Banking Bill

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Dr. Pugh: But you do recognise the anxiety there, that leaks of one kind or another will create more problems than you originally started with?
Ian Pearson: I am sorry?
Dr. Pugh: You do recognise the problem that if a degree of transparency causes panic in the market, to some extent the special resolution regime will not work as perfectly as it might?
Ian Pearson: Let me come on to that point. There is first the point about getting the legislation right, and then how it will be implemented if it is thought right to do so in the future. On that latter secondary point, we have been clear in the legislation that it is the responsibility of the Financial Services Authority to take the decision to initiate the special resolution regime. It is the Bank of England’s responsibility to decide which tool to use, and its implementation of that option must be presented to the markets in a single step. I agree that any period of uncertainty surrounding these processes could undermine the resolution of a failing bank. That is why it is important that the authorities work closely together on this, and why although there are clear roles and responsibilities—and rightly so—there will be close working between the three authorities.
Q 16Ms Sally Keeble (Northampton, North) (Lab): I want to ask some questions about the regime for depositor protection. To what extent do you think that in setting up the enhanced scheme, the Government have abandoned the idea of moral hazard and consumer responsibility, by diversifying the risk across investments?
Ian Pearson: I do not think that we should abandon the principle of moral hazard, but the actions taken in the past to ensure stability were right. As my hon. Friend will be aware, the FSA recently increased the compensation limit to £50,000. It is currently consulting on reforms to the scheme. We have made it clear that the Government will do whatever it takes to ensure that depositors have confidence in their savings, and that is the right approach in the current circumstances. However, you should not assume that, by saying that, we have completely abandoned the concept of moral hazard, because that would be the wrong thing to do.
Q 17Ms Keeble: When Mervyn King came to see us he said that a scheme like this, if the banks were to pre-fund it, would amount to tens of billions of pounds, which he called “non-negligible”. Since then, to maintain confidence in the banking system has cost more than that—it has been hundreds of billions. What modelling have you done about how much would actually be needed for the scheme? What kind of bank collapse would it be able to deal with? Could it deal with an HBOS? What size of bank? When will you publish the draft regulations—there are some in clauses 155 onwards, but I mean more detailed ones?
Ian Pearson: I will let Emil answer the question about regulations, but I will say something about the broader approach. When the Governor of the Bank of England came to speak to you, he did so in slightly different times. Many of us have been living these events day by day, and the unprecedented crisis that we saw in global financial markets meant that we had to take unprecedented action, and rightly so. That is why the Government have said that they will do whatever it takes when it comes to deposits, and that is why we have seen the bank capitalisation programme and the money going in to ensure liquidity and support inter-bank lending. Many other countries have adopted that approach across the world, and it has been the right one to try to bring stability to the financial system.
Q 18Ms Keeble: But what size collapse would you expect this to deal with? How much money would you expect to be in the kitty, and where would it come from?
Ian Pearson: It is not helpful to talk about what size collapse there might be—that is not a place we want to go to. Emil, did you want to say something about regulation?
Emil Levendoğlu: Absolutely. As Ministers have made clear, the power to pre-fund the Financial Services Compensation Scheme, in part 4 of the Bill, is taken as a power to be used in the future—the medium to long term. This would not be the appropriate time to introduce pre-funding, and there is no plan to introduce draft regulations until a decision has been taken as to whether to proceed with pre-funding. That will be at some point in the future when market conditions have changed.
Q 19Ms Keeble: What—improved or got worse? That is a serious question. If the decision is to be taken in the future, at what point would that happen?
Ian Pearson: Perhaps I can reply to that. The Government will make a decision, in conjunction with the FSA and the Bank of England, as to when the economic and financial circumstances might be appropriate to make progress with pre-funding. As Emil said, we want to make that decision before publishing regulations.
Q 20Ms Keeble: So in the meantime, it is Government funded?
Ian Pearson: The Government have provided a loan to the financial services compensation fund.
Q 21Dr. Pugh: May we go back to depositor protection and the variations in it? When Northern Rock began to have difficulties, the compensation scheme changed and went up to 90 per cent. It went up to £35,000. Recently, protection increased to £50,000 and now offshore depositors in failed Icelandic banks are told that they are totally protected. Can you point to a genuine practical compensation limit, or is it a case-by-case decision being made by the Government?
Ian Pearson: The Financial Services Authority has a £50,000 compensation limit. As you will be aware, it is consulting on possible variations to that limit and that remains our position. In the extraordinary circumstances that we were faced with, we thought it right to say that the Government would do what it takes, and to ensure that no retail depositors of Icelandic banks lost their money. We still think that that was the right decision to ensure public confidence in the banking system in the United Kingdom.
Q 22Dr. Pugh: So if another crisis of another nature were to loom up, theoretically, the limit could change again almost overnight?
Ian Pearson: It is not helpful to speculate on things that might happen in theory.
Dr. Pugh: It happens in practice.
Geraldine Smith (Morecambe and Lunesdale) (Lab): We certainly live in extraordinary times; may I begin by congratulating the Treasury team? I think that you have worked extremely well in amazing circumstances. I thought that the Government had a lot of things to deal with, but we effectively have a strike of capitalism, with the banks refusing to lend money to one another. I hope that the measures we are taking can get them back to work and get them lending the money to businesses again. The SRR that the Government are bringing in is presumably the nuclear option. You would not want to be using that too often. What can you do to prevent us getting to this situation?
