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Clause 39

Banking Bill – in a Public Bill Committee at 12:00 pm on 11th November 2008.

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Supplemental instruments

Photo of Roger Gale Roger Gale Conservative, North Thanet

With this it will be convenient to discuss the following: Government amendment No. 97.

Government new clause 12—Reverse property transfer

Government new clause 13—Temporary public ownership: reverse property transfer.

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

The measures in this group are analogous to those that we debated under clause 25 on the share transfer powers.

I have already referred to the general context in which transfers may take place. The general principle is that due to the swiftness with which the authorities may have to act, and the complex nature of the businesses that they are acting on, it is sensible to provide for considerable flexibility. These measures provide further flexibility for supplemental and reverse property transfers.

Supplemental and reverse property transfers provide particularly valuable flexibility for property transfers. Not only do the powers provide the Bank of England with the means to ensure that an initial property transfer is effective, but they may also produce a better outcome for the resolution. For example, a further transfer of property to a bridge bank may increase the value of the bridge bank, in turn increasing the amount that a private sector purchaser is prepared to pay for the business. That will be treated as proceeds of resolution under a bank resolution fund, the net proceeds being available for the failing bank.

The Bill already provides flexibility to the Bank of England to make supplemental transfers in relation to the bridge bank stabilisation option. The Government consider it desirable to extend that power. Amendment No. 96 provides the Bank of England with the flexibility to effect a supplemental property transfer to a private sector purchaser. As I made clear in the debate last week on the analogous Government amendment for supplemental share transfers, the measure would be used where a transfer to a private sector purchaser had occurred at speed and before all due diligence could be completed. In that situation, a supplemental transfer of property could be made to ensure that the purchaser had all the relevant things for carrying on the banking business effectively.

The existence of the power should increase the likelihood of an immediate private sector solution being successful, as commercial purchasers are assured that the authorities have the means to ensure that the transfer is fully effective. However, I should emphasise that a supplemental transfer would never be made simply because a private sector purchaser had requested it. The action would have to meet the resolution objectives, and the authorities would have to consider it necessary and proportionate.

New clauses 12 and 13 introduce powers to make reverse property transfers. Those powers are available in three situations. The first is when the Bank of England has made an initial transfer to a bridge bank and wishes to transfer some of the property back to the failing  bank. The second is when the Treasury has taken a bank into temporary public ownership, transfers property to a publicly owned onward transferee and subsequently wishes to transfer some property back to the bank in temporary public ownership. The third is when the Bank of England has a bridge bank, transfers some of its property to a publicly owned onward transferee and subsequently wishes to transfer some property back to the bridge bank.

In summary, the Government amendments provide the flexibility to make reverse property transfers subject to one constraint—that property may not be transferred back from the private sector purchaser.

It may help the Committee if I provide some examples of how the power may be used. If the Bank of England had transferred the majority of a failing bank’s business to a bridge bank but it became clear in due course that some small aspect of its balance sheet was not attractive to a private sector purchaser, that item could be transferred back to the failing bank, allowing the bridge bank to be sold. Another example would be using the power to transfer back if a particular class of asset suddenly deteriorated in quality. In summary, the powers may be used to optimise the balance sheet of the bridge bank.

The partial transfer safeguards apply to supplemental and reverse property transfers. They offer three protections. First, the authorities will need to provide the same degree of protection to set-off and netting arrangements when effecting supplemental and reverse property transfers. Secondly, security interests will need to be protected. Thirdly, supplemental and reverse property transfers will need to be taken into account when determining the compensation amount for creditors left in the residual bank. I look forward to debating those safeguards in detail when we come to clauses 42, 43 and 55.

In addition, the Government consider it appropriate to introduce another safeguard to run alongside the flexibility provided by the amendments. It is proposed that secondary legislation should set out a list of property rights and liabilities that may not be transferred back. For example, if a creditor in a bridge bank thought that the bridge bank would be transferred back to the failing bank, the creditor may not have sufficient confidence to continue doing business with the bridge bank. In broad terms, the Government therefore propose to protect liability holders from being transferred back. That, of course, includes depositors. I emphasise that in no circumstances would protected depositors be transferred back. The consultation document on safeguards, published last Thursday, provides further detail on this point; the document also consults on what types of asset and liability should be protected.

To conclude, the Government consider this group of amendments and new clause to be a worthwhile addition to the Bill. I remind the Committee that when using the powers provided by the amendments, the authorities must have regard to the special resolution objectives. They will guide any decision to make a supplemental or reverse property transfer. I hope that the Committee will accept the amendments and new clauses.

Photo of David Gauke David Gauke Shadow Minister (Treasury) 12:15 pm, 11th November 2008

The Minister was right to mention safeguards in this context. I hope that we will turn to them shortly, although I note that according to the discussion paper that the Government produced last week, they are at an  earlier stage of development than others, and draft secondary legislation has not yet been prepared. We are therefore unable to debate the detail of reverse and supplemental transfers today. We will return to that subject later.

The Minister gave hypothetical examples of how the provisions in the Government amendments and new clauses would be of assistance. That was a great help. However, as the Treasury’s consultation paper makes clear, the amendments are driven by

“the light of recent experience”.

