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Clause 11

Banking Bill – in a Public Bill Committee at 1:00 pm on 6th November 2008.

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Bridge bank

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

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The clause deals with the bridge bank option, which is the least familiar to the Committee. We all know what temporary public ownership is, and we all know about the private sector. I want to speak about some of the tensions that there might be in running a bridge bank. We touched on them briefly when dealing with the code. The arrangements generated a reasonable amount of comment during the consultation process, but there is concern about how a bridge bank might operate in practice.

In response to the July consultation, the British Bankers Association said:

“Under the bridge bank model the Bank of England would play a key role in setting strategic objectives and overseeing the management. Inevitably having the central bank involved in matters of commercial positioning, possibly with the bank also receiving public financial support, could raise competition policy issues.”

The code suggests that the Bank would be run on a conservative basis.

The City of London Law Society, in its response, said:

“We would...welcome further clarification regarding what a bridge bank would be able to do in terms of banking functions. Is it envisaged that it will be able to accept new deposits or to accept new business? There is a real risk that allowing it to carry out traditional banking activities could distort the inter-bank market.”

Not LIBOR in that context, but competition between banks. The society noted that it could be argued—as we did earlier this year in the context of Northern Rock—that because of the bridge bank’s healthy and attractive balance sheet and because it is in effect supported by the Authorities, there is the chance that it will have a competitive edge over other banks.”

In terms of running a bank on a conservative basis—I use the language of the code—to what extent will a bridge bank be able to carry out the normal activities of a bank? Will it be open to accepting new business? Will it be open to innovative competition with other banks?

One objective of the bridge bank is to try to facilitate a private sector purchase. It would clearly need to maintain the franchise value of the failing bank. Would that be maintained if the bank is run in a conservative fashion, or would it always be at the bottom end of the market? If so, that position could stifle it over time and limit its ability to grow. In the long term, it could reduce its franchise value, although that depends on how long it remains as a bridge bank. These issues would not necessarily be relevant if it was a bridge bank for only a month, but the rules for the reports that the bank would need to make allow for the possibility of the bridge bank lasting for more than a year. I would like a better understanding of the constraints under which a bridge bank would function.

Another aspect is who would run the bridge bank. The Bank of England is in charge of appointing a new board of directors, subject to the approval of the Financial Services Authority. The City of London Law Society said in its representation:

“The directors may be selected by the Bank of England from amongst the existing directors of the failing bank... but there is clearly a question as to whether such directors would be willing to take on the corporate governance of the bridge whom would they owe their duty of care—the Authorities or the failing bank’s creditors?”

The code says that the bridge bank’s board may or may not include employees of the bank, and that it will be decided case by case. However, according to the July consultation on the special resolution regime, the Bank of England is expected to weed out from the board of the failing bank the directors who contributed to its downfall. The example of Northern Rock may be instructive. The chief executive and the chairman resigned fairly quickly and new senior directors were appointed, but not all the executive members of the board of Northern Rock were replaced.

The third element to pick up on is how the bridge bank will be run at arm’s length from the Bank of England. Arm’s length is defined by the code as

“leaving day to day management of the bridge bank to its board of directors and keeping shareholder involvement at a strategic level.”

It later states that

“the Bank shall work with the board of directors to decide upon how the bridge bank should be operated... where appropriate the board shall produce a business plan setting out how the directors intend to operate the bridge bank in a manner pursuant to meeting the objectives.”

If the primary objective is to sell the bank on, how will that be reconciled with the challenge of the competitive issues? The arm’s length relationship the bank will have with the directors as the sole shareholder is the right  place to start, but there is also the potential move towards deciding how the bridge bank should be operated and where the division is to be drawn between the arm’s length relationship and the operational decisions. The Minister will not be immune to some of his colleagues’ comments about the actions that Northern Rock should be taking in the context of repossessions. When the Government take a controlling stake in RBS and a large minority stake in Lloyds HBOS, pressure will be placed on them as a significant shareholder to become involved in the day-to-day operations of the bank. How will the arrangements for bridge banks work to prevent that day-to-day interference?

