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HM Treasury

I am grateful to the Financial Secretary to the Treasury for setting out the purposes of the motion. As he says, essentially it enables the Government to restore the money in the Contingencies Fund, following the expenditure in relation to the recapitalisation of Lloyds TSB, HBOS and the Royal Bank of Scotland, and in relation to Bradford & Bingley and the Icelandic banks. Of course, we on the Conservative Benches support recapitalisation of the high street banks, which accounts for the majority of the funding, and we recognise the particular issues relating to the Icelandic banks and Bradford & Bingley. We have said throughout that we are keen to work on a bipartisan basis. None the less, this is a huge expenditure and it is right that we have an opportunity to scrutinise and question it. Several of the questions that arise have not been answered as fully as they might have been, and I shall raise some of them with the Financial Secretary. I appreciate the prudence of the Government in seeking to restore the Contingencies Fund now rather than waiting until December, but it might be helpful if the House had the answers to some of our questions, so that we know where taxpayers' money will go. The sums are huge—£42 billion will double the borrowing that the Government previously proposed—and we need to know how it will be accounted for. The US had lengthy debates on these matters, although we do not want a repeat of the uncertainty that they created. In any case, we work on a different basis in the UK, but it is right for the House to have an opportunity to ask some questions. We need further clarity on the issue of the Government's acquisition of ordinary shares. When the Chancellor made his statement on 8 October, on the banks that would qualify for the recapitalisation provided by the taxpayer, it looked as though the investment would be made through preference shares. The Chancellor set out his priorities and said that £25 billion would be used to acquire preference shares. He stressed that those would rank above ordinary shares and have better protection against future losses. It was also made clear that further capital would be made available, and I acknowledge that he recognised the possibility of the acquisition of ordinary shares. However, the Treasury memorandum made it clear that the Government will acquire £28 billion of ordinary shares in RBS, HBOS and Lloyds and £9 billion of preference shares. That is a substantial change from what was envisaged on 8 October. On 13 October, the Chancellor explained this by saying:"““Given the scale of what is necessary…the balance””—" between ordinary and preference shares—"““has to be struck in a way that is workable…if too many preference shares were put into an organisation it would impede its ability to get through this period and recover””.—[Official Report, 13 October 2008; Vol. 480, c. 544.]" He added that he was acting on proper advice. That is clearly a change in approach and it would be helpful to the House to hear an explanation of that change. Is it the fear that the deal will involve no dividends until the preference shares are paid off, so that would have an adverse effect on the share prices of banks? Or is it, as The New York Times suggested, that the banks' memorandums and articles did not allow the issuing of enough preference shares to boost the banks' capital ratios to the required levels? The Chancellor referred to proper advice, and it might be helpful if the House could see that advice. That change has put the taxpayer in a different, and arguably worse, position. I am willing to be pragmatic about this issue, but we need to know the reason for the switch. Each bank is paying a 12 per cent. interest rate on preference shares. It has been argued in newspapers and elsewhere that the risk profiles of the three banks are different. Given the scale of the investment in RBS compared with Lloyds TSB, and the different risk profile, why was the same interest rate required? Another change in approach seems to have occurred in relation to board representation. On 8 October the Chancellor said:"““In relation to Government nominees sitting in boardrooms, I never thought that a particularly useful course of action to follow””.—[Official Report, 8 October 2008; Vol. 480, c. 286.]" Now we will have five members on bank boards. I do not necessarily disagree with the proposal, but it would be helpful to know why there has been a change in approach. Will it be their role to enforce the various conditions imposed on the banks by the Government? How will those directors work, given that the Government are keen to have an arm's length relationship with the banks? Will the Government directors serve on the remuneration committees, for example? The remuneration policies of banks are causing concern, but it is a particular issue for banks that are partially nationalised. We know that cash bonuses will be curbed, but I hope that the Financial Secretary can provide greater detail on the Government's attitudes to share options for senior and not so senior bank employees. Confusion has also arisen over lending conditions, as my right hon. Friend the Member for Richmond, Yorks (Mr. Hague) said at Prime Minister's questions. The Treasury statement on 13 October stated:"““The banks have agreed to maintain the availability of loans to homeowners and small businesses at 2007 levels.””" We recognise that the purpose of the intervention is to unfreeze the lending market, but does that mean that the Government wish to maintain the same level of borrowing as in 2007? They appear to have backed down from that and now place great stress on the word ““availability””, but do they envisage that the partially nationalised banks should offer the same types of products as were offered in 2007? Will we see the return of 125 per cent. mortgages, for example? After all, 2007 was part of the age of irresponsibility—to coin a phrase. Do the Government really intend a return to those times? I suspect that it was merely spin, but it puts the Government in an awkward position. They are either guilty of spin or guilty of encouraging a return to irresponsibility. Which is it?