Banking Bill

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Mr. Hoban: This is a difficult area to get right and I am pleased that I am in the position of having to criticise the code rather than having to draft it. It is a much easier position to be in. The interchange of thoughts about what sort of messages the code sends out is important, because when drafting the code one needs to be very careful about the impression that is created in the minds of depositors, as I alluded to earlier in response to the hon. Member for South Derbyshire before I took the intervention from the hon. Member for South-East Cornwall. For example, if there is a very clear restatement in the code that the limit for deposit protection is £50,000 and that will apply in the future, we may see the shuffling of money around banks, post offices and so on, which may trigger a fresh wave of uncertainty.
I am not a great believer in long documents and I always think that it is better to have a shorter ones, but when I opened the file containing the code of practice, I was surprised at how short it was given the complexity of the issues. While this is an early draft, and I suspect that later drafts may elaborate on some of these issues, this area needs elaboration. How should people expect the powers to work in—to use a different analogy—wartime and peacetime?
I have some more specific comments. Paragraphs 32 and 33 of the code deal with clause 8 of the Bill:
“The test of ‘necessity’ is a high one. In determining whether the exercise of the power is necessary, the Bank must have regard to whether other approaches would resolve the situation.”
Again, I am not sure whether there is enough information in the code to determine when the bank will find it necessary to exercise such powers. The code is a bit light on timings of when things may happen, so we need a bit more specificity in that regard. I draw the Committee’s attention to paragraph 20, which says that there will be a
“revised Memorandum of Understanding between the Authorities”
“will set out how the Authorities will communicate with each other before and during the resolution of an institution”.
It is not clear when that memorandum will be produced, and it would be helpful to know. When the Treasury Committee debated the matter, it was suggested that we would see the MOU long after the passing of the Bill. To help us understand how the authorities will interact with one another in the context of the Bill, it would be helpful to have sight of that element of the revised MOU before the Bill completes its passage through both Houses.
In paragraph 33, there is a trade-off. It says:
“The assessment must balance the short- and long-term effects on financial stability, public confidence and depositor protection of different resolution options.”
That is absolutely right; I could not disagree with that statement, but what does it really mean? What are the short and long-term effects? The paragraph refers to the need “to protect depositors” but it does not expand to cover the short and long-term effects on financial stability or public confidence.
Paragraph 36 of the code refers to
“the operational risks of managing a bridge bank and the amount of public funding that may be required to keep it operational.”
There is no sense of where the economic decision comes into play. We talked about the protection of taxpayer interests in the previous clause. The code says that
“the Bank will need to take into account in determining the feasibility of different tools”
factors such as the operational risks of managing a bridge bank and the amount of public funding that may be required to keep it operational. I do not get a sense of where the balance of judgment is between this and temporary public ownership.
Paragraph 40 of the code does not say much apart from paraphrasing conditions A and B. I think that more work needs to be done on that area if we are to understand how the Bank, or the tripartite authorities, will act in the public interest and how they will apply the conditions. I would have expected more clarity in that area.
Paragraphs 44, 45 and 46 are important and relate to the announcement of the tools and to accountability. I referred to that matter earlier today in the context of amendment No. 80, in which I call on the relevant authorities to comply or explain. Paragraph 46 relates to something that I mentioned in a previous debate. The Minister responded by saying how transparent the Treasury would be over the exercise of such powers. I asked him whether the announcement made by the Treasury in respect of Kaupthing and Heritable was a model or a template for what we would see under paragraphs 44, 45 and 46 or whether we would see a fuller explanation. The Minister did not come back to me on that point, and I was too slow to pick him up on it, but I will give him a second chance in this debate to explain—if he has not thrown away the notes that his officials prepared. That is important, because it helps to build up an understanding of how the Government will react in the minds of participants. When people are assessing how the powers will be used, they will look not only at the code, but at how the measures are applied subsequently, to see where the gap is between the application and the code. Therefore, we need to ensure that a decent level of information is available to help participants to understand the range of powers. Also, of course, that is an important part of holding the tripartite authorities to account on how the powers will be used.
I am not a member of the Treasury Committee and I was not able to listen to yesterday’s sitting because I was engaged on the Report stage of the Dormant Bank and Building Society Accounts Bill, but I suspect that the Committee would like to debate again Icelandic banks, for example, in the event of the exercise of the stabilisation powers. The more transparency about how the powers will be used and the more announcements that are made about them, the easier it will be for Parliament to hold the authorities to account, which is particularly important when taxpayers’ money is involved.
Paragraph 52 begins with the words: “In exceptional circumstances”. What are exceptional circumstances? Are they so exceptional that the Government do not expect the measure to be used? It is important to clarify the definition of exceptional circumstances.
To go back to time periods, paragraph 60 of the draft code states:
“However, in situations where there is expected to be a lengthy period of time prior to a sale, the Bank shall put in place an appropriate governance structure”.
How long is “lengthy”, and when does one decide when something has gone from being short to “lengthy”? If the powers had been available and the Bank had owned the shares in Northern Rock, it might have thought that it could flog it within a couple of months. However, I suspect that the gap between the Northern Rock rescue in September and its nationalisation in February would be deemed “a lengthy period” if the powers had been available at the time, and it may have been necessary to put in place appropriate governance arrangements. What is “lengthy”? How long is a reasonable period before steps to put in an “appropriate governance structure” need to be taken?
