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Clause 39

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

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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 12:00 pm, 11th November 2008

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.