Clause 203

Part of Banking Bill – in a Public Bill Committee at 6:30 pm on 28 October 2008.

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Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee 6:30, 28 October 2008

The provisions are intended to ensure that holders of Scottish and Northern Irish banknotes issued by authorised banks will be afforded a level of protection similar to that for holders of Bank of England banknotes. That is the first and foremost aim of part 6 of the Bill. The clause states:

“Banknote regulations must require authorised banks to have backing assets” to make a reality of that protection. Backing assets are assets of the sort specified in banknote regulations. Regulation 3 of the draft indicative banknote regulations that I have circulated to the Committee sets out three types of backing asset: Bank of England banknotes, current coin of the UK and funds placed on deposit in sterling from the account held by the Bank of England.

The regulations then set out precisely what form the backing assets should take in relation to banknotes in circulation and notes that have not been issued, but are  held otherwise than in designated locations, for example, in bank tills, in ATMs or in transit. It is not surprising that they were not mentioned in the 1845 legislation, but we thought it was time that we acknowledged their existence. Those notes are considered to have the potential to enter circulation, including in error or by theft, so it is necessary for them to be fully backed to protect holders of Scottish and Northern Ireland banknotes.

Of key importance is subsection (5), which provides that banknote regulations make provision for the treatment of backing assets in relation to insolvency processes. That is the ring fence we were talking about earlier. It means that should one of the issuing banks have such difficulties, there will be no ambiguity whatever about the fact that the backing assets are there to back the notes. That again features in part 6 of the Bill.

Part 3 of the draft indicative regulations, in particular regulations 11 and 12, makes it clear that, in the event of a banknote issuer becoming insolvent, noteholders can obtain full value for their notes from the backing assets. The ring fence will last for a protective period defined in regulation 13(2) as one year from the date on which the insolvency procedure commences. It can be extended by the Treasury in consultation with the Bank of England.