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Clause 3

Banking Bill – in a Public Bill Committee at 12:00 pm on 4th November 2008.

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Interpretation: Other expressions

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

I beg to move amendment No. 88, in clause 3, page 3, line 1, leave out from ‘assistance”’ to end of line 2 and insert

‘has the meaning given by section [“Financial assistance”].’.

Photo of Roger Gale Roger Gale Conservative, North Thanet

With this it will be convenient to discuss Government new clause 9—“Financial assistance”.

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

The purpose of the amendments is to provide the Government with the power to specify assistance that should or should not be included in the definition of financial assistance for the various purposes for which it is defined in the Bill, particularly as it is used in part 1. The term “financial assistance” appears throughout part 1. For example, it appears in relation to the trigger conditions for the special resolution regime and in relation to the valuation principles for the calculation of compensation.

Committee members will recall that the term also appears in part 7, as we have already discussed, to provide the necessary parliamentary authority for the Treasury to use public funds to provide financial assistance to financial institutions and

“in connection with, the provision of financial assistance to building societies.”

In all circumstances, the term includes giving guarantees, indemnities or any other kind of financial assistance, actual or contingent. The reason for moving the amendment is to recognise the fact that the Government can provide financial assistance to failing banks in a number of ways, and they may not wish some form of assistance to be treated as financial assistance for the purposes of all of the Banking Bill’s provisions.

Financial assistance is mentioned throughout this part of the Bill, but perhaps I might explain the purpose of the amendment by referring to two examples. First, in Clause 9(3), the provision of financial assistance for the purpose of resolving a threat to financial stability is defined as one of the conditions for taking a bank into temporary public sector ownership. However, it is not the Government’s intention that all forms of financial assistance to banks should mean that such a condition would be met, as that would provide a serious disincentive for banks to take advantage of other forms of financial assistance. In particular, the Government are thinking of the recent financial assistance that has been offered to the banking market as a whole, including the recapitalisation scheme and the credit guarantee scheme for banks to take up on commercial terms.

Another example can be found in clause 7, which requires the FSA to determine whether a failing bank remains in compliance with its threshold conditions. When assessing whether the threshold conditions continue to be met, it is likely that it will be appropriate for the FSA to consider the position of the firm without taking into account financial assistance provided to that firm on an exceptional basis. However, it may be appropriate for the FSA to take into account any financial assistance provided under a system-wide scheme—such as that  provided under the recapitalisation scheme—when considering whether the firm still meets its threshold conditions. It is difficult to say now what forms of assistance will be excluded from the definition. To future-proof the Bill by providing for current and future schemes of financial assistance to be included or excluded as appropriate, the Government believe that it is prudent, therefore, to take a power to specify types of assistance that should and should not be counted as financial assistance. I hope that hon. Members will agree that the amendment is a sensible and prudent measure and I commend it to the Committee.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 12:15 pm, 4th November 2008

I am grateful to the Minister for clarifying the purpose of the amendment and new clause 9. Nevertheless, I want to question him further. I think that he was trying to draw a distinction between specific assistance to an institution and system-wide support. He cited the recapitalisation package, but that has been accepted by only a handful of banks, so the credit guarantee scheme is available only to those banks that signed up for it.

I shall broaden the matter out a little. Last week, the Bank of England published a consultation document on the types of financial assistance that it might provide to banks. On the whole, they are system-wide schemes. They include the operational facilities that it proposes using to replace the standing facilities; the statutory discount window facility that will enable banks to borrow, given security against a wide range of collateral at any time, the type of collateral reflecting the size of the drawing; and the possibility of permanent long-term repos against high-quality private sector securities. As far as I am aware, they are system-wide schemes. Do the Government believe that they would fall outside the definition of financial assistance and that they have no mind to accept new clause 9?

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

On the recapitalisation scheme, the Government believe that assistance under it should not be of a type that would trigger certain provisions of the Bill—for instance, the provision for taking a bank into temporary public sector ownership. Nor should system-wide financial assistance, including the recapitalisation scheme, be treated as financial assistance for the purposes of the FSA’s assessment of whether the threshold conditions have been met.

The purpose of the recapitalisation scheme is to recapitalise banks and place them on a more secure financial footing. It would therefore be inappropriate if access to the scheme impacted on triggers for the use of the SRR powers. However, that does not mean that it will be excluded from the definition of financial assistance for all the purposes of the Bill. For instance, in some cases, access to the recapitalisation scheme may be relevant in determining compensation.

The special liquidity scheme has been mentioned. It does not fall within the definition of financial assistance, but it is not clear whether such system-wide assistance should be treated as financial assistance for the purposes of the trigger mechanisms in the Bill, including the determination by the FSA of whether a bank meets its threshold conditions.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The Minister said that it is not at all clear whether things such as the special liquidity scheme should be treated as financial assistance. He will understand that those who are using a special liquidity scheme would like some clarity on whether it is classified as financial assistance under the Bill.

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

Let me try to clarify the matter. The special liquidity scheme falls within the definition of financial assistance, but I said that it is not clear that such system-wide assistance should be treated as financial assistance for the purposes of the trigger mechanisms in the Bill, including the determination by the FSA of whether a bank meets its threshold conditions. We therefore need to exclude such assistance from certain provisions of the Bill. I hope that I have made matters clear.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am not entirely sure that the Minister has done so. It would be useful for the Committee to know in which sections it might be deemed to be financial assistance and in which it will not. My understanding is that the special liquidity scheme was designed to help banks through the current liquidity crisis. The Bank of England has made some proposals, but it would be helpful to know how it might develop its money market operations to improve liquidity in the market. What will be the precise interaction between those schemes and the Bill? That might well affect the extent to which banks take up the schemes. It also suggests that a bank that takes up a special liquidity scheme might find itself at risk under the Bill if the scheme is not excluded from the definition of financial assistance throughout.

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

I hope not to create confusion on that point. I hope that I was clear in saying that the SLS does fall within the definition of financial assistance, but that its operation would clearly not be something that one would want to take account of when the FSA was determining the threshold conditions. We will need to exclude that from certain provisions of the Bill, but not all of them. It might help members of the Committee if I wrote to them to explain in more detail how we see amendment No.88 and new clause 9 operating in practice.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am grateful for the Minister’s proposal to write to us, and it would be helpful if he indicated in that letter the sections in which the SLS would and would not be treated as financial assistance.

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

I will of course try to bring as much clarity as I can in that area, and I accept the point that some people will need to understand exactly how the regime will work.

Amendment agreed to.

Clause 3, as amended, ordered to stand part of the Bill.