Banking Bill

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Mr. Hoban: I am grateful to the Minister for his reply, which reinforced the intervention about the hierarchy of objectives made by my hon. Friend the Member for Wellingborough during my earlier remarks. It appears that the principal objective is the protection of depositors. Whenever we debate what the Bill seeks to achieve it appears that the interests of investors and creditors rank pretty low down the list of priorities. That is reinforced by this clause, which enables the Bank to disrupt traditional property rights because it gives the Bank the power eventually to have partial transfers. The message that comes through clearly is the relatively low priority given to the rights of creditors. That goes back to the concern people have about this Bill—that the power given by the Bill to the tripartite authorities is not well constrained when it comes to the interests of people other than depositors. The Government need to think carefully about how that protection of creditors is expressed or given—we will come on to that again in clauses 42 and 43. I do not get the impression at the moment that creditors are given a particularly high priority. That is why I would expect to see the Government take the interests of creditors more seriously. The Bank could have had regard in clause 8 to objective 5 in the same way as it has regard to the other objectives. There is a gap that the Government need to address.
Question put and agreed to.
Clause 8 ordered to stand part of the Bill.

Clause 9

Specific conditions: temporary public ownership
Question proposed, That the clause stand part of the Bill.
Mr. Hoban: I shall not go over the ground that I covered under clause 8, but the same sorts of concerns arise. There are two examples of temporary public ownership that we can refer to. One is the way that the Government dealt with Northern Rock, which is still in temporary public ownership and will be for some time. The other is the rescue of Bradford & Bingley, which, as I understand it, involved that institution going into temporary public ownership to enable deposits to be transferred and some of its residual activities to be acquired by Abbey Santander.
What guidance does the Minister have for the Committee on how long an institution will be allowed to be in temporary public ownership? The example of Bradford & Bingley would suggest a relatively short time—it was a very temporary measure—whereas Northern Rock could be with us as the people’s bank for some time. Temporary is an elastic term, but it would be helpful to know where temporary public ownership fits in the stabilisation options hierarchy, alongside private sector purchasers and bridge banks.
Ian Pearson: As we debated under the previous clause, the stabilisation powers can alter or remove property rights, and they involve public authorities taking control of commercial institutions. Therefore they should be used only when they are justified in the public interest. I wish to take issue with the hon. Gentleman. He said that we are not taking the interests of creditors sufficiently into account; clause 8 provides a higher-level test with regard to the public interest, which is why we included it.
Whereas clause 8 deals with the specific conditions for transferring a failing bank to a private sector purchaser or a bridge bank, this clause provides specific conditions that must be met before the Treasury can take a bank into temporary public ownership. Those conditions are that the exercise of the power is necessary to resolve or reduce a serious threat to the stability of the UK’s financial systems, or that it is necessary to protect the public interest where the Treasury has provided financial assistance in respect of the bank for the purpose of resolving or reducing a serious threat to the stability of the UK's financial systems.
The specific conditions in clause 9 are in addition to the general ones in clause 7, and are the same as those in the Banking (Special Provisions) Act 2008. Hon. Members will note that they therefore provide a higher test than those in clause 8. They signal that the power for the Treasury to take a bank into temporary public ownership is a last-resort SRR tool, and reflect the situations in which doing so may be the most appropriate option. Examples of those situations are: where the Treasury has provided a failing bank with a significant amount of public money to stabilise it; where wholesale and long-term restructuring is required to return the bank to the private sector; and where the bank is subject to an extremely fast-burn or complex failure such that there is insufficient time or means to effect a property or share transfer to a private sector purchaser without significant risk. The clause provides a strict test, and makes it clear that temporary public ownership is a last resort.
The hon. Gentleman asked how temporary “temporary” is. It would not be sensible to put a time limit in the Bill. The Government would not intend the option to be a long-term one, reflecting how the word is normally interpreted. We try to make it clear in clause 9 that we consider temporary public ownership only if it is appropriate. It is certainly a last-resort option. We would always want in the first instance to prevent a bank from entering the SRR. If it was necessary to do so we would look at the private sector purchase route. We would look to use the bridge bank tool. The temporary public ownership tool should be seen very much as one of last resort.
10.15 am
Mr. Hoban: I am grateful for that clarification. It is very much one of last resort, but I am not sure how clause 9 demonstrates that. It does not say that if we are unable to achieve the options set out in clause 8 we can move into temporary public ownership. Clause 12 talks about the “third stabilisation option”. I am not sure whether that means that it is the third preference, so I am not sure where this proof that it is a last resort appears in legislation.
