the Liberal Democrats, earlier this morning and to explain what we were doing and why. I also very much welcome the spirit of cross-party co-operation, and I hope that it lasts.
I shall now deal with the various points that the hon. Member for Tatton (Mr. Osborne) raised, beginning with Iceland. This afternoon, we will publish further details about how the Financial Services Compensation Scheme intends to proceed. I have to tell the House that getting information out of Iceland is proving to be quite difficult. That country obviously has severe difficulties, and that is why I decided that I had to intervene. It would have been quite wrong to say to people covered by the Icelandic scheme, Sorry, youve got to go to Reykjavik and try to get your money there. That is especially true when it is not clear to me whether the Icelandic scheme can be funded. So we have taken steps to freeze the assets of the bank involved, and I hope that we will be able to recover some of those assets in order to offset the money that we will have to provide to help people in the meantime.
The hon. Member for Tatton also asked about regulation. It is important that we learn from what has happened. First and foremost, we need to appreciate that, although it might have been sufficient in days past to allow a country to regulate within its own borders, it is now essential for a country that sees problems occurring within its own borders to discuss them with and report them to other countries. We saw problems in America, when that country was getting into the mire of the sub-prime market, and in the old days, that would have been a problem just for America, but it is now a problem for every country. So I think that the whole culture and approach to regulation needs to change, and there are obviously developments that we need herealthough I am bound to say that no one will convince me that we should back to the old days when we had nine or 10 regulators in this country who were all tripping over each other. It would also be absolute nonsense to go back to the days of self-regulation. However, I believe that the Bank of England should now have a statutory role in ensuring financial stability[Hon. Members: Ah!]as I announced in January of this year. I am glad that there is support for that in every part of the House.
The hon. Gentleman asked about the proposals that I announced today. What I have done today is announce the principles that will underpin our approach. As I said, and as the Prime Minister said at Question Time, we will reach individual agreements with the banks concerned. If they choose to use the facilities that we are offering, we shall sit down and discuss the detailed proposals with them.
I am grateful for the Conservative partys support for our approach to the excesses that we have seen. It is far more interventionist than I had always understood the Conservative position to be, but we must make sure that we go down what is a fine line. We must ensure that the public interest is maintained and yet not get ourselves into a position where we somehow think that we can sit in a boardroom and take all the decisions for everyone. At some point the hon. Member for Tatton came perilously close to suggesting that, but it is important that we make sure that we deal with some of the damaging effects of the bonus system that we have seen over the past few years.
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