Banking Bill

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Ian Pearson: Perhaps I could begin by responding to the comments by the hon. Member for Gosport and then move on to the issues regarding Landsbanki, safeguards, the code and consultation.
I accept the broad thrust of the analysis by the hon. Member for Gosport: that the origins of the global financial crisis were in the sub-prime market in the United States and that there was insufficient understanding of the impact of collateralised debt obligations on the whole market system. I do not particularly like to use the term “toxic assets” either. However, in this case we are talking about impaired assets in some shape or form.
The hon. Member for Gosport sees close parallels with Lloyd’s. There are some parallels, but there are also different circumstances. In the case of Lloyd’s and the reinsurance market some years ago, the company got into significant difficulties but it dealt with them. Banks or building societies may get into difficulties and they will manage them themselves. They will adopt a number of strategies, whether that is writing down the assets or isolating and separating out bad and doubtful debts. I do not think that there was a systemic risk to the global financial system in the case of Lloyd’s, as there has been as a result of the problems in the sub-prime market. But that is not to say that the hon. Gentleman does not make a number of valid points about these areas.
The hon. Member for Wellingborough mentioned the accounting treatment in this area. He will be aware of changes that were announced a couple of weeks ago in how the mark-to-market rules are to be interpreted in distressed economic conditions. That has been a beneficial clarification. The Government were still right to take the action that they did on liquidity, recapitalisation and providing debt guarantees to stimulate inter-bank lending. It is important to recognise that action needed to be taken on all three fronts because of the financial situation that we found ourselves in.
Sir Peter Viggers: I would submit that the situation at Lloyd’s and the present situation are very comparable. When the Minister said that the Lloyd’s case would not have led to the collapse of the financial markets, he described Lloyd’s as a company. Lloyd’s is not a company. It is an unincorporated structure. The people backing Lloyd’s at that time were 30,000 of some of the richest people in the United Kingdom, whose names were put forward to become names at Lloyd’s. If Lloyd’s had failed it might well have led to the bankruptcy of some 30,000 leading citizens and would have had a devastating effect on the City of London and on financial markets generally. The parallel is closer than his remarks indicate.
Ian Pearson: I agree of course with the hon. Gentleman’s statement about the legal status of Lloyd’s. I was trying to draw a distinction between that and the problems that banks and building societies might face in the future.
Mr. Bone: I should be grateful for the Minister’s opinion. He talks about liquidity, which obviously needed to be put into the banking system, and bank guarantees, which I also understand, but I query the third element—the capital. If one has written these doubtful assets down to a level that is far less then they are worth, one is putting in billions of extra capital that would not be necessary if one had the right valuation in the first place.
Ian Pearson: The hon. Gentleman is clearly right that in distressed market conditions assets get written down. In the case of banks that would affect their tier 1 capital ratios—hence the need for recapitalisation. Obviously we have gone through completely exceptional circumstances over the last couple of months, which is why there have been substantial international discussions, and why we took the action that we did across three fronts—liquidity, recapitalisation and debt guarantees—to get the inter-bank lending market moving. It is why there has been general consensus, as a result of those international discussions, that this is the right approach, and other countries have followed our lead. However, that does not neglect the need for banks and building societies to take action to deal with their own situations. The hon. Member for Gosport is completely right: hiving down the impaired assets part of an institution to a subsidiary company can be an effective strategy, and some institutions have done that in the past 12 months.
Mr. Newmark: Did the Government consider converting debts such as bondholders into equity, as a way of right-sizing the impaired capital structures of those banks? That would give the balance sheet a sensible capital structure, as opposed to simply infusing taxpayers’ money to right-size the balance sheet, which would leave impaired debt in place. I mean junior debt not senior debt—bondholders, for example. There are many bondholders in all those banks, and they could easily have been forced to convert their debt into equity.
Ian Pearson: We had detailed discussions with the banks on a wide range of issues concerning their financial position. We believe that we took the right course of action, in conjunction with the banks, to help to ensure stability in the financial markets.
