Banking Bill

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Q 142Sir Peter Viggers: Are there areas in the Bill that you think require further work? Are you content with the shape of the Bill as it is emerging?
Stephen Haddrill: One thing that we do not have is the code of conduct. We certainly want to see that and look at it before fully answering that question. We would like to see an objective to maximise the enterprise value while it remains in the SRR, so that the way that it is managed during that time does not fritter away the existing value in the business. We would like the hierarchy of creditor interest to be respected, so that when compensation is paid the bondholders have the opportunity to get some compensation.
We are also concerned to see as much certainty injected into the Bill as possible. Clause 65, which was mentioned in the previous sitting, creates the opportunity for the Government to completely rewrite the SRR regime. That seems to go much too far in terms of creating uncertainty for the future.
Q 143Dr. Pugh: Can I ask a supplementary question? I read your lucid, clear submission carefully. It contains a suggestion that the first port of call might be a shareholders’ meeting to see if they can divvy up a bit more cash or replace the management, or whatever. Given the speed with which events have been moving in financial markets recently, do you now acknowledge that that is a fairly unrealistic, not a real world, scenario?
Stephen Haddrill: No, I do not acknowledge that. I think that the institutional shareholders are capable of taking a rapid view, because after all if you hold 3, 4, 5 or 6 per cent. of a major institution, which some of the big institutional shareholders do, you know quite a lot about that institution. You saw three of those—Legal & General, Prudential and Standard Life—coming together to put more capital into Bradford & Bingley, although, in the event, of course, it was insufficient. That was done alongside some capital injection by the banks and it might have been sufficient; it was not, but it might have been. I think that such an opportunity should be provided.
Q 144Dr. Pugh: So it is a real-world scenario when you have a company that is failing but it has a few big institutional investors who can get together and sort it out quickly, but not otherwise.
Stephen Haddrill: I am not saying that they will be successful in all cases, but it is worth trying, if only because, if their money can go in, that is taxpayers’ money that will not be called upon.
Q 145Mr. David Gauke (South-West Hertfordshire) (Con): Mr. Haddrill, you have been in a minority in advocating that the special resolution regime should be administered by the FSA, rather than the Bank of England. Can you expand on why you think that should be so?
Stephen Haddrill: Initially, we took that view because we felt that, apart from the responsibility of the bank directors themselves, the responsibility for ensuring that a bank was not going into failure was the FSA’s. We were concerned that the FSA would be reluctant to hand over that responsibility to another institution, and that if a special resolution regime or another mechanism were needed, the FSA should be free within its own house to take that view, and then to deal with the consequences of it—the consequences partly having been driven by its own actions in the run-up to that—so that responsibility and power were kept in the same place throughout the process. The Government have clearly taken a different view, but we do not feel strongly enough about it to continue to argue the point.
Q 146Mr. Gauke: How do you respond to the view that since 1997, the Bank of England has been more distant from the banking sector as a whole, and that has been an adverse development?
Stephen Haddrill: I think that the Bank brings a great deal to such issues, because it is in the market. It trades on its own account, which gives it a perspective. In retrospect, I believe that it is right that the Bank should be brought much more firmly into the system and given a strong financial stability role within the new tripartite proposals.
We have reservations about the financial stability committee being a sort of subsidiary of the court, because we are not convinced that the court is at the operational heart of the bank. It should be a very senior committee at the top of the Bank and able to take effective decisions. We have not seen the court operating in that way.
Q 147Mr. Hoban: May I ask both the IMA and the ABI what are the consequences, from your members’ perspective, of the abridgement of property rights that the Bill sets out, and the way in which it can disturb the normal ranking of creditors in the event of the SRR being triggered?
