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Clause 8

Banking Bill – in a Public Bill Committee at 9:45 am on 6th November 2008.

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Specific conditions: private sector purchaser and bridge bank

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

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I want to make a few brief remarks about clause 8 and to probe the public interest point that the Minister mentioned in our brief discussion on clause 7. The clause sets out the conditions that enable the Bank to use its share transfer or property transfer powers to  transfer a bank to a bridge bank or a private sector purchaser. Condition A is that the exercise of the power is necessary having regard to

“the stability of the financial system...the maintenance of public confidence in the stability of the banking system...or the protection of depositors.”

Those three points relate back to the objectives of the special resolution regime in clause 4. I can understand why that is the case. What surprises me about those powers—given the nature of the stabilisation, the share transfer and the property transfer powers—is that they do not have regard to objective 5 in clause 4 (8), which is

“to avoid interfering with property rights in contravention of a Convention right”.

If we are talking about the Bank exercising the stabilisation powers, then it would have to consider objective 5. Will the Minister expand a little on that?

Photo of Peter Bone Peter Bone Conservative, Wellingborough

We are now returning to an earlier argument that we had in which we said that the Government have some super-objectives, and that all the objectives listed in clause 4 do not balance each other. Now we have this clause, which states only three of the objectives rather than the five. Therefore the Government have, in effect, three super-objectives. I do not understand why the Government will not admit to that.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

My hon. Friend makes an important point. We debated the priority of the objectives, and we were told that there was no priority. However, we have a situation in which one of the objectives, which is relevant to the powers the Bank can exercise under clause 8, has been excluded. We must consider whether objective 5 in clause 4 has any value both in the Bill and in the context of the share and public transfer rights.

Condition B is phrased rather differently. It comes into play when the Treasury notifies the Bank that

“they have provided financial assistance in respect of a bank”.

Again, we have debated this matter. We have considered what financial assistance means and what types of financial assistance can trigger the special resolution regime. We know that the Government will come forward with secondary legislation on that. Again, we have a situation in which the objectives that condition B relates to are much more limited. Subsection (5) (a) says that

“the Treasury have recommended the Bank of England to exercise the stabilisation power on the grounds that it is necessary to protect the public interest.”

It is not clear whether that is the same public interest that is referred to in subsection (2), which is effectively in the first three options. Subsection (4), however, refers to the financial stability objective. The Treasury, through condition B, recommended that the Bank should exercise its stabilisation powers, but there is no reference to objective 5, which is about property rights. Given that those rights effectively effect a partial transfer, why is objective 5 not listed there? Concerns have been expressed about the impact of such powers on creditor rights. Therefore, it is surprising that objective 5 has not been included in clause 8.

Condition B can be satisfied only if

“the Treasury have recommended the Bank of England to exercise the stabilisation power” and if it is the Bank’s opinion that that is the best way to proceed. Will we ever know whether the Bank has turned down the Treasury’s request? Would the Bank ever turn down the Treasury’s request or is it one of those areas where we are back to the non-linear decision tree in which there is a general discussion and all the steps are announced at the same time?

I wonder whether the Minister will take the opportunity to explain which definition of financial stability applies in the clause. We have the broad definition in the code and the one set out in the evidence given to us at the start of Committee by Nigel Jenkinson of the Bank of England and provided in evidence to the Treasury Committee. The Bank’s working definition, supplied to us in the evidence session, is narrower than the definition in the code. I raised that with the Minister on Tuesday, but the question did not get a reply. It will be helpful to understand how the tripartite authorities will reconcile the two definitions of financial stability.

Returning to this slightly non-linear process, I think that clause 8 is subordinate to clause 7, whereas the language in clause 8(6) suggests that it is in addition to it and that the two work together. The provisions in clause 8 can be exercised only if a decision under clause 7 has been reached, but the language in clause 8 does not reflect that.

