21 January 2008

Statement by the Chancellor on Northern Rock

1. With your permission, Mr Speaker, I would like to make a statement on Northern Rock.

2. The House will understand that it was necessary to issue a statement to the markets with our proposals, before the start of trading this morning in the usual way. Copies of that statement and the accompanying Treasury press release are available in the Vote Office.

3. Mr Speaker, I shall next week, publish proposals for strengthening depositor protection and the supervision of banks.

4. But today, let me set out how we intend to meet the previously stated objectives of the Government, Financial Services Authority and the Bank of England with regard to Northern Rock, as well as the background against which we make our proposals.

5. The proposals that I set out today for a solution to Northern Rock - which is underpinned by Government support - is one which best meets our objectives of protecting taxpayers and depositors and maintaining financial stability. I will set out the reasons for this in greater detail.

6. Mr Speaker I can confirm that the existing Government guarantee arrangements to depositors will remain in place. Savers' money therefore remains safe and secure.

7. Mr Speaker, as the House will recall, at the end of last summer following the problems in the US mortgage market, Northern Rock found it increasingly difficult and then impossible to raise the billions of pounds they needed to finance their business. They were completely exposed. They had no 'Plan B'. Northern Rock was therefore forced to ask the Bank of England for support to allow it to continue to operate.

8. The Government agreed to that support because, in the then prevailing conditions, there was a serious risk that other parts of the Banking system would be destabilised. That support was successful and prevented further contagion. And that decision was wholeheartedly supported by Right Honourable and Honourable Members of this House.

9. As the House knows, the Government has announced guarantee arrangements for depositors' money saved with Northern Rock. In October and December we also provided further guarantees and funding arrangements in order to give the company the time it needed to try and find a solution to its problems, which I informed the House of.

10. At that time I said that I would ask Northern Rock to come back with proposals no later than mid-February this year.

11. Mr Speaker, these guarantee arrangements, including the extension in December, have not been called and therefore there has been no cost to the taxpayer. However, these arrangements remain necessary and will be in place for the time being.

12. Equally, Bank of England lending is secured against Northern Rock's assets such as, high quality mortgages, which are assessed by the Financial Services Authority, as being of good quality. Again, there has therefore been no cost to the taxpayer.

13. Mr Speaker, let me make it clear that the Government's position - which I reiterated most recently at Treasury Select Committee on 10 January - is that a private sector solution for Northern Rock is preferable route for meeting our three objectives but this cannot be at any cost.

14. If it does not prove possible to secure a proposal that meets our stated objectives and conditions, it would be necessary to take Northern Rock into temporary public ownership. For that reason it would be irresponsible to rule it out.

15. Mr Speaker, despite intensive efforts over the last few months, and as a result of uncertain market conditions across the world, it has proved impossible for Northern Rock to find a purely commercial solution.

16. In the Autumn, market conditions were such that banks became increasingly reluctant to lend on terms that would have been acceptable. As the House will be aware, right across the world banks are having to make substantial provisions.

17. Whilst conditions are better now than they were before Christmas they remain difficult and the Government's financial advisers believe that there is no chance of achieving a private sector deal backed entirely with private finance in the near future.

18. Before I turn to my proposal, let me first deal with the question of putting the company into Administration, as some have suggested.

19. Administration would mean that control would immediately pass to an administrator who would look to realise the value of the company's assets which, under current market conditions, would amount to a fire sale. It could also exacerbate current market turbulence. And costs would be significant. I have therefore rejected such a proposal.

20. My proposal today is one in which Northern Rock is owned and run in the private sector as a commercial bank - and where the Government provides a backstop guarantee to make private financing possible in the current market conditions. I believe this company should be managed with private sector disciplines and management, provided we can do so on terms which properly protect taxpayers' interests.

21. Mr Speaker, let me now set out in greater detail how this proposal will meet our objectives of: protecting the taxpayer, protecting consumers and promoting financial stability.

22. Northern Rock would raise the funds it needs from investors by selling assets. The Treasury would guarantee payment to these investors in the event that the assets were insufficient to meet its obligations, for which Northern Rock would pay the Treasury a fee. In this arrangement, shareholders and other providers of capital in Northern Rock accept the first risk; with the Government acting as a backstop.