Photo of John Pugh John Pugh Shadow Minister (Treasury) 1:15 pm, 6th November 2008

I have a different set of concerns. The clause starts:

“The second stabilisation option is to transfer all or part of the business of the bank to a company”.

I want to talk briefly about partial transfers. In our evidence sessions concerns were expressed about that remedy. Angela Knight was particularly vocal. Responding to a question from the hon. Member for Gosport, she said that

“we would like to see an entire bank move... Partial transfers come rather a long way down the list. Our preference would be not to have a partial transfer unless there has been a default. If it is the decision of Parliament that a partial transfer must remain as part of the SRR tools before a default is triggered, it is absolutely essential that the creditor’s rights are not reordered, that the netting is properly taken care of and that the decisions taken at the time cannot be retrospectively changed by clause 65.”——[Official Report, Banking Public Bill Committee, 21 October 2008; c. 48, Q136.]

She was a particularly eloquent witness. She gave some reasons for her stance and her distaste for a partial transfer earlier in the proceedings in answer to a question from the hon. Member for Fareham. [Interruption.] I am sorry. My phone is ringing. It is not a call from the British Banking Association, although one would have been helpful.

Angela Knight told the Committee that

“other people’s intervention regimes do not interfere with creditors’ rights, and netting agreements are preserved so that there is not the problem of not being able to net off your capital. Certainly, we have been told by a number of our members that if they could not net off, they would no longer be able to do that business here in the UK, so we would see a commensurate loss of a significant amount of business out of London.”——[Official Report, Banking Public Bill Committee, 21 October 2008; c. 38, Q109.]

The allegation is that there is a possibility on the horizon that fewer people will engage in banking activities in the City of London or in the UK.

I reiterate those concerns because they were legitimately brought up by the British Banking Association in a particularly eloquent and telling way. It may be that the concerns the association is voicing are well addressed by subsection 3, which provides for a code of practice that may allay the association’s concerns about what might be regarded as an unfair or improper partial transfer. We can return to the debate about toxic and non-toxic assets and how we treat them differently, but the Minister has heard the concerns of the BBA. Has he had time to consider and respond to them? The concern is primarily about the first sentence of the clause; the association has a distaste for partial transfers because it thinks that  as long as they are in the toolkit there will be detriment to City business, so I would like the Minister to respond to that concern.

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

I understand the concerns of the British Bankers Association on that matter, and my officials have had extensive discussions with its representatives. It is represented on the expert liaison group, whose views we have been listening to intently. It is fair to say that partial transfers are the most contentious part of the special resolution regime. We are keen to ensure that creditors are no worse off in the case of partial transfers, which is one of the reasons why we inserted clauses in the Bill that will enable us, through secondary legislation, to provide strong safeguards.

As I have explained, we are consulting on both the code and some of the legislation on safeguards for partial property transfers. If I may engage in a little publicity, the document “Special resolution regime: safeguards for partial property transfers” is available today at the very reasonable price of £14.35, but it is free to members of the Committee, who I am sure would like to take one from the brown box in the Committee Room. The document answers several of the points that the hon. Member for Southport raised because it specifically covers set off and netting arrangements, security interests, structured finance and third-party compensation. It includes consultation on the code, which the hon. Member for Fareham also talked about on several occasions. We are keen to see comments on the code from outside.

Photo of David Gauke David Gauke Shadow Minister (Treasury)

We will have a greater opportunity to debate those matters when we get to clause 43 and, to some extent, clause 42. Is the Minister saying that the safeguards will be included in the secondary legislation or in the code of practice? Presumably there will be a combination of the two, but can he give us some guidelines on what the balance will be?

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

The stakeholders we consulted this year have been very much of the view that they want the safeguards in secondary legislation, rather than in the code. We have taken that to heart, which is why we have produced the consultation document. It is right that those safeguards are enshrined in secondary legislation. When the hon. Member for Fareham has had an opportunity to look at what we are proposing, he might start to take a different view of the code than that expressed in his previous comments. Rather than putting the safeguards in the code, it is right that they should be enshrined in secondary legislation and that Parliament should have an opportunity to debate them. We have tried, as far as possible, to reflect the views of stakeholders in the secondary legislation.

