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14 Oct 2008 : Column 697

The Banking (Special Provisions) Act 2008, which we passed in February, will lapse on 20 February next year. If the Bill has not received Royal Assent by then, we will have to introduce a one-clause Bill to extend that Act. Obviously, I would much prefer to have the present Bill on the statute book by that stage. I welcome what has been said about that both publicly and privately.

Mr. George Osborne (Tatton) (Con): Let me repeat in public what I have told the Chancellor in private—that we will do everything we can to get the Bill on the statute book by next February, when the special powers taken over Northern Rock will expire.

Frank Dobson (Holborn and St. Pancras) (Lab): Which you voted against.

Mr. Osborne: The point that I made was that it would have been good to have the present Bill a bit earlier, so that we would not have needed those emergency powers. However, that was my Second Reading speech on the previous Bill, so we will wait for today’s speech.

On the specific point about the code of practice, which is absolutely crucial to the Bill—it is how the special resolution regime will actually operate, be triggered and so on—can the Chancellor assure us, in the spirit of our co-operation, that the Government will publish it as soon as possible so that we can debate in Committee how the bank failure regime will operate, which is at the heart of the Bill?

Mr. Darling: I can give the hon. Gentleman that undertaking. As I understand it, it has been agreed through the usual channels that the Bill will be taken in a slightly different order from that in which the clauses appear, so that when we reach the special resolution regime we will have the code of conduct. I understand that that has already been agreed, and I am quite sure that we can co-operate on that and other matters.

As the hon. Gentleman mentioned one part of his Second Reading speech on the previous Bill, I shall say that it would have been quite impossible to produce a 200-clause Bill this February. What I had to do earlier this year was ensure that we had powers to nationalise Northern Rock and—very presciently, as it turns out—to take additional powers. Otherwise, we would have been in real difficulties over the past few weeks.

Stewart Hosie (Dundee, East) (SNP): On that point, it is probably worth clarifying that the genesis of this Bill was in the depositor protection consultation of last October, when powers were sought to deal with failing banks based on the economic crisis that started last summer. The Bill, 200 clauses though it is, will not be on the statute book until 2009, so it is not exactly decisive action in relation to that point.

Mr. Darling: I shall come to that in a moment, but I would just say that we took action in February. I remember the hon. Member for Runnymede and Weybridge (Mr. Hammond) asking articulately and forcefully at the time why we were going beyond the clauses necessary to acquire Northern Rock. I had to put it somewhat delicately because I knew a number of things that were not then in the public domain, but I said that there might be cases in which we would have to intervene.

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If we had not had the special powers for which we argued in February, I could not have dealt with the Bradford & Bingley situation, which arose during the parliamentary recess. We would have had to recall the House, which would have exacerbated an already difficult situation. Nor could we have dealt with the collapse of the Icelandic banks Kaupthing and Heritable if we had not had those powers. We do not have to imagine what life would be like without the current Bill, because we have seen in the past few months what can happen, and what can happen very quickly. I am glad that we got the special powers, and I am sorry that the Opposition voted against them. It was essential to have them, otherwise we would have been in real difficulty.

Several hon. Members rose

Mr. Darling: I shall take one intervention, then I would quite like to get to clause 1 before the day is out.

Mr. Peter Bone (Wellingborough) (Con): My recollection is that, at the time, the Chancellor said that Northern Rock was unique and that no other financial business was in trouble. Have I misunderstood the situation?

Mr. Darling: The hon. Gentleman may well want to check his recollection. We would not have taken those powers if we had not anticipated that there might be difficulties. Indeed, I remember a right hon. Gentleman—he is not in his place, so I shall not name him—specifically asking me why I was mentioning building societies. Building societies were included in that Bill because we thought there might be occasions when we had to do something to help them. That piece of legislation was essential because it looked ahead to what, I think, all of us could have contemplated might happen in the ensuing few months. As I say, I am glad that eventually we got parliamentary approval for the Bill. The only point I am making, for those who doubted whether that Bill was necessary, is that events have proved that it was very necessary. It is also very necessary for us to pass this Bill.

Mark Lazarowicz rose—

Mr. Darling: I hope to return to it. I shall give way to my hon. Friend, not least because he is a fellow Edinburgh MP.

Mark Lazarowicz: Without the powers that the Government had from a number of directions they would not have been able to come forward with a proposed merger between HBOS and Lloyds TSB. My right hon. Friend will be aware that people were commenting this morning, in Scotland, in particular, that, given last week’s announcements, the merger should not go ahead. What does he say to people who take that point of view?

Mr. Darling: My hon. Friend will recall that the decision to merge was taken by the boards of HBOS and Lloyds TSB; it was their commercial judgment that was important. It was the judgment of ourselves, the Financial Services Authority and the Bank of England that it was also in the interests of greater financial stability that the merger should go through. Indeed, that is why we amended the provisions on the competition
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law. As I said at the time, that was one example of where financial stability trumped competition concerns, and that remains our view.