Mr. Todd: One of the difficulties with using the bad-bank option as a relatively rapid response to a crisis is that it requires the unpicking of the asset basis of the various businesses that have been handled differentially, because of the different approaches to writedown that banks have taken in short time frames. The Scandinavian model was facilitated by almost the entire Scandinavian banking system ending up in public sector hands, which meant that the separation of assets into a bad bank could be compelled through one coherent ownership model. That is not the case in the UK.
Ian Pearson: That is a helpful clarification for the Committee, but I repeat that there is nothing to stop individual banks putting assets into subsidiaries at the moment. It is a perfectly permissible approach. We will discuss good banks, bad banks and partial transfers later, but the point emphasises the importance of the safeguard provisions. I shall speak broadly about them in a moment, and we will come back to them under clauses 42 and 43.
Mr. Hoban: May I take the Minister back to his comments on capitalisation and the writedown of asset values? Is it his view that the Government’s contribution to the recapitalisation of banks—either subscribed for by private shareholders or underwritten by the Government—is sufficient to cover historical writedowns only, or has some idea of future levels of writedown on both mortgage-backed securities and corporate debt been factored in?
11.30 am
Ian Pearson: I do not want to respond directly, but I will say that the agreement that the Government have reached with the banks has been designed to ensure that the banks are able to meet their tier 1 capital ratios. The overriding objective of the Government’s actions has been to ensure confidence and stability in the banking system.
Mr. Todd: The Treasury Committee queried an aspect of this yesterday. It was made reasonably clear that the FSA and the banks had modelled requirements according to a variety of circumstances, which would have included a substantial further loss in their asset base before determining the capital injection requirement that the Government have subsequently offered.
Ian Pearson: I thank my hon. Friend for that comment. I understand that the Chancellor wrote to the Chairman of the Treasury Committee providing a significant amount of detail regarding the announcements that were made in the House on 8 and 13 October and that that is publicly available.
I move on to the point about Landsbanki raised by the hon. Member for Fareham. We can deal with it in more detail in clause 2, if it is felt necessary. We believe it right to put in place arrangements to ensure that retail depositors receive their money in full and we continue to work with the Icelandic authorities to ensure fair treatment for UK depositors and creditors. There clearly is a difference, which we discussed earlier, between subsidiaries of an Icelandic bank, which are regulated by the FSA, and branches, which are regulated by the home country authority. The Bill does not in general allow the authorities to take control of branches of European economic area banks in line with our obligations under Community law. There are clear EU law obligations that we need to apply.
The Bill differs from the Banking (Special Provisions) Act 2008 specifically with regard to new tools to deal with failing banks, such as the proposals on bridge banks, and the two new insolvency procedures—the bank insolvency procedure for fast payouts to depositors and the bank administration procedure to make partial transfers effective. There are other differences with regard to preconditions, framework powers and compensation. It might be helpful if I circulated to the Committee a brief summary of the differences between the Bill and the 2008 Act. We are able in the Bill to provide a permanent framework to refine and develop the powers in the Banking (Special Provisions) Act. In some cases those powers are very broad, and there was significant stakeholder concern about their broad nature and the fact that there is not the legal certainty that hon. Members rightly want. That is why the safeguard provisions, and others that we will come on to discuss, refine the powers in the Act.
Mr. Gauke: I am grateful to the Minister for his offer to circulate a document distinguishing what we have in the Bill and what is in the 2008 Act. Some elements of the Financial Services and Markets Act 2000 are to do with transfers of property too. As the Minister is being so helpful, would it also be possible to circulate a summary of any developments and changes regarding the Financial Services and Markets Act as well?
Ian Pearson: I will certainly look to do that as speedily as possible.
