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Northern Rock

My Lords, with the leave of the House, I shall repeat a Statement made in the other place by my right honourable friend the Chancellor of the Exchequer on Northern Rock. The Statement is as follows: ““I hope the House will understand that it was necessary for me to issue a statement yesterday ahead of the markets opening so that trading in Northern Rock shares could be suspended this morning. It was also essential to allow the management of Northern Rock time to tell its employees what was happening so that the bank could open as normal this morning. ““As I said yesterday, the Government have decided to introduce legislation to take Northern Rock into a period of temporary public ownership. I took this decision after full consultation with the Bank of England and the Financial Services Authority. ““I made the draft Bill available in the Vote Office and in the House of Lords since this morning. I did so to provide as much time as possible for right honourable and honourable Members, as well as the other place, to examine the provisions of the Bill. If the House agrees, the Bill will begin its parliamentary passage tomorrow. I have also arranged for the principal opposition spokesmen to be briefed by Treasury officials today. ““It is important for savers and depositors to be reassured that their money remains safe and secure. Northern Rock will continue to operate as a bank on a commercial basis. It has been open for business as usual today. The Government guarantee that arrangements which I announced last year will remain in place and will continue to do so. Borrowers will continue to make their payments in the normal way. I have appointed Ron Sandler as the executive chair. He is in Newcastle today and has had meetings with the company and its employees. ““The new board and the bank will operate at arm’s length from the Government, with commercial autonomy for their decisions. I will publish shortly the framework agreement, which will outline how the relationship between the Government and Northern Rock will work. ““As I said yesterday, the board’s proposals will also cover the Northern Rock Foundation, which is very important to the north-east. The board will commit to guaranteeing a minimum income of £15 million per year in 2008, 2009 and 2010. This will be paid directly by Northern Rock, as now, and would be a condition of any sale if it were sold in this time. The new board will be asked to identify a long-term future for the foundation. ““I shall set out the reasons for the decisions that I made and outline what the new legislation will do. Before that, let me remind the House that last September there was almost universal agreement that the Government were right to intervene to save this bank, to stop its problems spreading into the wider banking system. There was also agreement that ultimately the long-term future of this bank must lie in the private sector. Even those who advocated nationalisation in the autumn did so on the basis that it could only be a temporary step—a stepping stone—to return it the private sector when market conditions made that possible. ““Throughout last autumn and from the start of this year, the Government wanted to test all the options and to give the shareholders and the management time to find a solution which was acceptable and which met the three principles that I set out last year. These were: to support financial stability; to protect depositors’ money; and to protect the interests of the taxpayer. I have said throughout that all options, including a temporary period of public ownership, remained on the table. ““As the House will know, the Government had two private sector bids to consider. Each of them was tested against the option of a temporary period of public ownership to see which met our objectives and decision principles, including the best value for the taxpayer. Both proposals involved a degree of risk for taxpayers and very significant implicit subsidy from the Treasury, involving a payment below the market rate to the Government for continuation of the guarantee arrangements and for the financing we would be putting in place. ““Each proposal had its pros and cons. The Virgin proposal, for instance, would have brought a new brand and management. However, the taxpayer would only have seen any share of the private sector's return if the value of the business to its investors had reached at least £2.7 billion. The board's proposal would have involved a similar level of subsidy, but it had other disadvantages compared with Virgin—it would bring in less new capital and the business would be dependent for longer on government guarantees for new retail deposits. A subsidy on the scale required would not provide best value for the taxpayer; the private sector rather than the taxpayer would secure the vast majority of the value created over the period ahead. This would be a poor reflection of the balance of risk borne by the two sides. ““By contrast, under public ownership the taxpayer will secure the entire proceeds from the future sale of the business in return for bearing the risks in this period of market uncertainty. That is why we made the decision that we did. Therefore, we have made the decision we have to protect taxpayers, after weighing up all the various competing considerations. In deciding which was the best option for the taxpayer, it was clear that a temporary period of public ownership was the better option. ““I shall go through the contents of the Bill in more detail at Second Reading tomorrow. We have deliberately drafted the Bill to ensure that a bank can be acquired only in certain tightly defined circumstances, and that power will last for only 12 months. I have already announced a consultation which will lead to permanent legislation to deal with situations such as this in future. The Bill potentially applies to a range of financial institutions. I want to make it clear that the Government have no intention at present to use the Bill to bring any institution other than Northern Rock into temporary public ownership. The Bill also provides for appropriate compensation for shareholders. As I explained on 21 January, that is on the basis that all financial assistance provided by the Bank or the Treasury, including the guarantee arrangements for depositors, was withdrawn and that no further public financial assistance, apart from ordinary market assistance from the Bank, would be provided to the deposit-taker. I believe that this is fair to both shareholders and to the taxpayer. ““The Bill also makes provision for transfer of the bank, or parts of it, into the private sector. ““Let me remind the House that, following the problems that started in the United States last summer, Northern Rock was unable to raise the billions of pounds it needed to stay in business. We were right to save the bank. We were right to do everything that we possibly could to find a private- sector buyer on terms that were acceptable to the taxpayer. Because of current market conditions, we are right, now, to take over this bank on a temporary basis because that is what is in the interest of the taxpayer. ““There were choices to be made. We could have let the bank go under. But the risks to the wider financial system, for savers and the general public, were not acceptable. Having made the decision to save the bank and maintain financial stability and protect savers, we are now taking this decision to protect the taxpayer””. I commend the Statement to the House.