Mr. Kenneth Clarke (Rushcliffe) (Con): I understood and supported at the time the idea that the competition laws had to be removed, because there was a serious risk of the collapse of one or other—or both—of the banks. That is no longer the case; the Government are now in a position to take a substantial stake in those banks if they remain separate, and they undoubtedly will do so if the banks merge. What is the point of setting aside competition law now? Why do the Government want to take a stake in a large bank that will have a dominant market share that would not have been permitted if the banks had carried on, financially solvent?

Mr. Darling: As the right hon. and learned Gentleman knows, we are proposing—I set this out yesterday—to take a stake in the merged bank. The decision to go ahead with the merger was primarily taken by the two boards; they considered it again at the weekend. It is still my view that the merger would not just be beneficial for them—that is their decision primarily; in the interests of financial stability, the two banks together would be stronger than the separate organisations. That remains our position, but, primarily, the decision to merge was taken by the two banks because they thought that to do so was in their best interests.

I want to get on to the Bill. First, I remind the House of the basic supervisory architecture that has been in place for the past 10 years and remains so. In addition to its prior existing functions, the Bank of England has, since the Bank of England Act 1998, also been responsible for monetary policy. It has a responsibility for ensuring financial stability, but that is not a statutory responsibility, and that is one of the things that the Bill seeks to change. The FSA brought together eight or nine different regulators. That was the right thing to do, and I do not think that anyone would argue for going back to the situation before then. Interestingly, the United States is seeking to follow that model, with legislation being proposed there to do the same thing. The Bank of England, the FSA and, of course, the Treasury—because of the wider public interest and financial interest—will remain essentially as they are. The one change that we propose is to give the Bank of England a statutory duty in relation to financial stability, and that is very important.

Mr. Gerald Howarth (Aldershot) (Con): If that minor change is all that is needed, perhaps the Chancellor could explain to the British people how on earth we have come to this pass. The FSA has been responsible for the authorising of individual practitioners in the banking business and allowed the ramping up of capital ratios, so that we have reached this dreadful state of affairs. Has the Chancellor got no explanation of how that happened under the regulation of the FSA, and no alternative approach to doing something about it apart from this minor tinkering?

Mr. Darling: Perhaps I should have stuck to my guns and gone through the Bill. We are not just proposing that one change: we are proposing many changes. However, the point I was making was that the basic architecture
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of the Bank of England having responsibility for monetary policy and an overall responsibility for financial stability, and the FSA regulating and supervising each individual institution, is right. We consulted on that point, and the vast majority of people said that that basic architecture was right. Of course, the FSA has to learn the lessons of what happened with Northern Rock and other institutions. As I said earlier, of course improvements need to be made to the supervisory regime, but no one is arguing that we should go back to the past, when the Bank of England regulated some aspects of the banking system but not others and we had eight or nine different regulators for everything else.

Several hon. Members rose

Mr. Darling: No, I shall make some progress; otherwise it will not be fair to those who wish to speak in the debate.

The Bill will build on that framework, and I shall outline the broad scheme that it follows. Part 1 provides for a permanent special resolution regime that is at the heart of what is proposed. As hon. Members are aware, it will allow us to accelerate the transfer of a bank to another private sector bank or to transfer some or all of a bank’s business to a publicly controlled bridge bank, on the way to a private sector sale. It will also modify the insolvency procedure and allow us to take a bank into temporary public ownership, should that be necessary. Part 1 also includes measures to strengthen the Bank of England, which I have touched on and to which I shall return, including a role in overseeing the inter-bank payment system because of its possible systemic importance.

Part 4 of the Bill will improve protection for depositors through the Financial Services Compensation Scheme, and it includes other measures to build confidence. I shall return to those points later, but I wish first to deal with the provisions in part 7 to strengthen the Bank of England. These will have a new statutory objective of financial stability. They will provide the Bank with statutory immunity as a monetary authority in pursuit of its financial stability objectives. The provisions will also establish a financial stability committee as a sub-committee of the court. That is important. The Monetary Policy Committee, which of course determines interest rates independently of the Government, has been a great success and other countries have followed our lead. We also need to bring in outside expertise to advise the Governor on financial stability. The court, which is at present too large at 19, will be reduced to 12 members.

The committee of court members will bring in expertise from the City and elsewhere to advise the Governor, and that will be important. It will ensure that the Governor has at his disposal a wider range of advice. Its deliberations will be made public, although probably not immediately in many cases for obvious reasons. In situations such as we have seen in the past few weeks, it would not be wise to provide a daily, weekly or even monthly commentary on what has been discussed, but the Bank will consider how the deliberations of the committee can be publicised when it is right to do so.

