 House of Commons |
Session 2007 - 08 Publications on the internet General Committee Debates Banking |
Banking Bill |
The Committee consisted of the following Members:Alan
Sandall, Mick Hillyard, Committee
Clerks † attended the
Committee Public Bill CommitteeTuesday 18 November 2008(Morning)[Mr. Roger Gale in the Chair]Banking Bill10.30
am
Clause 123overview Question
proposed, That the clause stand part of the
Bill.
The
Economic Secretary to the Treasury (Ian Pearson): It is a
pleasure to serve under your chairmanship, Mr. Gale, for the
penultimate sitting of this Committee.
As clause 123
outlines the main features of the bank administration procedure, it
might be helpful if I briefly set out some of these. This procedure may
be required in the event of a partial transfer of a bank’s
business to a bridge bank or a private sector purchaser. Where a
partial transfer takes place, the residual bank—the part left
behind—may be insolvent. In such circumstances, the Bank of
England may make an application to the court for a bank administration
order.
The bank
administration procedure is a new and unique insolvency procedure
created to deal with an insolvent residual bank following a partial
transfer, although it is largely based on existing insolvency
provisions, specifically the procedure of administration as set out in
schedule B1 to the Insolvency Act 1986. It is designed to ensure that
any essential services or facilities that cannot be immediately
transferred to a bridge bank or private sector purchaser will continue
to be provided for a period of time.
The Committee
heard the Government’s case for the importance of the partial
transfer tool within the special resolution regime when we discussed
part 1 of the Bill. The Committee has also heard that the Government
are engaging closely with stakeholders to put in place safeguards to
allay any potential concerns over a partial transfer. We discussed
these safeguards last week in our consideration of clauses 42, 43 and
55. As the Committee will be aware, we are continuing to consult on
these issues, including through the expert liaison group which we have
established and which one of the later amendments seeks to provide on a
statutory basis. In the context of consultation, it is also worth
noting that key stakeholders, including, for example, the British
Bankers Association, broadly agree that if the partial transfer power
is used the bank administration procedure may be necessary and is a
sensible measure for the winding up of a residual
bank.
Bearing that
in mind, I will outline why the bank administration procedure is
necessary and what it is designed to achieve. Where part of a failing
bank’s business is transferred to either a bridge bank or a
private sector purchaser, in accordance with clauses 10 and 11, the
residual part of the bank may be left as an insolvent entity. However,
it may be vital that the insolvent residual company continues to
provide support activities to the commercial purchaser or bridge bank.
For example, it might be impossible to transfer certain assets or
service contracts as part of the initial arrangements. These items may
be vital for the successful operation of the transferred
business.
Under a
normal administration, the administrator would have no obligation to
provide support services to a commercial purchaser or bridge bank and
would be required to take actions in the best interests of creditors.
This could include taking immediate steps to wind up the affairs of the
company, selling its assets and distributing the proceeds to creditors.
Such action could threaten successful resolution of a failing bank
through a partial transfer, since it may render a bridge bank
unworkable or deter any commercial sector acquisition. Crucially then,
the bank administration procedure will oblige the bank administrator of
an insolvent residual bank to provide essential services and facilities
to the transferee. To that end, the bank administrator will have unique
statutory objectives: first, to provide support to a commercial
purchaser or bridge bank and secondly, to rescue the residual bank as a
going concern or wind up its affairs in the best interests of
creditors.
By obliging
the residual bank to continue to provide services to the transferee,
the bank administration procedure will improve the likelihood of a
successful resolution of a failing bank’s business. Once it
becomes no longer necessary for the residual bank to continue to
provide support services, the procedure would continue in a similar way
to an ordinary administration, although to keep down costs, maximise
returns to creditors and to protect the interests of creditors by
providing for a full range of outcomes, some of the existing powers of
a liquidator have been built into the procedure.
One of the
main concerns raised by stakeholders—which the Government have
addressed—is that following a partial transfer those creditors
who remain in the residual bank will lose out. We have debated this
before, which is why the Government have put measures to mitigate the
risks in clauses 42, 43 and 55, and in the code and regulations on
which we are consulting. We are continuing to discuss the subject with
the expert liaison
group. The
bank administration procedure also provides that the bank administrator
will work on both objectives simultaneously, to protect the interests
of creditors. The bank administrator will be required to ensure that
essential services and facilities are supplied to the private sector
purchaser or bridge bank. At the same time, he or she will be able to
take action to rescue the residual bank or to wind up its affairs,
provided that these do not interfere with the first objective. It might
be perfectly feasible to realise some of the residual bank’s
assets without prejudicing the operation of the transferred
business. Many
provisions of the bank administration procedure are substantially based
on the existing provisions of UK insolvency law, namely the
administration provisions of the Insolvency Act 1986, as amended by the
Enterprise Act 2002. The provisions will, therefore, be familiar to
companies and their professional advisers. The UK’s existing
insolvency regime is widely regarded as robust and well supported. In
line with the approach taken for the bank insolvency procedure, powers
are to be taken in the Bill to extend the provisions of the bank
administration procedure to building societies and credit unions, with
necessary modifications. A power is also to be taken to adapt the bank
administration procedure to deal with multiple transfers to different
purchasers. The
bank administration procedure is a well designed measure, for use only
in very specific circumstances, which builds on existing insolvency
procedures and forms an essential part of the special resolution
regime. It has been consulted on and there is substantial agreement
that it is necessary. The subsequent clauses have attracted very little
comment and have wide-ranging support. I hope that this brief overview
debate is helpful to the Committee.