Ian Pearson: The higher tests for temporary public ownership than for a bridge bank or transfer to a private sector purchaser clearly demonstrate the Government’s intention. We believe that taking ownership of the whole of a bank must be justified only on the basis of a higher public interest test that reflects the specific reasons why such action will be taken. We think it important that this is an option to address financial stability risks, including when financial assistance has already been provided, as I have explained. It is important to have the ability to protect taxpayers’ interests by taking full control of a failing bank. I am happy to repeat that the higher test levels and the fact that the authorities would always want to look for another solution first, very much reflect the way in which we have designed the Bill overall.
Mr. Bone: I understand that the Minister is stating the Government’s position, which is that if circumstances necessitate it, partial public ownership will be the last resort. That is their intention. But it does not bind any future Government to that. The next Government may be very keen on nationalising things. That is very unlikely, but the Bill does not rank it. The Minister is stating the current Government’s position if such an event occurred.
Ian Pearson: It is certainly this Government’s position. But I refer the hon. Gentleman to some of the detail of the clause. It makes it clear that a high level of test needs to be satisfied before action can be taken in this area. There would have to be a systemic threat to financial stability. There would have to be some significant Government investment in the failing bank already. A medium-sized bank that got into financial difficulty and which the Government had not supported previously could not suddenly be nationalised. That is not the Government’s intention. Clause 9, as I understand its construction, would not allow that to happen. We are trying to make the Government’s position in this area as clear as possible. That is why I have indicated very strongly that this is seen as an option of last resort which might be needed in certain circumstances.
Dr. John Pugh (Southport) (LD): Just to be absolutely clear, and I think I understand the logic of the position, the Minister is saying that the Government wish to keep open the possibility of temporary public ownership, even if the option of private sector purchaser and bridge bank is also open at the same time. In other words, it could be a tool of preference. That is clearly what the legislation says at the moment. Even though the preference would normally be to use it as a last resort, it would not inevitably be used as one, and it could be used in circumstances where there was still a private sector purchaser in the wings or the possibility of a bridge bank.
Ian Pearson: As I was trying to explain, the higher public interest test means that it could be used only when financial assistance had been provided or there was a systemic threat. It could not just be generally used. If either of those conditions were met, it would be a matter for the Treasury, in discussions with the Bank of England, which will take the lead responsibility in exercising stabilisation tools, to come to some agreement about the best way forward. I used the term “last resort” because it announces the Government’s intention clearly, but it would not be appropriate to put that in the Bill. It could certainly be an appropriate course of action depending on the circumstances, but as I have outlined, the higher-level tests provide a significant assurance about how the power might be used in future.
Mr. Hoban: I am still not entirely clear that the clause includes a higher public interest test. It provides a public interest test where financial assistance has been provided, but financial assistance is also one of the precursors to condition B in clause 8. It is not clear where the crossover point is between condition B and the higher tests in clause 9. The Minister may say that the language in subsection (2) about “a serious threat” beefs up the provisions beyond clause 8. That might be his justification that the test in clause 9 is a higher test, but I am not sure that that is what he is saying. We have not heard clearly on the record what specifically about the wording of clause 9 makes it a higher test than clause 8 and a power to be used only in the last resort.
Mr. Bone: On the principle behind the clause, I understand entirely the Government’s position that Government ownership of a bank is the last resort, but that is not what the Bill says. Under the Bill, even though a private market opportunity might be available, the Government could decide that nationalisation, even temporary nationalisation, was more in the public interest.
If that is what the Government mean—if they want to leave it open for a Government to decide that nationalisation is an option although there is a market solution—that is fine. However, that is moving a long, long way from the position at the start of the crisis, when the Chancellor was almost apologetic about nationalising Northern Rock, saying that it was the last thing and that we could not find any other market solution. We may have to come back to this on Report, but I ask the Minister: what are the Government really saying? Are they saying that in all cases, they want a market solution if possible?
Mr. Mark Todd (South Derbyshire) (Lab): There is one conceivable circumstance in which pursuing an available market solution might not be regarded as appropriate or in the public interest. We have seen an illustration of that in the dilemma involved in the permissive approach to the merger of Lloyds TSB and HBOS. A judgment might be made that that was such an uncompetitive move in the marketplace that it was not in the public interest to pursue it, even though it could be conceived as a solution to that particular banking crisis. That is an illustration of why the tools might be used slightly differently.
It being twenty-five minutes past Ten o’clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.
Adjourned till this day at One o’clock.
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