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Clause 229

Banking Bill – in a Public Bill Committee at 3:15 pm on 30th October 2008.

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Financial assistance to building societies

Question proposed, That the clause stand part of the Bill.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 3:30 pm, 30th October 2008

I have a quick question for the Minister. The matter was covered in the Banking (Special Provisions) Act 2008, but it is covered in this Bill too.

The building societies are limited in the amount of wholesale funding that they can use. It was 50 per cent., although the Bill sponsored by my hon. Friend the Member for Bournemouth, West (Sir John Butterfill) provided for that to be increased to 75 per cent. I think that the Banking (Special Provisions) Act said that financial assistance, where given, should be disregarded for the purposes of calculating the 50 per cent. limit. Is that still the case in this Bill?

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

The clause provides powers for the Treasury to amend the Building Societies Act 1986, as the hon. Gentleman rightly pointed out. The purpose of such an amendment would be for building societies to access financial assistance from central banks or the Treasury on the same basis as banks. The Building Societies Act includes a number of provisions that could restrict the ability of societies to accept emergency lending from central banks or the Treasury.

In particular, building societies are currently prohibited from granting floating charges under section 9B of the Act. When seeking emergency liquidity assistance, financial institutions may have to grant floating charges over their assets, to provide sufficient security to a central bank. The Bank of England would typically want to take and rely on higher-quality collateral, except in urgent or unusual cases, and it is likely to insist on title transfer collateral or fixed charges over defined assets. However, in those urgent or unusual cases, it is important that building societies are also able to offer a floating charge, as a bank can. The fact that building societies cannot grant such floating charges means that they are disadvantaged in comparison with banks when seeking emergency liquidity support. There are two possible implications. The first option could be that the Bank of England could offer liquidity assistance without taking any charge, which would leave the Bank exposed to a lack of security. The alternative is that the Bank of England may not feel able to offer liquidity support if it is unable to gain sufficient collateral. Both outcomes are highly undesirable.

The prohibition on the granting of floating charges is one of a number of provisions of the 1986 Act that could prevent effective financial assistance. Other important  provisions that might need to be modified for this purpose include lending limits, funding limits and provisions concerning what has to be in the memorandum of the rules of a society. Such provisions remain appropriate in most normal circumstances. The Government support a strong and vibrant building society sector, separate and distinct from the banking sector, but with regards to the provision of liquidity assistance, the legislation currently creates anomalies with potentially serious consequences. The Bank of England and other central banks, including the European Central Bank, and the Treasury where appropriate, must be free to provide emergency support to banks and building societies on an equal basis. That is what the clause brings about.

The hon. Gentleman asked about percentage limits. I need to write to him about that, because I do not have the answer to hand. I hope that he will accept that I shall do so as soon as possible.

Question put and agreed to.

Clause 229 ordered to stand part of the Bill.

Clause 230 ordered to stand part of the Bill.