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Clause 7

Part of Banking Bill – in a Public Bill Committee at 9:15 am on 6th November 2008.

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Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury 9:15 am, 6th November 2008

I shall happily cover that point, although the hon. Member for Gosport has raised it and we have discussed it on a number of occasions, including on Second Reading and in debate on other parts of the Bill.

Let me explain why the tests we are putting in place with these two general conditions are the right ones. The purpose of the clause is to make it absolutely clear that the authorities will not—indeed, cannot—use the stabilisation powers until it is clear that a bank is failing and that voluntary or regulatory action is no longer appropriate to resolve the situation. Clause 7 has two conditions that need to be met. The first is that

“the bank is failing, or is likely to fail, to satisfy the threshold conditions”.

The second is that

“having regard to timing and other relevant circumstances it is not reasonably likely that (ignoring the stabilisation powers) action will be taken by or in respect of the bank that will enable the bank to satisfy the threshold conditions.”

That point of “reasonably likely” has been raised by the hon. Member for South-East Cornwall with his amendment and the word “timing” was discussed by the hon. Member for Fareham in his contribution. On timing, it is not appropriate to set in the Bill a future time limit by which the bank has to demonstrate that it is reasonably likely that it can turn the situation around. The two conditions are to ensure that the bank is put into the special resolution regime at the right time. The cumulative effect of both conditions achieves that, as they cover a decision based on, in the first instance, the current situation of the bank regarding quantitative and qualitative conditions, and a decision about whether the future turnaround of the bank is unlikely. Those decisions are designed to ensure that the SRR powers can be exercised before the banks enter insolvency. One reason for that—as we have discussed in relation to other clauses—is to preserve whatever residual value there may be in the failing bank, which is a point that the hon. Member for South-East Cornwall made strongly on Tuesday. Acting at that time increases the chance of a private sector solution or a swift resolution through a bridge bank. Given that fact, the reasonable likelihood for the second test provides the right level of assurance for stakeholders that voluntary or regulatory action will no longer work, while increasing the prospect of a successful resolution.

The use of any of the stabilisation options also includes a strong public interest test which we will debate in clause 8. As Lord Turner recently said to the Treasury Committee, things can move very quickly when a bank is in a failing situation. These are matters of judgment, but I do not think that the amendment proposed by the hon. Member for South-East Cornwall would help. We believe that the two conditions set the bar at the appropriate level.

My hon. Friend the Member for Northampton, North asked the familiar question about why the FSA should pull the trigger rather than the Bank of England. We believe that the FSA, as the regulator of firms, should be the lead authority in deciding when a bank is failing. That position was supported by respondents to the January and July consultations. Giving the trigger to another institution would be likely to lead to dual regulation of financial firms, which would be wasteful and costly. Obviously—I have made this point on a number of occasions—at such a time the tripartite authorities would be in close contact, as they are now.

If the hon. Gentleman feels that he has to press the amendment, I will encourage the Committee to oppose it. We believe that the test of reasonable likelihood—the two conditions in clause 7 and the public interest safeguards in clause 8—sets the right level, but I appreciate the probing way in which he has pursued the amendment.