We may talk about hypothetical examples, but partial property transfers have already happened. We have seen it with Bradford & Bingley and with Kaupthing and Heritable. The Government are therefore able to benefit from the experience of those processes to find weaknesses within the system and seek to improve it.

It seems that the amendments, which have come relatively late in the process, derive from the experience of Bradford & Bingley and the Icelandic banks. The Minister will correct me if I am wrong, but that is the impression given by the Treasury document, which on two occasions says that in the light of recent experience, the Government consider it appropriate to increase flexibility.

We are not against flexibility in these circumstances. We have some sympathy with what the Government are seeking to do and the Minister made a reasonable case for the provisions. However, they seem to be a consequence of something happening in the Bradford & Bingley and Icelandic bank cases, so it might help the Committee if the Minister could explain the particular problems that arose in those cases and why the clauses would be helpful. He gave examples which sounded hypothetical, but are they in fact rooted in the experience of the past few weeks?

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

I fear that I shall have to disappoint the hon. Gentleman. I do not want to get drawn into a detailed discussion of Bradford & Bingley or Kaupthing Singer & Friedlander and Edge as these are obviously very recent events. In response to those circumstances and to the thinking that that has engendered within the authorities, we believe that the flexibilities in the amendments and new clauses could be beneficial in situations that might occur. We believe that the additional flexibility could enable successful resolutions and, as I indicated in my initial remarks, potentially optimise the balance sheet of a bridge bank and make the transfer to a private sector purchaser more likely.

Photo of David Gauke David Gauke Shadow Minister (Treasury)

I am not sure that it is entirely appropriate to decline to discuss a matter because it arises from recent events. The Committee is capable of discussing recent events. I stress that twice in three paragraphs the Treasury document makes it clear that amendments were introduced in the light of recent experience. It would be helpful to the Committee to know what that recent experience is.

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

As I explained, recent experience is obviously framed by specific situations in which the Government and the authorities have taken action, but  it has also produced a great deal of thinking within the authorities about what powers are needed. It has given us the opportunity to look at hypothetical circumstances as well as real situations when framing the legislation. As a result of those broad deliberations, we believed that it was appropriate to provide additional flexibilities for the future. I do not want to be drawn on the detail, not because I am not happy to defend the actions that we have taken—far from it—but there is still the possibility of future litigation, so it is probably best that the detail of these matters is not directly discussed.

Photo of David Gauke David Gauke Shadow Minister (Treasury)

I am grateful to the Minister. May I put it another way? I take the point that events may inspire deeper thinking, new circumstances may emerge and hypothetical circumstances may be considered, but would he say that the inability to carry out supplemental and reverse transfers in the Bradford & Bingley and Icelandic cases has proven to be disadvantageous to the Government in trying to address those matters?

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

I do not want to get drawn on to that ground. We should bear in mind that we often deal with situations in which action needs to be taken very swiftly indeed, with only limited time for detailed analysis. As I explained earlier, in some cases due diligence will not have been possible. In those circumstances, having the flexibility needed to take rapid action can help to maintain the value of a failing bank. I think the hon. Gentleman broadly accepts what we are trying to do with the powers and he is trying to press us on the detail. I have explained to him why some of that is difficult, but the powers are, in our view, worth while and needed.

Photo of Peter Bone Peter Bone Conservative, Wellingborough

I quite understand the Minister not wanting to be drawn on the specifics of the Bradford & Bingley situation but, in general terms and without being specific, would the Bradford & Bingley transfers have been easier if these tools had been in place?

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

The actions that the Government have taken with regard to Bradford & Bingley are entirely right, and those who look at these matters from outside welcomed them. It is not helpful to try to retrofit the experience of Bradford & Bingley into the Bill’s deliberations, although I am being invited to do so. The key learning points have been that the speed of events and the uncertainty that often arises require the flexibility to take action and the ability to transfer back, with safeguards in place, so that if a deal is done with a private sector purchaser, we will not go back on it. Being absolutely decisive and certain in that is helpful. The measure is designed to allow successful resolutions in the future, and I hope the amendment is agreed to.

Amendment agreed to.

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

Photo of David Gauke David Gauke Shadow Minister (Treasury)

I have a brief question about drafting, which applies elsewhere. Subsection (6) states that:

“Before making a supplemental property transfer instrument the Bank of England must consult...the FSA, and...the Treasury.”

As far as I can see, there is no real guidance about what is supposed to flow from that. I query whether the wording should be “notify” rather than “consult”, because  it is not clear what the FSA and the Treasury are being asked, and how the Bank of England should react to any responses received from them. Can the Minister outline how he sees that aspect working and why “consult” rather than “notify” is used?

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury 12:30 pm, 11th November 2008

We have discussed similar subsections in other parts of the Bill and at all stages I have been at pains to point out that the authorities work extremely closely together in these situations and on the exercise of the special resolution regime. When we are talking about supplemental property transfer instruments, it is important that we continue the dialogue among the Bank of England, the FSA and the Treasury. The word “consult” is right rather than “notify” when we expect discussions to take place. In the normal way in which these events are handled, we would expect a close consultation not just on transfer instruments, but far more broadly.

Question put and agreed to.

Clause 39, as amended, ordered to stand part of the Bill.

Clause 40 ordered to stand part of the Bill.