Guy Sears: We have called for the introduction of the SRR, and we have resisted getting rid of partial transfers. They are a necessary power, as is the power to interfere with property rights if required. For example, the Icelandic banks and Bradford & Bingley used partial transfers to move £22.2 billion of retail deposits, and that seems to have been an effective use. We have some concern—like the ABI, we are waiting for the secondary legislation to come out and the banking liaison group to work—about what they mean in the other areas, and what will actually happen to the cost of capital. At the moment, there is a range of concerns, such as worry that security will be taken away and you will be left only with liabilities, which is almost certainly unlawful under European directives, but there may be instances—we had change of bond terms in Bradford & Bingley—when, if it is not predictable and if we do not understand how the tripartite authorities will use the powers, people will price conservatively, so the cost of capital will go up. If you know which way a bond may be affected by collapse, at least that can be priced in slightly more efficiently. Again, to echo Stephen’s comments, we await sight of the code and the secondary legislation, which will be critical to the Bill.
Q 148Mr. Hoban: Would you outline for us what the changes were to Bradford & Bingley’s bond terms, so that we can understand the sort of changes that could happen?
Guy Sears: Yes. It may have been slightly less controversial, although some of my firms would not agree with me. The provision in the transfer order was, from memory, that for the subordinated loans, dated and undated, the bondholders were not allowed to treat the non-payment of principal as an event of default. Essentially, from the Treasury’s point of view, it wanted to ensure that subordinated creditors could not hold the new transferor, or the old Bradford & Bingley—it still exists in wind-down—to ransom by saying that the transfer had triggered an event of default and that, therefore, they were entitled to full payment now rather than over time.
Q 149Mr. Hoban: Did your members who objected to that object in principle or to the fact that they had lost that right?
Guy Sears: A lot of it is that it is almost chance at the moment whether you are a holder at the minute that such things occur. There is no predictability. Over time, we will start to learn how Government will use these measures, and you will therefore know, if you have a subordinated bond, that the terms can be changed. If we are to have those powers, it would be useful to see in the code when that will happen and what might be the circumstances. In other words, perhaps it would say, “We will only ever change these provisions in so far as it is necessary to ensure a transfer across, and the provisions we would change are the following, and you would be entitled to compensation,” which the Bill does provide. That would start to give certainty to the market, but at the moment, I think—and certainly last week—Bradford and Bingley bonds are trading at almost nothing.
Q 150Mr. Hoban: Almost at nothing?
Guy Sears: Yes. I think that there is a little bit of payment for the interest that has accrued.
Q 151Mr. Hoban: What does that tell us about people’s views about those bonds being repaid?
Guy Sears: Well, certainly, in the pricing last week, when my firms wrote in, they did not expect to be repaid.
Q 152Mr. Hoban: Yet bondholders would expect those bonds to be paid in full.
Guy Sears: Yes, but so much of this is about confidence. What we are trying to do is engender confidence in the financial system, and we therefore need to protect depositors, but that comes at a cost. The important thing, we would say—certainly for Stephen’s members, as our major institutional investors in this country, and my firms as the asset managers—is that of course depositors should be protected, but that there is a cost. Pension schemes and the savers of this country are invested in those banks. You cannot have things without cost, and there will be cost. If bond terms are changed and if equity raising is more expensive, that will impact on the pension schemes and other savings vehicles, and that still comes back to taxpayers. The question, therefore, is this: what do we need to do sufficiently to get confidence in depositors, not because depositors are always meritorious, as such, but because we need to secure financial stability? That is not to be against depositors; it is to say that with our other hats on, as the taxpayers, savers and pensioners of this country, they are impacted by the transfer and the loss of value that occurs from that.
Q 153Mr. Hoban: Do you think that the Bill reflects that tension appropriately?
Guy Sears: We have done a lot of work, before and during the summer, and the Government have done a lot of work to listen to the whole industry about concerns. There are a couple of points to repeat, one of which Stephen has made. There are fire sale concerns—in other words, let us just get rid of the deposit book as quickly as possible to whoever will take it without regard to the value that remains and the damage of that. Fire sale concerns are addressed by some of the provisions on maximising value, but, again, this is about confidence. Do we have confidence in the authorities to do that well enough? There is a concern at the moment regarding those fire sale concerns.
