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Clause 12(3)(d) reads:

this implies that they will be required—and the code comments on this in paragraph 51:

In Clause 12(3)(e) there is “eventual disposal”, which does not sound like a quick and successful sale. Paragraph 81 of the code goes to and fro again on this, as do many of the paragraphs in the code. It says:

“In some circumstances it may be appropriate to transfer some or all of a bridge bank’s business to a public-sector transferee,

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either a company wholly owned by the Treasury or an onward bridge bank ... However, this would only occur if it best met the bridge bank objectives”.

All this is set against the plea of the Government that flexibility is needed. These paragraphs show considerable flexibility. The problem is that flexibility is deeply at odds with certainty, and the market needs certainty. More thought than has been given so far is needed about the procedures that the bank will have to follow and how it would know that it had been successful. The language of the code is perhaps best summed-up by saying, “Now you see it, now you don’t”.

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This is all subject to Clause 79, which states:

“The Bank of England may not take action in respect of the bridge bank without the Treasury’s consent if the action would be likely to have implications for public funds”.

That seems to be a contradiction in terms. You cannot have a bridge bank without it having implications for public funds. So, throughout whatever is done, the Bank of England has to give its agreement.

Finally, under Clause 12(4), transfers from one Bank of England company to another will create an “onward bridge bank”. Why the Bank of England would want to complicate its life further with both bridge banks and onward bridge banks I do not know. We need a full explanation of these matters. Meanwhile, given the drafting of the Bill, particularly the drafting of the code, we live in the hope rather than the expectation that there will never be a bridge bank.

Lord Higgins: It is something of a relief to get away from discussing individual amendments in order to have a clause stand part debate. One should be grateful to the noble Viscount for giving notice of his intention to oppose the Question that Clause 12 stand part of the Bill. Clearly, the second option is very important. The noble Viscount raised a number of questions which I hope the Minister can clarify. In particular, I am not quite clear what will happen if part of a business, rather than the whole of it, is transferred to a bridge bank. Would the bank concerned effectively be split into two parts, one of which remains in the private sector and one of which would become a company owned by the bank? We are told that the code of practice will set out a number of things, including the content of the articles of association, which will obviously be very important, and the objectives. Perhaps the Minister should give us an idea of what the objectives will be. Will it not simply operate as a normal, commercial bank? If it is to have objectives beyond that, will it seek to facilitate, for example, the extension of lending when we know that considerable controversy has arisen because the Government have given large sums of money to banks which have failed to lend it on? Will there be objectives of that kind?

Like my noble friend who has just spoken, I am somewhat mystified by the concept of an “onward bridge bank”. It is not at all clear why, if it has been set up as a “bridge bank”, it will need to be transferred to a different company. What will be the difference between the initial bridge bank and an onward bridge bank? In that context, the code of practice is said to be important in setting up the objectives, the articles of association

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and so on for a bridge bank, but does not, apparently, fulfil the same function in relation to the onward bridge bank? It would be helpful to have clarification of that, which, as my noble friend has said, is apparently a completely new innovation and a concept we have not had on any previous occasion.

Lord Davies of Oldham: I am grateful to both noble Lords, in particular the noble Viscount, Lord Eccles, for asking me to spell out what Clause 12 represents. It is a tall order, as I am sure he will recognise. One feels more comfortable when one has specific amendments to which one can address responses. Covering the whole clause would delay the House for an inordinate amount of time. However, I will give as full an explanation as I can, consistent with respect for parliamentary procedure.

I begin by responding to the noble Lord, Lord Higgins. The noble Viscount, Lord Eccles, asked the same question, which is important to this clause: “What is an ‘onward bridge bank’”? I will tackle that first. The concept of the onward bridge bank, which is as new as that of the bridge bank itself, is that the Government are seeking a high degree of flexibility to allow the Bank of England to carry out any necessary restructuring. After the initial transfer to the bridge bank, it is possible that the Bank of England may wish to transfer some or all of the bridge bank’s business to another company that it owns. It might wish to do this, for example, if it wishes to split up the business prior to selling it. Under subsection (4), if property, rights or liabilities are transferred in this way, the new company is called an “onward bridge bank”. That is the concept behind that particular term.

I hope that noble Lords will recognise that we are talking about difficult circumstances for the Bank of England. I will deal later with the time constraints under which we are working, and how open the procedure is. The House will appreciate how the Bank of England, when it takes over a failing enterprise, must then create circumstances where it can meet the criteria of the rubric that the Opposition constantly enjoin upon us, and which the Government also accept—that there is no intention to take banks into public ownership, except when they are in such serious difficulties that that is the only possibility. Therefore, when the Bank of England takes responsibility for a bank, it must be able to make arrangements for disposing of it in due course, and returning to the private sector that part of the operation that may be viable and for which people will bid.

The concept of the bridge bank is fundamental to Clause 12.

Lord Higgins: The noble Lord is moving on from an onward bridge bank to a general bridge bank. Is an onward bridge bank what one might call a “split bridge bank”? Is it designed so that the Bank can fragment it if it wishes?