The hon. Member for Fareham rightly said that it is easy to recognise what temporary public ownership or a private sector purchase are, but that a bridge bank is slightly different and might appear strange to people from outside looking at our deliberations, so I shall explain in a little more detail what the bridge bank option will do. In essence, the bridge bank option will give the Bank of England the opportunity to stabilise a bank, preserve franchise value and ensure that consumers have continued access to banking services. It will provide  the Bank with time to pursue a private sector solution where that could not otherwise have been arranged immediately by allowing, for example, potential acquirers the necessary time to carry out essential due diligence on the business.

The bridge bank option is important, as it enhances the possibility that the authorities can facilitate the onward sale of the bank to a private sector purchaser, which, as I have said, is the Government’s favoured option for bank resolution. I understand the views that Angela Knight from the British Bankers Association has expressed. In response to the hon. Member for Southport, the BBA and the Building Societies Association recognise the potential utility of the bridge bank as a tool, but they have concerns about the safeguard provisions and the situation of creditors, which we are trying to address.

Of course, it is important that bridge banks be managed in the right way. The hon. Member for Fareham raised issues about what we mean by management on a conservative basis. It is appropriate to set out how that will work in practice in greater detail and, to that end, the code of practice, which the Committee considered on clause 5 and which is available for consultation, makes illustrative provision.

It may be helpful to put on record the fact that the Bank of England will not profit from operating a bridge bank. The compensation provisions, which will be discussed in detail in due course, provide that a bank resolution fund must be established when a bridge bank is created. The fund provides the failing bank with a contingent economic interest in the resolution. The bank resolution fund is a scheme under which the failing bank becomes entitled to the proceeds from the sale of some or all of a bridge bank’s business, less any deductions necessary to reflect the use of public funds in the resolution, including the placing of public funds at contingent risk, or any other costs of the resolution. On the winding-up of the failing bank, the net proceeds of the resolution will flow to the creditors and, should creditor claims be satisfied in full, the shareholders of the failing bank.

Photo of Peter Viggers Peter Viggers Conservative, Gosport

I am listening carefully to the Minister. He said that the entitlement would be minus any amount reflecting the net cost. Is he referring to the Treasury and Bank of England costs of administering the bank? There must be management and administrative costs involved. I imagine that most costs would be ring-fenced within the bank, but there must be costs of administering the entity at the centre. How will the costing be done and how will the Government, through their various manifestations, charge for management?

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

My understanding of the legislation is that the Bank of England, which will be pursuing the stabilisation option, can retrieve its costs from the bridge bank. I am not aware that there are likely to be substantial Treasury costs involved, but if I have information about that, I will get back to the hon. Gentleman.

Let me take up the other points raised in the debate about the bridge bank being managed on a conservative basis. The bridge bank will carry out the banking business transferred to it, which is likely to be predominantly deposit taking. It could take on new business, but it is  not at all intended that it compete aggressively in the marketplace. Our intention is to return a bridge bank to the private sector swiftly, if that is consistent with the special resolution objective and meanwhile operate the bridge bank conservatively.

I do not believe that the bridge bank would have an unfair advantage over private sector banks or that it would distort competition. It would be inappropriate for a bridge bank to compete unfairly on the back of public sector support and we do not intend that to happen. EU state aid rules and other relevant competition rules would prohibit it in any case.

In conclusion, I believe that having the provisions as a tool will be an important part of what we need to put in place for the future. It would not be sufficient to have only the ability to take a bank into temporary public ownership or to transfer it to a private sector purchaser. This is an essential tool but, as with all these tools, we hope it will not have to be used. Given the circumstances in respect of bridge banks and the issue of partial transfers, it is right that we consult widely with the industry about the potential ramifications and that we take due consideration of the views expressed to us in response, which the hon. Members for Southport and for Fareham have already mentioned. I am confident that as a result of that consultation we can produce secondary legislation that will give safeguards on partial property transfers. Our early discussions with the industry have been positive.

Question put and agreed to.

Clause 11 ordered to stand part of the Bill.