HM Treasury

Newsroom & speeches

19 January 2009

Statement to the House of Commons on Bank Lending

Check against delivery

 

Mr Speaker, with permission, I want to make a statement on today’s announcements on bank lending.

The House will, I hope, understand that it was necessary to issue a market notice this morning, in the usual way.

In the last few months our priorities have been:

This is also a problem faced by Governments across the world – and it is therefore necessary to achieve the maximum degree of international cooperation.

Mr Speaker, we are taking steps not just to support the banking sector – but, importantly, to safeguard the millions of jobs that could be put at risk by the continuing difficulties in the international financial system.

Restoring the banks’ ability to lend is an essential part of the economic recovery.

So today I am proposing further measures to meet two objectives:

Mr Speaker, I want to set out these new measures in the context of the strategy we have put in place to steer the country though the worst global economic crisis for generations.

Over recent months, banks have faced increasingly difficult conditions – as we have seen everywhere around the world – with:

Last October, faced with the potential collapse of the banking system, we recapitalised the banks, strengthening their position.

As a result, the Government has taken temporary stakes in two British banks – but as I said then, we have a clear view that British banks are best managed and owned commercially and not by the Government. That remains our position.

As a result of the action we took no savers in UK banks have lost money.

Mr Speaker, in the Pre-Budget Report I announced substantial extra help for people and for businesses.

Lower income tax, more capital investment now and lower VAT – which hand in hand with interest rate cuts and lower inflation – will support the economy and jobs.

And there is a clear international consensus that putting money into the economy now, to counter the recession and help people, is the right thing to do.

The cost of doing nothing would be substantially greater.

In almost every country, fiscal expansion policies have now been agreed –including, Mr Speaker, Germany only last week.

And in the US, President-elect Obama has already signalled the scale of their fiscal expansion.

But, Mr Speaker, as the President-elect said only yesterday, ‘restoring the economy requires that we maintain the flow of credit to families and businesses’.

In the UK, the total amount of lending available still falls short from meeting the needs of the economy.

Over the last ten years, lending by foreign banks and non-bank institutions accounted for over half of new corporate loans and 45 per cent of new mortgages here.

So a significant amount of lending capacity – by these foreign-owned banks and specialist lenders for example – has been withdrawn or has been returned to their home markets, demonstrating again the need for coordinated international action.

On top of that, in the last few weeks the world economic downturn has intensified everywhere – in the US, in the euro area, now spreading to Asia including China – all seeing weaker production, companies in trouble and fewer jobs.

As we go into what will be a difficult year, dealing with this global financial crisis will need continuous effort.

There is no single remedy. There is no instant solution.

We will need a range of measures designed to support lending, help businesses and protect jobs.

Together, my measures today remove uncertainty and accelerate a resumption of lending – a necessary precondition for recovery here and around the world.

Mr Speaker, there are three measures to address the capacity reduction in the banking sector.

First, because of current conditions, companies are finding it harder to get loans.

So the Government has today authorised the Bank of England to create, for the first time, a new £50bn fund.

This will help increase the amount of funding available to companies – by purchasing corporate assets from the banks – enabling them to invest.

This will help large companies and complement the substantial measures announced last week by my Right Honourable Friend the Secretary of State for Business to support small and medium businesses.

This fund will buy assets from banks, financial institutions and financial markets, with finance provided by the Treasury. The Treasury is also supporting the fund with an indemnity.

It will initially purchase high-quality private sector assets – like corporate bonds, commercial paper and syndicated loans – that companies use to finance their business.

The assets purchased by the Bank of England will be good quality investments, which will eventually be sold – so the taxpayers’ interests are protected.

This will enable larger companies to get the funding they need at a lower cost.

The operating remit of this scheme will be set by the Government, but it will be run on an independent basis by the Bank of England.

When purchasing these assets, the Bank of England will ensure the total amount of money in the economy does not increase.

In future, the Monetary Policy Committee will keep under review whether this facility could be used as an additional way for meeting the inflation target, in line with similar operations at the US Federal Reserve.

In such circumstances, I will decide the overall scale of the scheme – and I will keep the House informed.

Second, in order to maintain some of the capacity being lost in the mortgage market, I have decided that Northern Rock will no longer pursue a policy of rapidly reducing its mortgage book.