Mr.
David Gauke (South-West Hertfordshire) (Con): I welcome
you to the Chair, Mr. Gale. The Minister might be being a
little pessimistic—or optimistic—in saying that this is
the penultimate sitting of the Committee. I do not know which way to
look at it. I know that we are enjoying it a great deal, but I fear
that we may get through the remainder of the Bill in the course of the
morning. We shall see; perhaps I am being pessimistic in thinking that
we will not have the pleasure of debating it this afternoon as
well.
I shall make
two points about the clause. I welcome the attempt to address the
difficulties that we face by improving the structure of administration
for failing banks. We strongly believe that administration has a large
part to play. Indeed, we advocated some kind of administration
structure in the case of Northern Rock. We welcome the
Minister’s saying that this is appropriate. If I may, I will
contrast that constructive approach with the comments made by his
senior colleagues earlier this year. For example, the Chancellor of the
Exchequer, in the context of Northern Rock,
said: “Administration
would mean that control would immediately pass to an administrator who
would look to realise the value of the company’s assets, which,
under current market conditions, would amount to a fire
sale.”—[Official Report, 21 January 2008; Vol.
470, c.
1208.] The
Prime Minister, two days later,
said: “Let
me just tell the House what administration means. It means a fire sale
of the assets, it means closing down the company and it means the
Government losing billions of pounds. It is the worst possible solution
and the Conservatives are not only guilty of inconsistency, but guilty
of putting the stability of the economy at
risk.”—[Official Report, 23 January 2008; Vol.
470, c.
1490.] Now
we find that the Government recognise that administration for a
financial institution does not necessarily put the economy at risk,
cost the Government billions, and lead to mass unemployment and a
plague of locusts. Indeed, I asked the Minister at the beginning of
these Committee proceedings whether administration means a fire sale of
assets to which to he
replied: “It
is not right to say how the administrator would want to pursue its
duties. The administrator would certainly have objectives for ensuring
the supply of essential services and either rescue it as an ongoing
concern or wind up its affairs. It would normally want to do that in
the best possible way. If it can rescue the bank, it will want to do
that and, if it is to wind up its affairs, it will want to do that in a
responsible and appropriate
manner.”——[Official Report, Banking
Public Bill Committee, 21 October 2008; c. 8, Q12.]
The Minister puts it
very well; that is what administrators do. Some of his colleagues
appeared to be confused about the difference between administration and
liquidation. Clearly, administration does not mean a fire sale of
assets. It is one of the useful and necessary tools that need to be
available to the authorities in the case of a failing bank, and we
therefore welcome the inclusion of part 3. We will make one or two
comments on it during the proceedings, but—as the Minister
says—it has not produced many comments from outside bodies. We
have debated other parts of the Bill at great length, but that will not
be necessary with part
3. Another
general observation, which could have been made about other parts of
the Bill but which could help here, is that the Government have in
mind—as the Minister has stated and as appears in the
Bill—that when a financial institution runs into difficulties
some of the assets will be transferred to a bridge bank, or straight to
a private sector purchaser, and that will be the good bank. The
residual bank is the bad bank. We have debated what toxic assets are,
and agreed that the issue with a bad bank is often uncertainty rather
than its being all that terrible. The Bill, particularly in part 3,
makes it clear that the residual bank is the bad
bank. In
our debates, the Government have argued for as much flexibility as
possible in the Bill. However, the concern has been raised with us that
the Bill to some extent closes down one area of flexibility in that, in
simplistic terms, the residual bank will always be the bad bank and the
good assets will be transferred out. Is it not conceivable that the
easiest route would be for the residual bank to be the good bank, and
for some of the bad assets to be transferred out? It is possible to
imagine circumstances in which transferring assets to a bridge bank
would trigger an event of default, or in which regulatory permission
might be required. It might be difficult to transfer the good assets,
and it would possibly be better to transfer the bad ones and leave the
good ones in the residual bank. That has not been the experience so
far; that route was not taken with Bradford & Bingley. The residual
bank would perhaps normally become the bad bank, but the Government
seem to have closed off the alternative route. Tabling amendments to
address that would be hugely complicated and would, I suspect, create
difficulties even for the Treasury. None the less, it would help the
Committee if the Minister could explain why the Bill has closed off
that route. Does he consider it highly unlikely that it would ever be
useful to retain the good assets in the residual bank and transfer the
bad ones
out? In
conclusion, we support the need for a bank administration power. We
will raise one or two points in the course of the proceedings, but I
hope that we can make reasonably quick progress
today. 10.45
am
Ian
Pearson: That was fantastic. I thought when the
hon. Gentleman started criticising the Chancellor and Northern Rock
that we might get a chance to talk politics rather than debate the
technical details of the Bill. Alas, it was quite ephemeral and he went
on to the technical comments.
Partial
transfers are important; there is a world of difference between putting
a whole bank and putting part of a bank in administration. I strongly
believe that
the actions we took with Northern Rock and Bradford & Bingley, which
were opposed by the Conservative party, were the right ones. They
benefited depositors and will prove beneficial to creditors too. I
contrast what we did there and what we are proposing in the BAP, with
the actions that the Conservative party took when it opposed the
Banking (Special Provisions) Act 2008, opposed what we did
on Northern Rock and opposed what we did on Bradford & Bingley.
That is probably the end of the politics. I give way to the hon.
Gentleman and then I am sure we will revert to discussing the
BAP.
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