Rt Hon Lord Lilley

    Date of Proceeding: 09.10.2008
    Reference: 480 c444-46
    Member: Lilley, Peter
    Title: TOPICAL DEBATES Financial Stability

    I draw the House’s attention to my interest, as in the Register of Members’ Interests.

    It is a privilege to follow the hon. Member for Hackney, North and Stoke Newington (Ms Abbott). She referred to a speech that she made in a banking debate 10 or so years ago, which is one of the very few speeches from 10 years back that I still remember. It was as distinguished as was her speech today. She was right to say that we face a very serious problem.

    I shall try to be brief in making a number of assertions. The first is that recession is now inevitable, but depression is still avoidable. There has never been a 1930s-style depression when the stock of money and credit has been maintained, and I therefore welcome the measures taken by the Government to prevent the contraction of credit and money that would have occurred if there had not been an injection of public money into the banking system to help recapitalise it. My second assertion is that while it was right to put in public money and take a public stake in the banking system, we should seek to maximise the return to the taxpayers from that money, and maximise the private contribution of new capital to the system.

    Members may find it slightly odd that I should support what is effectively partial nationalisation of the banks, about which the Chancellor of the Exchequer appeared rather sheepish yesterday. In fact, I am the last Conservative Minister ever to have nationalised anything, albeit in a rather different sort of crisis: I nationalised all the Iraqi-owned assets after Iraq invaded Kuwait. In an emergency it is necessary to take drastic action, and it is essential for the Government to prop up the whole structure of credit, which exists only because Government allow fractional reserve credit banking and stand as lender of last resort.

    We need, however, to maximise the return to the taxpayer and maximise the injection of private capital into the banks. I am therefore puzzled that, in terms of maximising the return, the Chancellor of the Exchequer is proposing preference shares rather than convertible preference shares. If he had insisted on convertible preference shares, if and when, as we hope, the banks are restored to health and vigour and the economy likewise, the public sector would have seen a recognition, in the form of a profit, of some of the good that it had done. By failing to make the shares convertible-perhaps it is not too late to do so-the Chancellor of the Exchequer has deprived taxpayers of some of the profit that they could have made. If we had convertible preference shares, he would also be right to encourage the private sector to put in money instead. If the banks would prefer to have private capital coming in on the same terms, they should be allowed to do so. I should like the Chancellor to consider that.

    Of course, there is always a trade-off between the conversion price and the coupon that is paid. However, if that means that a slightly lower dividend is paid in return for a share of the profit at the end, that is a good thing in itself. We want to restore the capital base of the banks by retentions, rather than by paying out dividends, as much as possible.

    I welcomed the Chancellor’s statement that he was prepared to help to underwrite private capital injections. If he does so, I suggest that he take up the idea that I proposed last Monday that additional capital put in now should be given privileged status in the event of an eventual bank reconstruction, and not written off in the same way as old capital. That may indeed be what he is referring to when he talks of underwriting the injection of new capital.

    We need to learn the lessons of experience abroad. Some of the best lessons-they involve some of the greatest problems and some of the worst mistakes-can be learnt from the experience of the Japanese, who have undergone a prolonged banking crisis over the best part of 14 years. The lessons there are, I believe, that delay and dithering, a grudging injection of the minimum amount of help rather than help commensurate with the size of the problem and a piecemeal, bit-by-bit approach all undermine the impact of any measures that are taken. It is regrettable that we have waited as long as we have before taking this very substantial step, which, as I have said, is one of the Chancellor’s measures that I welcome.

    Eventually, the Japanese had to adopt all the weapons available to them: not just recapitalising the banks as we have done and not just injecting liquidity as we are doing, but moving non-performing loans off the balance sheet into a separate institution. I hope that that will not be necessary, but as the hon. Member for Hackney, North and Stoke Newington pointed out, it is a mistake to assume that all bad loans are over in the United States in sub-prime mortgages. There will be bad loans in this country, because many loans are backed by real estate and property values that have fallen dramatically and may fall further, and if we do move into recession many may begin to under-perform for other reasons.

    Mr. Andrew Pelling (Croydon, Central) (Ind): Is not one of the key solutions moving all the bad debts off the banks’ balance sheets? The real problem in Japan was a great reluctance to do that, which held the Japanese economy back for many more years.

    Mr. Lilley: That is exactly the point that I was making. We may have to consider doing likewise, in addition to the things that we have already done.

    The Japanese also had to extend a guarantee to all individual deposits. I find it incomprehensible that the Government have not done the same, although implicitly they are offering to do so; they extended a guarantee to all individual deposits in Northern Rock and Bradford & Bingley, which they have now extended to Icesave, or whatever it is called-the iceberg bank. If they can extend such a guarantee to a foreign and rather dubious bank, it is odd that they should not extend it, for a limited period, to all depositors in this country.

    The final thing that the Japanese had to do was cut interest rates drastically. I agree with my hon. Friend the Member for Chichester (Mr. Tyrie) that the Bank of England needs to recognise that in these circumstances interest rates may need to be cut further and faster than ever before. In Japan they had to be cut to zero. We should not relate interest rates to what was necessary during a period of excess credit creation, given that we are experiencing a period in which there is likely to be excess credit contraction.

    I hope that the Government will not rule out any further measures that are necessary, and I very much hope that the measures that they have already taken will be effective. They will certainly have the support of the Conservatives, but that does not mean that we will not hold them to account for getting us into these problems over the past 10 years. They must accept responsibility for that. That is exactly the point that I was making. We may have to consider doing likewise, in addition to the things that we have already done.