Clause 4
Banking Bill
12:15 pm
Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)
The clause is an important element of the Bill because it sets out the objectives that will determine how the various stabilisation powers will be exercised. I thought that I would perhaps start with the clause stand part section of the debate and then move on to the various amendments, because that is probably the most helpful way of putting the amendments in context.
The clause lists the five objectives to be met through the special resolution regime. Subsection (9) makes it clear that those are set out in no particular order, but I think that since our debate about the types of institution to be covered by part 1, we have all had a feeling that one of the main thrusts is the protection of depositors, and in a moment I will deal with how I see that playing out. I will just comment on the objectives.
We considered the first objective, financial stability, at some length last Thursday, so I do not want to run through that debate again, and I suspect that you would not allow me to do so, Mr. Gale. I was taken by the definition given in the draft code of practice, because it gives an indication of the direction in which the Government are travelling. It is rather a pity that the Committee was not able to see the code of practice before our debate on Thursday, because I thought that one point in the definition went rather wider than that given by the Governor of the Bank of England and by Nigel Jenkinson, the executive director of financial stability at the Bank, in oral evidence.
In the code of practice, it is suggested that financial stability includes
“the efficient operation of financial services and markets for...capital-raising, risk transfer, and the facilitation of domestic and international commerce”.
That is quite a broad and helpful definition and I think that it is actually broader than the definition that was given when we discussed it last Thursday. However, I am not clear—this is one of the recurrent themes that has emerged throughout the debate about the objectives—what weight will be given to the individual objectives when looking at the operation of the special resolution regime.
One of the consequences of the way in which the Government used powers to freeze Landsbanki’s assets was that it affected the efficient operation of wholesale markets. It created uncertainty about how transactions would be closed out, and the Government responded to that uncertainty through their use of clarifications to licences under a separate clarificatory document. But the action created uncertainty in the market, prevented the efficient operation of the wholesale market, and acted as a barrier to international commerce. In seeking to protect depositors and, potentially, safeguard taxpayers’ interests, the Government undermined the efficient working of capital markets. Therefore, it would appear that in the context of the Government’s approach to Landsbanki—given the Minister’s remarks on clause 2, I appreciate that branches are excluded from the powers in this Bill; I am just using this as an example—objective 3, “to protect depositors”, and objective 4, “to protect public funds”, had higher priority than financial stability, or certainly that bit of the financial stability objective that relates to the efficient functioning of capital markets.
Although the clause states in subsection (9) that there is no priority, it would be helpful if the Minister could give us some feeling of the kind of circumstances that might arise and how the objectives fit into them. We do not know that at the moment.
The clause states that objective 2 is
“to protect and enhance public confidence in the stability of the banking systems of the United Kingdom.”
Public confidence has several dimensions, according to the code. It refers to the expectation that deposits will be repaid in accordance with the terms, that normal banking services will be continuously available, that perceived problems in one bank or building society will not extend to other banks, and that systems exist to protect the interests of depositors if a bank does suddenly fail.
The intention of the objective is to drive us towards the view that authorities will have regard for the need to act in a way that enhances rather than detracts from people’s confidence in the banking system, but I wonder to what extent the objective will be looked at in the context of the crisis. We have had a sustained period of financial instability, and there is a perceived systemic risk to the banking system. As a consequence, to use the Minister’s phrase in giving evidence to the Committee a fortnight ago, the Government will do what it takes to fix it. Clearly, what it takes in the context of a systemic crisis may well be very different from what it takes to fix the problems of a single bank that faces problems in isolation from the others.
For example, in the context of this crisis, we have a de facto 100 per cent. guarantee for retail deposits, as evidenced initially in respect of Northern Rock but now in connection with deposits with Icelandic banks that have not been transferred to ING Direct, but we know from our debate on the Financial Services Compensation Scheme and the amendments to the FSA’s rules that the deposit limit is £50,000.
My understanding is that if we were to look at the various powers that are available to the Government, in normal circumstances, less weight may be given to objective 2 than in the current circumstances, and in normal circumstances we would go back to a £50,000 limit rather than a 100 per cent. limit. It would be helpful if the Minister could explain how objective 2 would work in periods of financial instability such as we have now, and how important it would be if we were in more stable times.
Objective 3, which is intended to protect depositors, was largely covered in our debate on the Financial Services Compensation Scheme at the start of Committee about what role the FSCS can play in ensuring that there is a speedy pay-out to depositors. If consumers can access their funds quickly and speedily, that will give them confidence in the strength of the banking system.
Another way of protecting depositors is to transfer accounts to another bank. That could take place under the stabilisation options as part of the powers that are available. That is what happened with Bradford & Bingley. Over the weekend, the accounts were transferred from Bradford & Bingley to Abbey Santander and, as a consequence, the depositors at Bradford & Bingley had access to their money from Monday morning. They would not have noticed a difference in the system, because it was a seamless transfer, their accounts were not frozen and there were no problems about paying their bills, whereas those accounts that were not covered by that type of process—those of Kaupthing Singer & Friedlander that were not part of the Edge brand—are being guaranteed by the Government and will be subject to a pay-out through the Financial Services Compensation Scheme. People with such accounts will not have that same easy access to their money. From the debate last week about Landsbanki, we have seen that people with deposits in Icesave will not get access to their money probably until the end of this month. There is an issue about ensuring that the tools that we have facilitate easy access to depositors’ accounts. That is an important objective.
The Minister may want to correct this impression if he thinks it is erroneous, but it is clear from the debate so far that, if we were to consider ordering the objectives, objective 3, on the protection of depositors, would top the list. I would be interested to find out whether the Minister disagrees with that interpretation and under which circumstances it would not be the most important objective.