23. According to the Financial Services Authority, Northern Rock has a good quality loan book. In normal market circumstances it would be unnecessary to need such a guarantee. However in the current circumstances to attract a wide range of investors on acceptable terms that protect the public interest, a guarantee is necessary.

24. Mr Speaker, if this proposal is accepted it would mean that all of the Bank of England's current loan facilities for the company are repaid in full, with interest, upfront, upon completion of the transaction.

25. Mr Speaker, our willingness to put this support in place depends entirely on the terms on which a deal can be struck. I will only authorise support for the private sector if the public interest will be better served than through taking the company into temporary public ownership.

26. In addition to this, any acceptable proposal would also need to comply with clear conditions. The company will need to demonstrate how it can operate sustainably in future without any government support and we will favour proposals that reach this point quickly.

27. New private sector capital will be needed, so that the private sector - not the taxpayer - takes the burden of risk for commercial success or failure. So long as the Government continues to provide a backstop guarantee, we will require restrictions on any sale of the company and on dividend payments.

28. Mr Speaker, to allow this financing structure to be explored, the Treasury and the Bank of England will make arrangements to extend the Bank of England's loan facility until 17 March, by which time we must submit a restructuring plan to the European Commission.

29. The proposals would involve private sector participation in the financing of Northern Rock and would also provide the taxpayer with the ability to share in the potential upside returns, as business conditions improve, in return for the financial support provided to the company.

30. The Government will make its decision as to which proposal we can as provider of support accept, and with the Bank of England and Financial Services Authority, we will consider proposals received by 4 February from potential interested parties, including the company itself.

31. Mr Speaker, any proposals either as a result of this support or public ownership are highly likely to need state aid clearance and will therefore be dependant on approval by the European Commission.

32. The Government has already started discussions with the company and with the two parties who have publicly stated an interest in the company. The Government is also ready to have discussions with any other interested parties.

33. Mr Speaker, let me make it clear, if the solution I have outlined proves not to be possible on terms which protect the public interest, then a temporary period of public ownership will be necessary.

34. Legislation is being prepared, should it be necessary, and would make provision for an independent valuer to decide on the level of compensation to be made to shareholders.

35. The principles for assessing that compensation would be based on the company not receiving public support and that all specific financial assistance from the Bank of England or Government had come to an end. This is set out more fully in the statement to the markets today.

36. Mr Speaker it is for the independent Office of National Statistics to determine whether Northern Rock is classified to the public sector in the National Accounts. Any liabilities classified to the public sector would be temporary and backed by significant assets and do not represent any meaningful measure of fiscal sustainability. The Code for Fiscal Stability - underpinned by legislation passed by this House - provides for such situations.

37. We would also address the future of the Northern Rock Foundation, in the event of temporary public ownership.

38. Mr Speaker, the proposal which I have outlined today meets our stated objectives of protecting the taxpayer, protecting depositors and maintaining financial stability.

39. Northern Rock got into the difficulties it faced because of global market conditions. The Government agreed to Bank of England support for Northern Rock because of the destabilising risk to the rest of the financial system and also provided guarantees to protect depositors. Both objectives have been met. We now need to reach a solution which leaves the greatest risk with the company yet will allow taxpayers to profit from any future sale.

40. Mr Speaker, ideally the best solution would have been a private sector solution without any government support, but in current uncertain market conditions that is not possible.

41. Administration - with the resulting fire sale of the company's assets - would not be in the public interest.

42. Temporary public ownership - nationalisation - remains an option, however even those who advocate now see it as a stepping stone to returning Northern Rock to the private sector that would involve government support. And in the meantime it would still require continuing financial support and it would leave the public sector bearing all the risk.

43. The proposal I have outlined today is the right one. It provides a government guarantee that enables a commercial solution in which the private sector raises finance and bears risk. It also offers the prospect of withdrawing government support more quickly and is therefore most likely to meet our stated objectives and conditions.

44. I commend this statement to the House.