Downing Street Says » Financial Situation

The Prime Minister s Spokesman (PMS) began by giving an update on the Government s stability and reconstruction programme for the financial sector. He said that the Prime Minister s efforts were two-fold; first of all, during today and the coming days, the Prime Minister would travel to different parts of the country in order to explain to the British public the action we had taken, and the reason why we had taken such action. The Prime Minister had spoken to young mothers this morning and he would be speaking to small businesses, among others, this afternoon in Birmingham. The Prime Minister would then visit the south west tomorrow. Other Ministers, particularly regional Ministers who had been fully briefed on the Government s plans, would play a key role in explaining the Government s actions in the regions.

Secondly, we would continue to work intensely with our international partners in order to work up a coordinated international response to the current global financial situation. The Prime Minister had met this morning with the Finnish Prime Minister and discussed with him how to take things forward in Europe. We were in regular contact with our other European partners ahead of the European Council meeting in Brussels next week. Crucially, Alistair Darling would be travelling later today to Washington for the meeting of the G7 Finance Ministers tomorrow, and the annual meeting of the International Monetary Fund and World Bank over the weekend.

Asked if there had been any feedback in the last 24 hours on the proposed lending guarantee as a model for elsewhere, the PMS said that we had been in discussion with our international partners on this proposal and other similar proposals. As the Prime Minister had been saying consistently, we needed a coordinated international response to what was a global problem.

Asked about local authorities with money invested in Icelandic banks, the PMS said that the Government understood the situation that they were in. We had had difficulty getting complete clarity from the Icelandic authorities in recent days about the position of all UK depositors in Icelandic banks. As the Treasury had been making clear, we stood ready to discuss this particular issue with local authorities to see if we could find a way through. We had frozen the funds and financial assets held by the Icelandic bank Landsbank, which would help to protect creditor interests. It was worth bearing in mind that, as the Local Government Authority (LGA) had said, it was not expected that this would impact on local services.

Put that Icelandic authorities had said that they expected a mutually satisfactory resolution to this, the PMS replied that we obviously wanted to find a constructive way forward with the Icelandic authorities and we appreciated the exceptionally difficult position that the Icelandic Government had found itself in recently. We wanted to work constructively and cooperatively with them to ensure that depositors and creditors were protected. However, as we had been unable to gain complete clarity on the position over the past few days, we took the action yesterday to freeze the assets of one particular Icelandic bank in the UK in order to protect the interests of UK creditors and depositors, and that included local authorities.

Put that the Government, at this stage, did not intend to offer a guarantee on councils deposits, the PMS replied that, at this stage, we were trying to extract the relevant information from the Icelandic authorities about the scale of potential liabilities. The Treasury, as had already been made clear, stood ready to discuss this issue with the local authorities in order to find a way forward. Again, as had already been made clear, the LGA was making clear that it did not expect this to have any impact on local services.

Put that the Government could say now that it would guarantee money for local authorities, the PMS said that we needed to establish what the facts were, have further discussions with the Icelandic authorities and with local authorities in order to come up with a way forward.

Put that the Government had been prepared to give a guarantee before it knew all the facts about private depositors, the PMS replied that there were exceptional circumstances around the action that we took in relation to the deposit guarantee for retail customers. The markets had been, and remained, very unstable and in the view of the Chancellor there was a potential systemic risk. That was why the action had been taken yesterday in relation to depositors.

Asked how much money there was in the frozen assets and if it would be set aside for compensation needs, the PMS said that the Treasury could provide journalists with whatever information they had, although some of it may be commercially confidential if it was related to particular financial institutions. The reason we had taken this extraordinary action was in order to try to ensure that there was money available for creditors and depositors in the UK.

Asked if it there could be a wave of retaliation involving other countries freezing assets of foreign banks, the PMS said that we would not anticipate that. We wanted to work cooperatively and constructively with the Icelandic authorities and we had taken the action we had because we were unable to get the clarity we needed from them to ensure that the interests of UK depositors and creditors were sufficiently protected.

Asked if any meetings with local authorities had been planned and if they would be given any reassurance that the Government stood ready to bail them out, the PMS said that the Treasury stood ready to meet with local authorities and it was best to check with them about any potential meetings. The LGA had said, in their statement yesterday, that councils were confident that they would have sufficient funds to tide them over for a considerable period of time and that they did not expect this to have any impact on local services.

Asked how much local authorities had invested in Icelandic banks and if there were any other public bodies that had money invested in Icelandic banks, the PMS said that he did not have that figure to hand and that it was best to talk to the Treasury.

Asked what the Prime Minister had meant this morning when he said that people would be punished for irresponsible risk taking, the PMS replied that the Prime Minister wanted to see responsible risk taking rewarded, but did not want to see any irresponsible behaviour being rewarded; he had been saying this consistently for the past few days and had also said it in his speech at the UN General Assembly.

Asked how people would be punished, the PMS repeated that we wanted to ensure that responsible risk taking was rewarded, not irresponsible risk taking.