In addition, looking at when the housing market recovers, I am considering whether, and if so how, Northern Rock or other UK lenders can best support prudent lending to creditworthy customers, who will need mortgages, but can only afford deposits less than 25 per cent.

Third, in order to ensure that RBS, who owns Natwest, can continue to support lending, I am taking action to strengthen its position.

When the Government purchased its stake in the bank in December, a new management team was put in place.

The company have announced further losses today, many of which are associated with its investments in the US following their take-over of a Dutch bank ABN in 2007.

So I have agreed to their request to convert the Government’s stake of preference shares into ordinary shares.

The Government could now own up to 70 per cent of RBS.

In return for this, we have agreed with them an extension of lending commitments to large companies, and an increase in lending of £6bn in the next 12 months. 

Mr Speaker, as well as taking action to maintain lending capacity, I want to remove some of the barriers and uncertainty preventing the existing banks from lending further.

But in return for this we intend to negotiate with each bank a lending agreement.

These agreements will be specific – covering both the quantity and type of lending made available to people and businesses across the country – just as we have done with RBS today.

These commitments will be binding and externally audited.

Mr Speaker, in return banks will get access to support measures.

First, a new scheme under which the Treasury will insure certain bank assets, for a commercial fee, against losses on banks’ existing loans.

The purpose of the protection is to allow the expansion of lending.  So the pricing has to be fair and reflect all our objectives.

The banks’ problems stem from uncertainty about the value of their assets - faced with this uncertainty, individual banks are reluctant to lend to businesses and companies.

This will reduce the banks’ exposure to risks and give them the room they need in order to lend more.

And we will insist on the highest international standards of public disclosure and transparency in the operation of the scheme.

Mr Speaker, countries all over the world are considering similar proposals – we will work with them to take action together.

The second step towards removing barriers to lending is an expansion of the funding capacity of financial markets.

The Credit Guarantee Scheme I announced in October will be extended beyond its current end date of April this year, so that instead it will run until the end of 2009, subject to state aid approval.

This scheme guarantees new unsecured borrowing – so far over £100bn of these guarantees have been taken up.

These guarantees have been successful in helping bring down the inter-bank lending rate from 6 to 2 ¼ per cent.

To complement this, the Bank of England will continue to provide similar types of liquidity support when the Special Liquidity Scheme expires at the end of this month.

Mr Speaker, until recently, between a third and a half of UK mortgages were funded from the wholesale markets.

At the time of the Pre-Budget Report I accepted the recommendations in the Crosby report on mortgage finance markets.

I have announced that the Government will provide up to £50bn of guarantees, initially on new mortgage lending and eventually on other assets.

Overall, the liabilities taken on will be backed by financial assets and fees will be charged for guarantees and insurance, safeguarding the taxpayers’ interests.

Third, Mr Speaker, the Financial Services Authority have set out today their policy on capital requirements.

It has set out the level of capital that individual banks need to keep on their books to allow them to withstand the slowdown and maintain lending.

It will be a key signal that banks should allow their capital to be used to absorb the losses from investments – while not unnecessarily restricting their lending.

And because the regulation of capital is fundamentally an international matter – tomorrow I will present our plan to European finance ministers in Brussels. I hope we will be able to agree similar capital policy changes. It is essential.

Because this financial crisis is affecting every country in the world, it is crucial that other countries also take steps to support their banking sectors.

We cannot risk a damaging worldwide spiral of weakened confidence and national-only policy solutions.

Stronger international collaboration will be strengthened with the arrival of the new US administration.

We must not give way to financial protectionism – which could be every bit as damaging now as it was to trade in the 1930s.

Instead, we must look at the causes of this international financial crisis – we must strengthen the supervisory and regulatory system here and internationally.

I shall publish proposals on the regulatory framework for the banks in the Spring together with the FSA’s own review.

And internationally, we will be actively pursuing this as part of our presidency of the G20 through 2009.

Our objectives in the G20 will be to continue to take action jointly to support the world economy, act together to restore the flow of credit, and improve the international regulatory regime.

Mr Speaker, this is a continuing effort .

Countries all over the world are united in supporting their economies, maintaining lending and protecting jobs.

We are ready to do whatever it takes.

And I commend this statement to the House.

ENDS

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