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Clause 11

Part of Banking Bill – in a Public Bill Committee at 1:15 pm 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 1:15 pm, 6th November 2008

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.