Asked if a punishment could mean, for example, regulators imposing higher capital requirements on banks, the PMS said that the Financial Services Authority (FSA) was already looking at how it would be possible to implement a regime whereby the amount of prudential capital the bank needed to set aside, was a function of the extent to which their remuneration packages encouraged responsible behaviour.

Asked to clarify the position regarding banks and their remuneration schemes, the PMS said that the FSA s position had been set out in a speech that the former chairman of the FSA, Callum McCarthy, had given on 10 June at the British Bankers Association Annual Banking Conference. Mr McCarthy had explained their concerns about the extent to which remuneration systems in banks were encouraging short term behaviour and potentially irresponsible behaviour. What the FSA was looking at, and what the Chancellor and the Prime Minister had referred to, was the extent to which the regulatory regime needed to take into account the remuneration systems that individual banks had in place. Clearly, this was something that the Treasury would want to take into account as they negotiated their equity stakes in banks in the days ahead.

Asked if there would be an FSA decision on remuneration before negotiations between the Treasury and banks were concluded, the PMS said that the FSA was already looking at how remuneration systems could ensure more responsible behaviour within banks, and the Treasury would work very closely with the FSA as they negotiated with the banks about the Government taking equity stakes.

Put that there were two tracks that could bite banks in terms of their remuneration, i.e. the individual contract negotiations and the FSA, the PMS said that that was correct. The Treasury and the FSA were working hand in glove at the moment, so although there were different routes by which the authorities could have an influence on remuneration systems in financial institutions, the fact that they were working very closely together suggested that the same approach would be taken.

Asked if there was any worry that if the bite was too hard it risked looking like the Government had control over a particular body, the PMS said that the Chancellor was clear yesterday that it was not the Government s intention to control and run banks. The Prime Minister had also been very clear that we should continue to ensure that we encouraged hard work, effort, enterprise and responsible risk taking; we were very conscious of that as we discussed how we reformed our financial system.

Asked if that meant there would be tougher regimes for banks that acted irresponsibly, the PMS said that the key issue for now was that we reformed the financial system in order to encourage more responsible behaviour going forward.

Asked if people would be told when negotiations had begun and about the transparency of the process, the PMS said that these were publicly traded companies and that any announcements would be made in line with Stock Exchange rules.

Asked if we would know a reasonable amount about the deals at the end of the process, the PMS said that there was a need for transparency, and that there was also a need to ensure stability in markets. What we had seen in recent days was some irresponsible briefing coming out of a meeting between the Treasury and banks, which contributed to instability in the markets and we certainly did not want to see a repeat of that. Therefore, we needed to act transparently and we would abide by the Stock Exchange rules, but we also needed to be mindful that these were very uncertain times in financial markets and we did not want to do anything that added to the instability. Any announcements would be made in line with Stock Exchange rules, which had a high bar in terms of transparency standards.

Asked if people who had savings in a high interest account from a failed foreign bank could expect their money back from the British Government, the PMS said that he was not going to pre-empt any future decisions or make any new commitments, but the Government would do whatever was necessary in order to ensure the stability of the UK financial system.

Asked if the Government, as part of the negotiations, would be encouraging banks to make it easier for people to get mortgages, the PMS said that there had been a reference, in the Treasury s statement of yesterday, to the need to ensure that lending flowed through to small business and to households when the Government took stakes in banks. The underlying reason why mortgage lending had fallen to its current level was because banks were not lending to each other; that was the reason why we had introduced such a big package of measures yesterday, in order to get the money flowing round the system, which would ultimately benefit small businesses and mortgage holders once banks were able to lend money to each other.

Asked if the Government would encourage banks to pass on the interest rate cut yesterday, the PMS said that the Prime Minister had answered that question this morning.

Asked if there would be an investigation into the source of the irresponsible briefing that came out of a meeting between the Treasury and banks, the PMS said that was something which would need to be considered at the appropriate time. The priority for now was to get on with addressing the problems and issues in financial markets.

Asked if the Bank of England s remit would be reviewed at any stage, the PMS said that the Chancellor had been asked this question many times in recent days and that there was nothing to add to what he had already said.

Asked if there would be a G8 meeting to discuss the global financial situation, the PMS said that we were in discussion with our international colleagues regarding a meeting. In terms of international meetings coming up, there was a meeting of Finance Ministers this weekend and the European Council next week.

Asked if Britain had offered to host such a meeting, the PMS said that we had a big meeting of oil producing and consumer countries later this year, so we were playing our part.

Asked if the Prime Minister had spoken to Mervyn King about the timing of the interest rates announcement yesterday, the PMS said that that question should be directed at the independent central banks involved. A guess is that it probably had something to do with the moment people were awake in different time zones.

Asked if the timing of the interest rate announcement and the Government s announcement had been coordinated, the PMS said no.

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» Thursday, October 9, 2008

Financial Situation

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