Root cause of lending crisis is uncertainty over debt liabilities

Root cause of lending crisis is uncertainty over debt liabilities - Thurso

January 14, 2009 5:25 PM
Originally published by UK Liberal Democrats

John Thurso responds to a statement on financial support for business, questioning whether the Government's new plans to guarantee bank lending will tackle the root causes of the credit crunch

John Thurso, Liberal Democrat Shadow Secretary of State for Business, Enterprise and Regulatory Reform, responded to a parliamentary statement by the Government announcing details of their business support measures.

Viscount Thurso said the Government's proposals failed to address the "uncertainty about the level of toxic debt in the banking system" and expressed concern that "large liabilities will continue to be taken on by the taxpayer without proper quantification or clear strategic thinking.

Read his full response below:

John Thurso (Caithness, Sutherland and Easter Ross) (LD): May I begin by saying that given the scale and complexity of the measures that are being proposed, it would have been far more appropriate if they had been communicated to the House in a statement on the Floor of the House? In future, if the Minister has any further such measures to announce, will he do so in the usual manner of making a statement to the House?

Is it not the case that the core issue for the economy remains the crisis of confidence in the financial system and the consequent inability of companies to gain credit? The proposals are designed to help alleviate that problem. I would welcome any well designed or thought through proposals, but it is somewhat difficult to know whether these proposals meet that test at this time and my fear is that they do not. The root cause of the problem in the financial system remains the uncertainty about the level of toxic debt in the banking system. It is a like a gangrene in the financial body and until that gangrene has been amputated in terms of the loss of a nasty bank that uncertainty will remain. Our concern is that large liabilities will continue to be taken on by the taxpayer without proper quantification or clear strategic thinking. Do the Government not accept that such conflict is inherent in their instructions to the banks to maintain 2007 levels of credit while repairing their balance sheets? Those aims, frankly, are not compatible.

With regard to the working capital scheme, may I ask the Minister how the Government will ensure that those funds go to companies that actually need them - to companies that would not otherwise be funded in the normal way by their banks? Is there not a danger that banks will simply use the funds to lower their risk? How is there to be a proper definition of new lending? Will it simply be new lending to an existing company that would already have had it or will it be to a company that would not have got it, and how will that be quantified?

With regard to the enterprise finance guarantee, how will creditworthiness be rated and what will be the due diligence procedure? How will the Government ensure that finance goes to firms that need it rather than to those that would have received it anyway?

Lastly, I am happy to give a cautious welcome to the capital enterprise fund, as I have long believed that one of the barriers to growth for small companies has been the lack of affordable capital, but how will the capital be made available? The Minister said that it will come by means of equity and that the fund will be run by professional managers, but at the core are the terms under which the equity will be acquired. What is the internal rate of return that the Government will target for those fund managers? What thought have they given to making the funds available in that way?

Although I welcome the sentiment behind the proposals, I am unsure as to their practical effects and whether they will work. May I ask the Minister that at the earliest opportunity the House be given the chance properly to scrutinise what has been put forward and to debate it in a manner other than this?

See also, John Thurso's reaction to the government statement

Ribble Valley Liberal Democrats