Cable quizzes Darling on the banking crisis

• [Jan 19]: ' . . THE Government increasingly resembles somebody who is trying to give the kiss of life to a corpse.'

Vincent Cable (Deputy Leader and Shadow Chancellor; Twickenham, Liberal Democrat): It is clear from the statement today that the crisis in the banking system is even more serious than it appeared three months ago, that the economy is in an even more vicious downward spiral, and that the bank rescue did not work. The Government increasingly resemble somebody who is trying to give the kiss of life to a corpse.

But before we discuss the latest resuscitation techniques, may I go back to the bank rescue that we had? It was a £37 billion recapitalisation: what happened to the £37 billion? Where did it go? The Government tell us that they are putting in place new lending agreements, but when the £37 billion was put in we were told that there was conditionality and that there were lending agreements. What happened to them, and where did the money go? Why was no inventory of bad debts taken at that time?

Is not the truth of the matter that instead of lending the money, as the Government and the Treasury wanted, the banks held it in reserve, as required by the Financial Services Authority? The significance of the FSA's statement today is that it got it wrong and is now having to change its instruction, which undermined what the Treasury, the Government and the taxpayer were trying to achieve.

On the new £100 billion guarantee scheme, how is it possible to insure enormous amounts of bad debt if the insurer does not know the risk, and if the risk cannot be evaluated until we have a valuation of the bad debts, which nobody yet has? Are the Government not operating the scheme in a falling asset market, with potentially enormous losses coming through on commercial property, for example? This morning, one of the brokers in the City estimated that in a falling asset market, the £100 billion insurance scheme could produce losses for the taxpayer of £30 billion to £40 billion. We are talking about an amount the size of the defence budget, which could go down the pan if this is wrongly timed and wrongly operated.

May I get to what I think we all agree is the central issue, which is how we get new lending going to sound commercial and household borrowers? I welcome the change of direction at Northern Rock; it had to happen. But the key is what the Government are doing with NatWest-Royal Bank of Scotland. The Government have increased their share from 58 per cent. to 70 per cent. Is that not nationalisation in all but name? Why do we not just say so, and why do the Government not spell out the implications of acquiring a bank whose balance sheet is bigger than the British economy? Why do they not explain to us, for example, why this bank managed to lose £2.5 billion through lending money to a Russian oligarch? This is not just about the past. I have been corresponding with the chairman about the bank's loans to another oligarch, Mr. Deripaska. The chairman tells me that it is a commercial matter-but it is not a commercial matter but a public policy issue. Another public policy issue is what happens to the hundreds of billions-not tens of billions-of toxic paper in the investment bank, because the taxpayer now has responsibility for that.

I want to conclude on this point. The Government now effectively control one of the largest banks in the world. They will almost certainly have to put more money in, and they may well acquire other banks. Why do they not now focus on the issue of how to get those banks-those enormous institutions-channelling funds into the British economy, and concentrate on that single-mindedly as their major objective?

Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour): I agree with the hon. Gentleman to this extent: the key for us, as for other Governments, is to get lending going into the wider economy. But I disagree with him in that I think that that has to be done not just through one particular bank, but through the banking system in general. The proposals that I have made aim to do that.

The hon. Gentleman asked a number of questions. He asked about the £37 billion. That was used to buy shares in the Lloyds group of banks-Lloyds-HBOS-and also in RBS. We still have those shares, and in time, when conditions improve as we get through this, our intention is to return that back on a commercial basis.

The FSA has made changes to the rules, but it can do only so much; it is also necessary to reform the Basel agreement, which governs the international capital ratios to which the hon. Gentleman referred. He was not the only one calling for that change; many, many people have been doing that.

The hon. Gentleman also asked about the agreements with RBS. The majority shareholding in RBS was acquired by the Government in December, and overall lending by RBS did increase as part of that wider agreement. Indeed, today, in return for converting our preference shares into ordinary shares, RBS has agreed to extend its lending by £6 billion. In relation to the other bank in which we have a shareholding-the Lloyds group-it is only today that that new organisation has come into force because of the procedures that had to be followed through. I agree with the hon. Gentleman and Mr. Osborne that it is important that we, and indeed banks, are clear as to what exactly is on their balance sheets. Clearly, in the case of RBS, the decision to acquire ABN a couple of years ago, with all the problems that have followed from that, caused that bank some very substantial problems.

If we are going to enter into an insurance scheme, or any scheme anything like that, we need to be clear exactly what the exposure is. Dr. Cable asked why we do not know today-but he answered that question to some extent himself. That process is difficult when conditions are deteriorating, and it takes time. However, I thought it right to tell the House what the Government's intentions are in that respect. I agree with him that the key thing is to ensure that we take action to get borrowing going into the economy, but that has to be done through the whole banking system, not just part of it.