Clause 229 of the Bill, as I said earlier, will allow the Bank of England to provide liquidity assistance to building societies on the same basis as banks. In that difficult area, I wish to draw the House’s attention to
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further provisions on the disclosure of Bank of England assistance. The matter arose throughout last year, especially when we were dealing with Northern Rock in the autumn. The Bank must publish its balance sheet weekly at the moment, but that proved quite difficult in the autumn. Of course, the Bank published that information, but I am concerned that when we are trying to help an institution to get through a difficult period, the very fact that we are helping that institution can actually be quite damaging to it, as we found with Northern Rock. The Bill seeks to make changes to the situation.

I want to emphasise that we need to find a mechanism that allows the fact that there has been assistance to be dealt with transparently, whether in general terms or when matters with particular institutions are fully resolved. The Bank is reflecting on the matter, but I want to draw the House’s attention to it as it came up in the Treasury Committee time and again. It was a live issue 12 months ago and it could potentially become an issue again at some stage in the future. It is important that we get that right.

As I said, part 5 of the Bill formalises the Bank of England’s role in the oversight of the payment systems. That is important. The FSA regulates the recognised clearing houses, but the Bank of England will have a role in the oversight of the system as a whole.

Let me turn to the special resolution regime, which is key to much of what we are trying to achieve.

Mr. Michael Jack (Fylde) (Con): The Chancellor referred to the provision of information about what is going on in the banking system, but I can find nowhere in the Bill any statutory requirement to report to Parliament and the House on the conduct of banking, bearing in mind the substantial amounts of public money that are being invested in the schemes the Chancellor is outlining. Will he reflect carefully during the passage of the Bill on whether there should be a requirement for a statutory report about the conduct of our banking system to be laid before the House, perhaps every six months, so that the House can, if necessary, debate it?

Mr. Darling: I am sure that that point will be raised in Committee. The conduct of banking strikes me as a very wide subject—perhaps the subject of a book rather than a report. I am sure that the right hon. Gentleman, who is clearly making a bid to his Whip to get on to the Committee, might want to raise that point—

Mr. Jack indicated dissent.

Mr. Darling: The right hon. Gentleman shakes his head.

Let me turn to the special resolution regime. The Bill establishes a permanent special resolution regime that provides the authorities with options to deal with banks that get into difficulties and to protect depositors. By sheer coincidence, the provisions can be found in clause 4. We can protect and enhance the stability of the financial systems and public confidence, and we can protect depositors and public funds, and the Bill provides for an accelerated transfer to the private sector and sets up a bridge bank if such a provision is necessary. As I said earlier, the Bill provides powers to modify the insolvency procedure and allows for temporary public ownership.

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In most cases, when a bank gets into difficulty the problems can be resolved either through regulatory interventions or voluntary action. The special resolution regime provides a clear regime for failing banks that removes control of the banks from management. It provides overriding powers over shareholders and directors.

The authorities will have clear and distinct roles. The FSA will lead in deciding that a bank is failing, as set out in clause 7. The Bank of England will lead in the operation of the special resolution regime, a provision that is set out in clause 8, but Ministers will retain control of decisions on public finances, as set out in clauses 66 to 70. The Financial Services Compensation Scheme will continue to deliver the payment of compensation.

The FSA will decide whether or not a bank is failing. It will have to consult the Bank and the Treasury before deciding that the conditions have been met. The Bill provides that the Bank of England can decide whether there is a systemic risk and that the Treasury can recommend to the Bank that action might be taken if it has been providing financial support for banks. The Bank then has two options: it can decide to transfer a bank to a third party or can transfer the bank’s assets into what is known as a bridge bank, which is owned, established and controlled by the Bank of England, pending reconstruction. Thereafter, the bank can either be transferred in whole or in part to a private sector bidder as appropriate.

What the Bill does is provide a mechanism that is not there at the moment. That mechanism will allow us to take a bank that is in difficulties out of the hands of its present management and, if it cannot be sold to a third party, either put it into a bridge bank or, if necessary, take it into public ownership.

Mr. Osborne rose—

Mr. Andrew Pelling (Croydon, Central) (Ind) rose—

Mr. Darling: I shall give way first to the shadow Chancellor, and then to the hon. Member for Croydon, Central (Mr. Pelling).

Mr. Osborne: I am grateful to the Chancellor for giving way. One area of disagreement has been about who pulls the trigger on the special resolution regime. As he knows, we think that the Bank of England should have that power, and so too does the Governor of the Bank of England. Did the Governor not in effect demonstrate that he had the de facto power to do that when he prevented Bradford & Bingley from accessing the special liquidity scheme and therefore forced the rest of the tripartite committee to deal with a bank rescue situation? No doubt there was consultation, but he nevertheless had that power. If the Bank of England has that de facto power, would it not be better to put it formally in the Bill, so that it can be properly considered by Parliament?

Mr. Darling: I had rather thought that the hon. Gentleman was now not insisting on that point, but he mentioned Bradford & Bingley. There comes a point with the special liquidity scheme when the Governor of the Bank of England has to form a judgment as to whether it is prudent to keep providing an institution with funds if he thinks that it will not get through.

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