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19 November 2007

Statement by the Chancellor of the Exchequer, Rt Hon Alistair Darling MP on Northern Rock

With your permission Mr Speaker I should like to make a statement to update the House on the current position with regard to Northern Rock.

The House will recall that last week I said during the Queen's Speech debate that I would keep the House informed of developments. I also said that I expected to publish a statement of principles underpinning the Government's approach to proposals received by Northern Rock with regard to its future.

I published that statement this morning, prior to the markets opening, in the usual way. Copies are available in the Vote Office and the library of the House.

Mr Speaker, it is important to be clear about the respective responsibilities of the Northern Rock Board and the Government. The Board is legally responsible to its shareholders for the future of the company.

However, the Government has a wider public interest in maintaining financial stability, which is why we agreed to lender of last resort support in September and subsequent lending by the Bank of England. And the Government also has an interest in protecting the interest of the taxpayer. Because of this, the Government has as a major creditor a very direct interest in the future of Northern Rock. The Government has to agree therefore to any proposals for the future of Northern Rock.

Before turning to our approach let me first of all deal with the position with regard both the guarantee arrangements to Northern Rock depositors provided by the Government and, secondly, the loan facilities provided by the Bank of England to support Northern Rock and maintain financial stability in general.

First, we have made it clear that the guarantee arrangements already announced for depositors in order to safeguard their position will remain in place during the current instability in the financial markets. These guarantee arrangements were absolutely necessary.

They have not had any cost to the taxpayer because these deposits covered by the guarantee arrangements remain in the bank.

As I have said before savers are free to take their money out if that is what they want to do, but they have no need to do so. The guarantee arrangements ensure that savers' deposits are safe. The guarantee will not be removed without proper notice being given to depositors.

Looking ahead I have made clear that the Government will legislate for a new regime for protecting bank depositors. As the House knows we have published a discussion paper on this legislation.

I welcome the offer of cross party support for it. But it is important we get it right. There are many examples both here and in other countries where legislation has been rushed only to be regretted later.

The current consultation finishes on 5 December. I will bring forward proposals in the New Year when I have also had time to consider the outcome of the Treasury Select Committee's work, as they have requested.

The second element of support is the Bank of England loan facilities.

It is important to remind ourselves of why this support was put in place in the first place. Northern Rock got into difficulties because it was almost totally reliant on getting very substantial sums from the securitisation and money markets on a continuous basis to do its business. When that lending became ever more difficult, it had no option other than to go to the Bank of England. Because of the possible impact on the stability of the wider financial system it was right that I authorised the Bank of England to intervene. And this too had cross party support.

Whilst international financial markets have shown signs of improvement since the sharp credit squeeze in August and September, there clearly remains continued uncertainty in markets following the problems that arose in the American housing market in the Summer. The rates at which banks are willing to lend to each other also remain high in all the major currencies. Therefore it is vital we do everything we can to maintain stability internationally as well as here at home.

As the House knows, we are taking steps at an international and domestic level to improve the regulatory regime and to provide greater transparency. This was the subject of the discussions of G20 Finance Ministers that I attended in Cape Town over the weekend.

The continuing support by the Bank of England has also given Northern Rock an opportunity to consider its strategic options. I am very clear this is also the right thing to do, and indeed when I announced this to the House it enjoyed support from all parts of the House.

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Mr Speaker, I know there has been interest in how much support the Bank of England is giving. The Bank publishes its balance sheet every week.

However, in common with other central banks, it does not however provide details of any operations because it believes that doing so would undermine its ability to provide such support. I understand the frustrations this can sometimes cause. However, to provide what would in effect be a running commentary on any operations would likely have adverse affects that none of us would want.

Having said that, I can tell the House that the Bank of England lending is secured against assets held by Northern Rock. These assets include high quality mortgages with a significant protection margin built in and high quality securities with the highest quality of credit rating. The Bank is the senior secured creditor. The FSA has said before and continues to say that Northern Rock's main asset base, its mortgage book, is strong and sound.

Like any lender on this scale, we have ensured that the Bank's lending is subject to significant conditions and controls to ensure that our interests are protected, and in return for this facility Northern Rock has agreed a number of controls including not declaring, making or paying any dividend without the prior written consent of the Bank of England and not making any substantial change to the nature of its business.

Mr Speaker, I now turn to the next stage. It is in the interests of everyone that the situation with regard to Northern Rock is resolved as soon as possible. That is why Northern Rock asked for expressions of interest in purchasing the business.

As the company has announced earlier today, as part of its review of its strategic options, the Company has received indicative expressions of interest covering a range of options for the business. It currently expects to receive further expressions of interest in the next few days.

Mr Speaker it is essential that public interest here is protected. That is why today I have published the principles that will underpin the Government's approach, when assessing proposals from Northern Rock regarding its future. And as I said the Government has to agree any such proposals.

These principles make it clear that the Government has a clear duty to protect the public interest and we will do that. However, I think the whole House, and particularly those Honourable Members representing constituencies in the North East, will want us to do everything we can within the constraints upon us to resolve a very difficult position for Northern Rock.

So let me set out our approach:

  • First, to protect the interests of the taxpayer. Substantial sums have been lent and this money has to be repaid at an appropriate time and rate. The Government will consider proposals with a view to reaching the best outcome for the public purse.
  • Second, to protect depositors. It is essential to do everything we can both to safeguard their interest and to maintain the service provided to them.
  • And third, to maintain wider financial stability.

As I have made clear all along, the Government will now assess proposals from the company consistent with the approach I have set out here, and we remain closely engaged with the company as the best outcome for the future is assessed.

As the company has acknowledged today, any proposals would have to be approved by the Government. And importantly any proposal can be vetoed by the Government. In that way Government can ensure that the public interest is safeguarded. And as I told the House any outcome must meet EU state aid rules.

Mr Speaker, it would be quite wrong to dismiss any option now without proper consideration as some suggest. I continue to believe it is right to use this time to explore the best outcome for the company and the public interest.

Mr Speaker, I agreed to Bank of England support because I believe it was right to do so.

I agreed to continuing to support to allow Northern Rock the time it needs to consider its strategic options because it was right to do so.

And I have today set out the approach the Government will take as it assesses proposals from the company to ensure that we will only approve a solution that safeguards both the public interest and the specific interests of the taxpayer.

That work is being done now and will be concluded as quickly as possible.

I will, of course, continue keep the House informed in the coming weeks.

I commend this statement to the House.

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