In his remarks on a previous clause, the Minister referred to the safeguarding in the code of practice of operating strategies. Paragraph 68 states that that
“is likely to involve the bridge bank operating on a conservative basis, to protect the franchise value of the business”.
I am not sure what “conservative” means. Does it mean prudence in the management of liabilities or when dealing with repossessions? Is it “conservative” in that the bridge bank does not take any risks and operates at the less competitive edge of the threshold? Doing so could impede the achievement of its objectives. Knowing the meaning of “conservative” in this context would be helpful to the banking system.
I appreciate that no one expects a bridge bank to exist for too long a period—that is not necessarily its purpose—because there could be other ways in such a period to resolve the situation. Paragraph 72, on the bridge bank report, states:
“The Bank must report to the Chancellor about the activities of a bridge bank if a bridge bank exists for a year. The first report must be made as soon as is reasonably practicable after the end of one year beginning with the date of the first transfer to the bridge bank. A similar report must also be made as soon as is reasonably practicable after the end of each subsequent year”.
My understanding is that Northern Rock reports quarterly to the Treasury, and I am not sure why the reporting requirements for the bridge bank are less onerous. I thought that they would be broadly comparable.
Paragraph 80, which is on disposal and onward transfer, states:
“Following this process, the Bank shall complete the transaction. This may be achieved through a standard commercial agreement...or by exercising the onward transfer powers provided in the Banking Bill.”
I do not know whether there is a practical difference between the two options. Will they be used in different circumstances, or are they interchangeable? It is not clear why that might be the case.
6 pm
Paragraph 93, on page 16, is also ambiguous as to time:
“If a bank is likely to remain in public ownership for longer than a short period”.
It is sometimes difficult to determine what a short period is. There is no guidance, and the context is the objectives that the Treasury will set for the board of directors. In the case of Northern Rock, even though we are in a period of temporary public ownership, that period has been deemed sufficiently long for the Government to set objectives. The Government could have argued in February that they expected to make a quick sale and therefore would not set objectives. That is a purely hypothetical argument rather than a realistic one, but the presumption should be that objectives will be set for a bank in temporary public ownership.
Having read through the code, I have just picked out some areas where further work needs to be done. I make those points not to sound pedantic or picky but to say that we need to be much clearer about how the code will operate in practice if it is to be the reassurance that the financial services sector is looking for as to how the powers will be exercised.
To touch on amendments Nos. 82 to 85 to clause 6, which I tabled, I wanted to focus on the consultation process surrounding the code. Since I tabled the amendments, the Minister has tabled a new clause that addresses amendment No. 83, which would insert after subsection (1)(c) a new line (d):
“‘those persons whom it considers to have relevant knowledge of those matters.’.”
The new clause, which is not scheduled for debate today, deals with amendment No. 83, because it sets out clearly who should be consulted. In terms of the broader consultation on revisions to the code, the Government might wish to go wider than that. I have also proposed that the code should undergo some form of scrutiny. I would not normally advocate parliamentary scrutiny of a code, but given the importance invested in this one, Parliament should have the opportunity to consider it. It forms an important part of the framework of the Bill.
In conclusion, the code as we saw it on Thursday, which is largely as it will be when it is made available for public consultation later this week, requires a lot more work. One or two people to whom I have spoken who have seen the code share my view that there should be much more detail about how it will work in practice, and others do not yet see it as the safeguard that they anticipated. I hope that the Minister will see my comments as constructive rather than critical for the sake of being critical. We want to be constructive about how we engage on the code, but there is a lot more work to be done.
Mr. Breed: The proposal relates to an amendment that we tabled to clause 7. Under clause 5(2)(d) the code will provide guidance on
“how to determine whether Condition 2 in section 7 is met”.
While I recognise that we are talking about a draft code of practice, what we have so far does not really explain precisely how it will be determined that condition 2 in section 7 is met. It merely repeats some of the wording from the Bill itself.
A fundamental aspect of both the amendments to clause 4 and what is happening in clauses 5, 6 and 7 is how the external investors may view bank shares or banks in the future. Their investment, which can be considerable, may be far less certain than they had originally expected. The determination of whether condition 2 in section 7 is met is fundamental. We need a clear indication of that in the code because that sort of clarity, along with the other aspects of amendments that are yet to come, and one that has already been withdrawn, is fundamental to the way in which the SRR will work.
Timing is obviously of the essence. I accept that and it is recognised in the guidance. But we need to be much more precise about how that condition is exercised. Upon that will depend so much of the perception of whether a bank can raise more capital, whether it has enough investors to begin with and even future capital-raising exercises if necessary. Unless investors are confident that the plug will not be pulled from a bank in which they are going to invest and that the conditions will be clearly met and will not be very subjective in their interpretation, they will be reluctant to invest in such businesses.
Mr. Bone: I am trying to follow the hon. Gentleman’s argument. Is he making the case that where a bank is in some sort of trouble, but has not reached this stage, investors who might invest in order to save it will stand back if they do not know the precise terms of when the special regime will come in?
Mr. Breed: That is exactly right. As the Minister said, the objective is to try to maintain these entities as going concerns. In general terms that will probably require some sort of recapitalisation and additional investment. The conditions under which an entity may ultimately come under some sort of regime may determine whether that capital-raising exercise is successful. We have to make it much clearer that it is not too subjective and that clear conditions have to be met, so that people understand what will happen. As I said, I can see in the drafts no clear explanation of how it will be determined whether condition 2 in section 7 is met.
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