Obviously there needs to be some global regulation. A lot of ordinary people feel that there has almost been criminal negligence here. What can we do to prevent these sorts of things happening in the future? We are seeing large amounts of taxpayers’ money being used to prop up the banking system. It must never be allowed to happen again. I appreciate that we need to act quickly, but we also need to get some responsibility back into the banking system.
Ian Pearson: I think there are a number of different points. First, on what my hon. Friend calls the strike of capitalism, which we tend to call inter-bank lending, the Government have provided £250 billion to support inter-bank lending. We believe that we will make a difference and we are already seeing a reduction in LIBOR rates. So there is an indication that this is working. Clearly, the operation of this special resolution regime only happens in exceptional circumstances. We hope that the legislation that we will discuss in detail in due course will never have to be used, but it is important to have that framework of legislation in place so that we can take decisive action and give a framework of confidence to banks and building societies as well for the future.
The other point that I would want to make is about the enhanced role that we are giving to the Bank with regard to financial stability. We see that as being an important part of the Bill. The Bank has always played a role in financial stability, but the proposals in the Bill build on what is done to date and provide it with a high-level statutory responsibility for contributing to the maintenance of financial stability. We see that as one of the ways in which we can say that we have learnt lessons from recent events and are building a more robust system for the future.
Mr. Bone: Just so there is no doubt, I think that the Treasury team have been running around like a load of headless chickens. They have been lurching from one set of goalposts to another. So I take a slightly different view from the hon. Lady. May I refer the Minister to the Banking Bill regulatory impact assessment? Paragraph 1.192 says in big red lettering:
“The Banking Bill will enable the FSA to collect information from firms that the FSCS requires (and share this with the FSCS) before default.”
Ian Pearson: First of all, I should like to pay tribute to Treasury, FSA and Bank of England staff for the actions they have taken to ensure the stability of the UK financial system and to deal with the crisis, which has not been of our manufacturing, but started in the United States.
Mr. Bone: That is open to debate.
Ian Pearson: You say it is open to debate and I know that your leader wants to airbrush out of history the facts of the sub-prime crisis in the United States and that most countries across the world are taking similar action to us because they are in similar situations due to the combination of the credit crunch and high oil and food prices. I do not think there is much debate. I think there is a very small minority opinion that does not accept that there has been and is a global financial crisis.
With regard to what you say about the regulatory impact assessment, I refer you to clause 162, which allows the FSA to make rules allowing it to obtain information that the FSCS may require to carry out its work or prepare for payment of compensation. The FSA is working with the industry to establish how customer-level information can best be provided to the FSCS and on what basis compensation is calculated. The FSA’s plan is to consult on new rules in due course and in line with its statutory obligations. This will include a cost-benefit analysis of any new rules. I think that that covers the point that you are making.
Q 23Mr. Bone: Mr. Chairman, I think the Minister said “customer-level” in that answer. I am trying to understand why that customer information is wanted in advance of a collapse. The nearest comparison I can think of is a collapse of a travel firm where ABTA will, immediately after the collapse, get the information about the customers who are travelling and then refund. Why do you want customer-level information to go to a Government agency before the collapse?
Ian Pearson: Perhaps I may ask Emil to answer.
Emil Levendoğlu: The FSCS will not necessarily require customer-level information prior to collapse in order to take a view as to what work is needed to prepare for payout. It may need to see the sort of information held by the institution so that it can judge how quickly it can prepare for payout in the event of the firm collapsing. The point about customer-level information relates to the work around ensuring that depositors get fast payout and the question of the single customer view has come up in consultation and also in the Treasury Committee’s report. The question of how customer-level data are provided in the event of a payout is one that the FSA is working on with the industry to work out the best possible solution. So customer-level data may not be required prior to default.
Q 24Mr. Bone: Finally, Mr. Chairman, we have already touched on it but there is the matter of funding this compensation scheme. I link it again to the travel industry, where the funding is put up by the travel companies and paid into a fund so that it is there for when a company collapses. It is very strange that we are treating bankers with kid gloves and not making them contribute. Last year, one of those banks made £9 billion. Are we talking one thing for bankers and another thing for other companies?
Ian Pearson: I understand the point that the hon. Gentleman is making. However, it remains our view that pre-funding at this stage would not be appropriate. We do believe that in different times there should be pre-funding—we have said so on record—and it is why there are powers to do this in secondary legislation. We do not think it right to go down that road at the moment.
Emil Levendoğlu: Of course, the industry does contribute in the event of a deposit payout. In the current arrangements, it contributes after the payout rather than before. It is not the case that the industry does not contribute to the cost of payout.
Q 25Mr. Mark Todd (South Derbyshire) (Lab): The Bill says that an objective of the Bank should be to
“protect and enhance the stability of the financial systems of the United Kingdom.”
It is not clear what tools, other than a financial stability committee, it will have to carry out that function. Can you tell us more?
Ian Pearson: The Bill talks of the financial stability objective. My hon. Friend knows that the Treasury Committee, of which he is a member, has strong views about membership of the financial stability committee.
Q 26Mr. Todd: I shall come to that.
Ian Pearson: I thought you might. I emphasise to the Committee that the Bill gives the Bank of England responsibility for oversight of the payment system. The Bank of England also has responsibility for taking action under the special resolution regime, in the event of a failed bank. I suspect that the hon. Gentleman is probing more on how we prevent getting into a situation in which the SRR has to be introduced—
Q 27Mr. Todd: I am probing whether the Bank has the resources to do what is set down in its new objective, which is not to manage the stability, but to contribute to protecting and enhancing our ability to protect stability.
Ian Pearson: Yes.
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