There is also a need for various other safeguards to do with knowing precisely which netting agreements, if any, are going to be affected. That is why, as you might know, we have proposed what has now been announced as the banking liaison group. My suggestion was that, not only would the technicians in the industry work on the secondary legislation, but that we would need to keep it up to date, because it would be very easy to pass the Bill and the secondary legislation and think that we had got it fixed. I assure you of one thing: the markets will exploit any fissure and they will innovate. We therefore need to keep things under review. That is our hope from the banking liaison group.
Q 154Mr. Hoban: Mr. Haddrill, you have described the authorities’ consultation process as paying
“only perfunctory and box-ticking reference to the need to avoid interfering with property rights in contravention of the Human Rights Act 1998.”
Is the Bill any better?
Stephen Haddrill: I do not think that the Bill does enough on protecting property rights, for some of the reasons that I mentioned earlier. The reference to the Human Rights Act is all very well, but gaining the confidence of the institutional shareholders requires rather more specific protection of what they can reasonably ask for. Some of the things that we have just mentioned are relevant, in terms of maintaining value where possible, not transferring assets through a partial transfer and eradicating the rights and values of bondholders. All those things need to be sorted out, but we do not yet know exactly how that will be done.
Q 155Sir Peter Viggers: A comment was made about the financial stability committee. I heard some implied criticisms, or at least a lack of total enthusiasm. What more would you wish to see of the committee that would enable you to feel much more enthusiastic and confident about it?
Stephen Haddrill: It is an extremely important part of the architecture, and we are glad that it is being established, but it needs to be as important a body within the Bank as the Monetary Policy Committee. However, it does not appear to us that it is being established in that way. It looks to have been established as a sub-committee of the court, and I do not really understand why that should be case.
Q 156Sir Peter Viggers: And it is, as it were, influential, rather than a decision maker?
Stephen Haddrill: Yes. I am a bit reluctant to say exactly how it should be reformed, and it is something that Parliament needs to debate—how do we lift the level of the committee so that it has real, solid influence and the capacity to influence not just the Bank, but the Treasury?
Q 157Sir Peter Viggers: Did you read the recommendations of the Treasury Committee, which were similar but different? Do you have any view on that?
Stephen Haddrill: I did at the time, but I am afraid that I cannot comment on that now.
Q 158Sir Peter Viggers: Mr. Sears, do you have any thoughts on the FSC?
Guy Sears: No not particularly, Sir Peter. We place more emphasis on the fact that the Bank’s role, as proposed under the SRR, and ability to exercise the powers, would mean that it would have to resource up and have the people and skills there to fulfil that. Whatever role it did have, therefore, the FSC would have much more weight than you might expect even now.
Q 159Mr. Bone: Mr. Sears, I want to return to your remarks about Bradford & Bingley towards which the Government took an approach different from that taken towards the other banks. Basically, the good bits were got rid of and sent to Santander, and the bondholders were left with a huge loss. Under normal circumstances, would the bondholders have ranked above or level with the deposit takers?
Guy Sears: I think that there is a mix, but that some would have come after the creditors, who of course were the depositors and who rank with other creditors. In terms of the good and bad bits, it is a bit more that if you move a deposit book, as they did, of £14 billion, or £17 billion with the top-up, and move with it the same value of assets—in other words, if it is one for one—how the rump ends up depends on whether it was solvent on an asset and liability basis. If, of course, it was not solvent on that basis, you will necessarily worsen the position, because those people have got pound for pound. But that is the world that we are in at the moment. We need to ensure and secure financial stability. Some say, “Should depositors have precedence?” My view is that the Government have sought to preserve creditor rights, through compensation for those who are worse off by reason of the transfer—there are safeguards in the Bill for that—but they have in practice ensured depositor precedence. I think that that is quite neat, although it is expensive and tricky to work out the impacts on the Bank. We still have much work to do on that—Stephen mentioned the secondary legislation. However, it is a way of securing precedence, at a time of crisis, while ensuring that they rank equally at the moment of a going concern.
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