08 October 2008

Statement by the Chancellor on financial stability

Check against delivery

1. Mr Speaker, with your permission, I would like to make a statement on the proposals I announced this morning.

2. And I hope the House will understand that it was necessary for me to issue a statement this morning ahead of the markets opening, for obvious reasons.

3. Mr Speaker, before I turn to that, I should tell the house that at 12 noon today the Bank of England, as part of a coordinated move with other leading Central Banks has cut interest rates by half a per cent, to four a half percent with immediate effect.

4. As I said in my statement to the House on Monday, the disruption in global financial markets has intensified over the last few days and weeks.

5. I also said that Government is ready, with the resources and the commitment, to do whatever is necessary - in terms of liquidity and capital - to maintain stability in the banking system.

6. That’s why today I put forward measures designed to restore confidence in the banking system and put banks on a stronger footing.

7. There are three strands to what I have outlined today:

First, to provide sufficient liquidity now;
Second, 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
Third, to ensure that the banking system has the funds necessary to maintain lending in the medium term.

8. My proposals today, as well as supporting stability in the financial system, will protect depositors, safeguard the interest of taxpayers, and play an important part on the international response to this global crisis.

9. And this, in turn, should help people and business, as well support the economy in these extraordinary times.

10. Mr Speaker, let me set to the House further details and the purpose of our measures.

11. First, the Government and the Governor of Bank of England will take whatever action is necessary to ensure that the banking system has sufficient funds – or liquidity – to function properly.

12. This is a crucial measure – needed to allow money to flow through the banking system.

13. To this end, I have agreed further immediate liquidity measures with the Governor of the Bank of England.

14. Until markets stabilise, the Bank of England will extend and widen its injections of funds into the system, to build on the £40bn it put in yesterday.

15. The Bank of England will continue to lend these funds to banks, in both sterling and dollars, by taking a wider range of security in exchange.

16. And today I have increased the amounts available to the Bank of England to lend through the Special Liquidity Scheme, to a total of at least £200bn.

17. By injecting this short-term funding into the system, the banks will be better able to conduct their daily business with their customers.

18. Importantly, this form of funding, which allows banks to swap assets for government securities, keeps the risk of losses with the banks and not the taxpayer.

19. The Bank next week will bring forward its plans for a permanent regime underpinning banking system liquidity, including a Discount Window facility.

20. Mr Speaker, the second step is to help the banking system become stronger so that it can better deal with the current turmoil in global financial markets. Banks will do this by raising the level of capital they hold.

21. A healthy banking system is the cornerstone of the economy – strong banks underpin a strong economy.

22. But many banks, all over the world, don’t have sufficient capital.

23. And banks need adequate capital so that they can keep on lending to people.

24. This is why today the Government has established a Bank Recapitalisation Fund – to allow UK banks to increase their capital position.

25. The eight major UK banks have today announced that, in aggregate, they plan to increase their capital by £25bn. Banks can raise this capital in the open market, in the usual way, or they can raise it through the newly-created Bank Recapitalisation Fund. And other eligible banks and building societies can also take part.

26. Through the Fund, the Government stands ready to buy “preference shares” in the participating banks.

27. Preference shares rank above the stock of ordinary shareholders. And the Government will receive a fixed regular payment for holding the shares and will get better protection against future losses.

28. And in addition to this, the Fund will be ready to provide at least another £25bn of capital, to strengthen the balance sheets of any interested bank.

29. The taxpayer, therefore, will be fully rewarded for this investment.

30. Additionally, the Government is also prepared to consider standing behind the issuance of new shares by any bank taking part in the Recapitalisation Fund.

31. And the Fund will cover a wide range of financial institutions – from UK-based multinational banks, to high-street branches and regional building societies.

32. And through these measures, UK banks will be strengthened to above the standards required by international conventions.

33. And 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.

34. And this brings me to the third element of the Government’s proposal today.

35. 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.

36. If banks do not lend to each other, they will also not lend to people and businesses up and down the country.

37. So 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.

38. Mr Speaker, this means that participating banks can start having confidence in each other again, because they will know that the Government is standing firmly behind them when they want to issue new debt.

39. This guarantee aims to unblock the system, so that banks can go about their business of lending to people and businesses.

40. And because it will be priced on commercial terms, taxpayers will be rewarded for the risk they’re taking on.

41. The guarantee is expected to cover an amount of around £250bn – but we will keep the total under review. And over time, the cost of lending between banks should fall, reducing the need for a guarantee.

42. Mr Speaker, the freeze in global markets is a problem for all countries.

43. Yesterday, at the meeting of European Finance Ministers, we agreed to work together to rebuild confidence in the banking system. And I believe that the measures announced today are an important part of that.

44. I shall be having further discussions with Finance Ministers. And when I go to Washington this weekend, to discus extending these proposals – as well as continuing with our work towards strengthening the system of international supervision.

45. And the Prime Minister has agreed with other major countries on the need for a meeting of heads of government.

46. Mr Speaker, I believe these measures are essential for the economy.

47. But let me deal with the implications, for the Government and of course for the taxpayer, of these new proposals, as well as others announced on previous occasions.

48. When we nationalised Northern Rock, the Government lent it around £30bn, but they have now paid back more than half of that, ahead of schedule.

49. When we nationalised parts of Bradford and Bingley, I was clear that we would run off their assets in an orderly way and get back as much as possible of the money provided to cover liabilities to depositors.

50. The injections of liquidity, through the SLS and other operations, simply allow banks to swap securities with the Bank of England, so the risk remains with the banks not the taxpayer. In other words, we get the money back.

51. And for all the operations of the Recapitalisation Fund, we will be charging the banks on full commercial terms. We will hold a capital stake as part of the investment. That will include the payment of dividends on shares and the appropriate charges for the use of the guarantee – ensuring that the taxpayer is appropriately rewarded.

52. So the implications for the public finances as a result of today’s announcements will be exceptional, and mostly temporary.

53. Mr Speaker, 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.

54. The public is 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.

55. Mr Speaker, I want to say something about the Icelandic banks, Landsbanki, its UK subsidiary Heritable, and Kaupthing, which was put into liquidation within the last hour. The FSA decided yesterday that Heritable couldn’t continue to meet its obligations – and today has just taken exactly the same decision for Kaupthing. I therefore used powers under the Special Provisions Act to transfer most of their retail deposits to ING, which is working to ensure that it is business as usual for all its customers, protecting its savers money. The rest of the business has been put into administration.

56. On Icesave, we are expecting the Icelandic authorities to put Landsbanki into insolvency, despite the fact that this is a branch of an Icelandic bank, I have in the exceptional circumstances we see today, guaranteed that no depositor loses any money as a result of the closure of Icesave. I am taking steps today to freeze assets of Landsbanki in the UK until the position becomes clearer.

57. Mr Speaker, these actions demonstrate my strong commitment to protect UK retail depositors.

58. The purpose of these proposals is to get lending started again and the economy moving forward. It is one of a number of measures we are taking to deal with specific cases as well as providing general support. And we are ready to do more, whenever it is necessary.

59. Failure to act would have meant far greater risks to the economy and to the public finances in future.

60. Mr Speaker, I 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.

61. And I commend this statement to the House.

ENDS