Lord Davies of Oldham: I have gone as far as I can in explaining the onward bridge bank. It is where the Bank of England has a potentially disposable asset

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that it wants to transform into one that in fact does meet the requirements of the market. We must give the Bank greater flexibility to effect this. The onward bridge bank is only an addition to the provision of the bridge bank, preparatory to the Bank making arrangements for the return to the private sector of some of the assets—if it cannot effect what would be most desirable, which is the return of the totality. That is what the concept is.

I hope that the noble Lord will interpret that answer as broad agreement with what he is asking.

On the more general issue, the clause embraces the second of the stabilisation options—the bridge bank. The option gives the Bank of England the ability to take control of part or all of a failing bank’s business. Once the Bank of England has control of this bank’s business, it may stabilise it, restructure it as necessary, and sell the bridge bank. If it is successful in doing so, the concept of the onward bridge bank does not come into play.

The bridge bank option will give the Bank of England the opportunity to stabilise the bank, preserve franchise value and ensure that customers have continued access to banking services. It will provide the Bank with time to pursue a private-sector solution where this could not have been immediately arranged, for example by allowing potential acquirers the time needed to carry out essential due diligence on the business.

The bridge bank option is very important, which is why the noble Viscount, Lord Eccles, has focused on it. It enhances the possibility that the authorities will be able to facilitate onward sale of the bank to a private sector purchaser, which, I repeat, is the Government’s favoured option for the resolution of banking difficulties.

Bridge banks are intended as short-term operations, and the aim is for a swift onward sale to a private sector purchaser. Under Clause 80, the Bank of England must report to Parliament about the activities of a bridge bank after one year.

As with the previous clause and the private sector purchaser tool, Clause 12 establishes that where the general special resolution regime conditions and the specific conditions for the bridge bank stabilisation option are met, the Bank of England may transfer all or part of the business of a bank to a bridge bank. Transfer to a bridge bank may be effected through a transfer of the bank’s property, rights and liabilities, and is executed by one or more property instruments made by the Bank of England. The Bank of England has the power to choose which parts of a failing bank’s business to transfer. Hence, as with the private sector purchaser option, partial transfers are possible. I shall provide a detailed treatment of partial transfers when we debate the property transfer clauses.

Unlike the private sector purchaser tool, the bridge bank can be effected only through the use of the property transfer power, and not by share transfer. This is because a bridge bank is a new entity, especially established to carry on the banking business transferred to it. Property transfer powers offer a number of advantages, in particular the fact that they permit a partial transfer, which may be the best solution in some circumstances.



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It is important that bridge banks are managed in the right way; the noble Viscount made that quite clear when he introduced the debate. The Government consider it appropriate to set out how this will work in practice in greater detail. To this end, the code of practice, to which the noble Viscount made copious references, which is provided for under Clause 5, will cover matters relating to the governance and management of bridge banks. The published draft code makes draft illustrative provision on these matters.

The Bank of England will not profit from operating a bridge bank. The Bill’s provisions for compensation provide that a “bank resolution fund” must be established when a bridge bank is created. The fund provides the failing bank with a contingent economic interest in the resolution. The bank resolution fund is a scheme under which the failing bank becomes entitled to the proceeds from the sale of some or all of a bridge bank’s business, less any deductions necessary to reflect the use of any public funds in the resolution, including the placing of public funds at contingent risk, or any other costs of the resolution. On the winding-up of the failing bank, the net proceeds of the resolution will flow to the creditors—and shareholders, should creditor claims be satisfied in full—of the failing bank.

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The bridge bank stabilisation option will help the authorities to resolve the issues surrounding a failing bank, enhancing the chance of a successful sale of the bank to a private-sector purchaser. That is the concept behind the bridge bank. I hope that I have explained the additional dimension of the points on which the noble Lord, Lord Higgins, in particular challenged me. I hope that the noble Viscount, Lord Eccles, will think that the combination of the proposals in the clause and the code to which he has made reference is explicit about how the Bank of England will manage this part of the resolution procedures, which are very important.

Lord Wade of Chorlton: Could a bridge bank be used to take over the toxic assets of a bank or banks, or could it take over only an entire bank?

Lord Davies of Oldham: If the option exercise involved the Bank of England establishing a bridge bank, the Bank would take into account the nature of the institution that it was taking over. The straightforward answer to the noble Lord is that it might take over any bank in any circumstances which fulfilled the criteria. The answer to his question is therefore yes.

Lord Wade of Chorlton: That is not really what I was looking for. It is clear that a number of banks are having problems and nobody knows how many toxic assets they hold. That is one of the fundamental issues. One solution might be if banks could get rid of their toxic assets and make it clear what their proper balance sheets were. Would it be possible for the Government to use this process to take hold of those toxic assets for a period and move them on in better times?

Lord Davies of Oldham: The answer is yes, but I think that the noble Lord will recognise that, in terms of the public position, the Bank of England would

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exercise real judgment in using the option in such circumstances. That is why we are in very difficult waters and need more than one vessel to navigate them, of which the bridge bank is one.