Mr. Hoban: Before the Minister moves on, I should like to return to the comparison between the 2008 Act and the Banking Bill. Clearly the 2008 Act’s powers have been used to bring about change in a number of institutions—we have talked about Bradford & Bingley—but how would those circumstances have been handled if the wide-ranging powers in the Banking Bill had been available to the Government? Knowing that will help us to understand how the Government will apply the powers in practice in a context with which we are familiar.
Ian Pearson: It may help if I clarify those points directly. A Bradford & Bingley-type resolution is possible under the Bill, because clause 2 permits the transfer of banking to temporary public ownership via a share transfer. Clause 14 permits the partial transfer of the deposit book and branches, such as in the case of Santander. A similar result is also possible using direct partial transfer by the Bank of England to Abbey or any other private purchaser, or, alternatively, via a bridge bank. The exact resolution option used would depend on a wide range of detailed factors, but the options pursued in the Bradford & Bingley case are possible under the permanent regime if a similar situation arises in the future.
Mr. Hoban: That is very helpful, but can the Minister go further and elaborate—not necessarily now, but perhaps when we discuss the relevant clauses—on the factors that suggest one course of action rather than another? It will help to build a sense of how the powers will be used in practice if the Minister uses the same examples later on and says, “If this happens, we will use these powers for these reasons and if something different happens, we will use a different set of powers”.
Ian Pearson: I shall see what is possible. The range of tools is an important feature of the regime and how the tools are used depends on the particular circumstances faced. With Kaupthing Edge, deposits were first transferred to a company owned by the Bank of England and then to ING Direct; under the Bill the same effect can be achieved in a variety of ways, as I have outlined with regard to Bradford & Bingley. I am happy to write to the Committee setting out the general differences between the Bill and the 2008 Act. If I can, I will give examples of how the same situations are still possible.
Finally, I want to respond to the comments made by the hon. Member for Fareham about the consultation process on the code. As I outlined in my initial remarks, on Thursday we intend to publish a consultation document on the safeguards and on the draft code received by the Committee last Thursday. I want to highlight the fact that the safeguards will be put in secondary legislation, which is what stakeholders have been asking of us. That obviously ensures that there will be proper parliamentary scrutiny in future.
As I indicated, I have already shared the draft code with the expert liaison group and I will ensure its continued involvement. However, given that we are publishing the draft code only on Thursday and there needs to be a consultation period, I cannot guarantee that we can have a further draft of the code by Report, because we will not have been able to get all the consultation responses. The assurance that I can give is that the real detail of the safeguards will be in secondary legislation. That will go through the parliamentary process, which will certainly ensure a level of scrutiny. Our intention is that consultation on the code will be finished and we will have the final version before the Bill completes its parliamentary passage. If there are any concerns about it there will be an opportunity for them to be expressed at a later date.
Mr. Hoban: I am grateful to the Minister for that clarification of the process, but two questions arise. First, will the code to be published on Thursday be significantly different from the code that members of the Committee saw last Thursday? Secondly, the Minister will be aware of the concern about the possible gap between primary legislation being passed and secondary legislation being debated. What is his view about that gap? Will secondary legislation be in place around the time of Royal Assent, or will there be a longer delay? The longer the delay, the greater the uncertainty in the market about how effective those safeguards will be.
Ian Pearson: First, my understanding is that the code is not substantially different from the draft that the Committee saw last Thursday. It has been seen by the expert liaison group at first-cut level. Undoubtedly there is potential for it to be modified through the consultation process by the expert liaison group and by others who will naturally have an interest in it. I completely appreciate what the hon. Gentleman says about the gap. I would like as small a gap as possible between the legislation coming into force and the secondary legislation being improved and that is certainly what we will endeavour to achieve. The consultation document that we are issuing this Thursday provides some draft legislation showing what the secondary legislation would look like. There will be an opportunity for its external scrutiny, and I hope that it will be in good shape so that we can implement it as soon as possible after the Bill receives Royal Assent.
Question put and agreed to.
Clause 1 ordered to stand part of the Bill.
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