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.
| 