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury 10:00 am, 6th November 2008

The authorities recognise that the stabilisation powers can alter or remove property rights and involve public authorities taking control of commercial institutions. Therefore, the special resolution regime stabilisation powers should be used only when they are justified in the public interest. To that end, in addition to the general conditions provided in clause 7, the Bill requires further specific conditions to be met before the authorities can deploy particular SRR stabilisation options, and those are set out in clause 8. The clause requires the Bank of England to be satisfied that specific conditions have been met before exercising a stabilisation power to transfer the whole or part of a failing bank to a private sector purchaser or a bridge bank. I draw the attention of the Committee to the structure of the conditions, which require that one of two specific conditions be met before the Bank can act.

Condition A ensures that, before the Bank of England can exercise the powers to transfer a bank to a private sector third party or a bridge bank, it needs to be satisfied that exercising the powers is necessary, having regard to the public interest in the stability of the financial systems of the UK, in the maintenance of public confidence in the stability of the banking systems and in the protection of depositors. Those specific conditions provide a higher test than a public interest test framed in wholly general terms. Effectively, they set out in the Bill those elements of the SRR objectives, which the hon. Member for Fareham noted we discussed under clause 4, to which the Bank of England must have regard before deploying its resolution tools. Before determining that the conditions are met, the Bank of England must consult with both the Treasury and the FSA.

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

May I reply to the points raised by the hon. Member for Fareham? I will then happily give way. The hon. Member for Fareham asked why the specific conditions cover all the SRR objectives, but ignore the SRR objective of protecting property rights. The aim of the stabilisation tools is to protect depositors and to maintain financial stability and confidence in the banking system, or to protect public funds if they have been invested in the bank before the SRR powers were exercised. The authorities must have regard to the objective of protecting property rights when exercising the tools, so it is not appropriate for it to be a public interest test that justifies using the tools.

Photo of Peter Bone Peter Bone Conservative, Wellingborough

Towards the end of his speech the Minister said, “the stability of the financial systems of the UK...and the protection of depositors.” It says in the Bill “or”. If it is “and”, all the conditions will have to be met; if it is “or”, only the protection of depositors. I wonder which it is—the collection of the three or the single one. If it is as it says in the Bill, not as the Minister said, it could be just the protection of depositors, irrespective of the other two conditions.

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

My understanding is that it could specifically refer just to the protection of depositors. It could refer to all three of them but singly would be possible.

Condition B in clause 8 applies to the situation where the Treasury has provided financial assistance to a failing bank

“for the purpose of resolving or reducing a serious threat to the stability of the financial systems”.

In such situations, to protect public funds, the Bill requires the Treasury to lead in judging that a stabilisation power is necessary to protect the public interest but the Bank of England will still lead in deciding that an exercise of a stabilisation tool best protects that public interest. This arrangement ensures that both authorities exercise powers under their mandates.

The hon. Member for Fareham also asked about definitions of financial stability. One definition of financial stability relates specifically to the Bank’s exercise of its powers under the SRR. There is also a wider definition of financial stability. That explains why there are different definitions. It might be helpful if I write to the Committee and explain the difference and the reasons for it.

This is an important clause that ensures that the stabilisation tools are used only when it is necessary to protect financial stability, confidence in the banking system or depositors.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am grateful to the Minister for his reply, which reinforced the intervention about the hierarchy of objectives made by my hon. Friend the Member for Wellingborough during my earlier remarks. It appears that the principal objective is the protection of depositors. Whenever we debate what the Bill seeks to achieve it appears that the interests of investors and creditors rank pretty low down the list of priorities. That is reinforced by this clause, which enables the Bank to disrupt traditional property rights because it gives the Bank the power eventually to have partial transfers. The message that comes through clearly is the relatively low  priority given to the rights of creditors. That goes back to the concern people have about this Bill—that the power given by the Bill to the tripartite authorities is not well constrained when it comes to the interests of people other than depositors. The Government need to think carefully about how that protection of creditors is expressed or given—we will come on to that again in clauses 42 and 43. I do not get the impression at the moment that creditors are given a particularly high priority. That is why I would expect to see the Government take the interests of creditors more seriously. The Bank could have had regard in clause 8 to objective 5 in the same way as it has regard to the other objectives. There is a gap that the Government need to address.

Question put and agreed to.

Clause 8 ordered to stand part of the Bill.