Lord Newby: Let us be clear. When the Minister said that a bridge bank could take on toxic assets, am I right in thinking that it could do so only in the context of Clause 8—namely, that the bank from which it was taking the toxic assets was in such difficulty that either the stability of, or maintenance of public confidence in, the financial system was at risk or protection of depositors was required—and that it could not take on the toxic assets of a bank that was doing reasonably well? Could it take on toxic assets only in cases where the conditions for the stability regime to come into play were met?

Viscount Eccles: You come back to a judgment about what is a threat to the stability of the UK financial system. In circumstances such as today’s, you could argue that all sorts of things are a threat to stability.

Lord Davies of Oldham: Of course, that is right. That is why we have great difficulty anticipating all circumstances for which the Bill is intended to allow the authorities to act effectively. I am grateful to the noble Lord, Lord Newby. Just as the Box raced a note back to me saying, “Quote Clauses 7 and 8”, which are the conditions under which the authorities act, the noble Lord expressed them with great accuracy and clarity.

Lord Mackay of Clashfern: If I have understood this situation correctly—and I would like the Minister to say if I am right—an onward bridge bank is just a bridge bank. The relationship between that bridge bank and the first bridge bank really gives rise to the definition of “onward”. The onward bridge bank could be a bridge bank already in existence to take on the assets of another failing bank. It might be thought a good idea to amalgamate some part of the assets of one failing bank with the assets of the second, and put them into a bridge bank which would be an onward bridge bank in relation to the first and just a bridge bank in relation to the second. Then the whole thing could be sold off to the private sector as a bridge bank if that was feasible. Is that correct?

Lord Davies of Oldham: Sometimes I feel that ministerial replies ought to consist of one sentence, so that everyone can then put their gloss on it. We learn more from the contributions around the Committee than we sometimes do from the notes on which I base my replies.

The noble and learned Lord is of course right. The onward bridge bank is for circumstances where, in preparing for a purchaser, it is clear that there is not the potential for the sale of the entity for which the Bank of England became responsible, but that it may have parts that can effectively be made ready for the market. First, there may be several different such circumstances and, secondly, it is quite difficult for us to envisage just how such circumstances can be defined. However, the concept is exactly as the noble and learned Lord suggests.



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Baroness Noakes: My noble friend Lord Wade mentioned the taking-on of toxic assets. It is worth clarifying that the Bill in no way creates a facility to take toxic assets out of banks that are not otherwise in trouble. The Bill therefore does not provide a mechanism for that, should the Government choose at any point to go down that route. The Minister might like to confirm that the Government do not intend to take legal powers to do that.

Lord Davies of Oldham: I am extremely grateful to the noble Baroness. The noble Lord, Lord Wade, introduced the concept of toxic assets. I was seeking to establish that the Bank of England may take on a bank, parts of which can readily be described as “toxic”. That is why we have the concept that it is perhaps able to sell on only a part of itself when it has analysed its position. The noble Baroness is absolutely right. The Bill is not about dealing with toxic assets, but with banks that fall into the clearly defined areas of Clauses 7 and 8, where they present dangers to the financial system and, therefore, to the public interest.

Viscount Eccles: On that last point, is the Minister saying that the Bill, when enacted, would not allow another Bradford & Bingley? In that situation, the viable parts of the business were immediately subject to a successful private-sector sale. The non-viable, or much more doubtful, parts of the business were taken into public ownership. There was an absolutely clear decision to cherry pick: dispose of the good thing immediately and take the less good thing into public ownership. As I have read the Bill, I see nothing to prevent the Bank of England, once it has the right approvals and the FSA has pulled the trigger, doing a Bradford & Bingley: immediately selling the deposit-taking part of the business and taking on the not-so-good book.

Lord Higgins: Is it not the case under this clause that the Bank of England could take over a particular bank and make it into a bridge bank but, under the provisions for onward bridge banks, it could indeed pass on the viable part of it—the Minister seemed to imply that that would happen—but get left with the rump, including the toxic assets? To that extent, the Government would be taking over a degree of toxic assets and retaining them, even though the best part had been sold on. It is the same point as that which my noble friend Lord Eccles is making.

Lord Davies of Oldham: We all have to recognise that the Bank of England will not be involved in these circumstances any more than the Financial Services Authority or the Treasury. None of them will get involved in these circumstances unless a bank is in such trouble that it is presenting a threat to the financial system and to the public interest. When the authorities act, it is not the case that they are dealing with the world in perfect viability; far from it, they are dealing with crisis and institutions in crisis. There is bound to be an unfortunate dimension—even a toxic one—as far as such institutions are concerned. The issue we are trying to resolve in Clause 12 is whether this structure is a valid and valuable option for a solution to such difficult circumstances. That is why the clause should stand part of the Bill.



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Lord Armstrong of Ilminster: The Minister has not dealt with one point made by the noble Viscount, Lord Eccles, that a bridge bank is by definition in the Bill wholly owned by the Bank of England; the Bank of England is wholly owned by the Treasury; therefore, a transfer to a bridge bank under this clause is, in effect, a transfer into public ownership. Should the instruments that effect that not be subject to some kind of parliamentary procedure as the Delegated Powers and Regulatory Reform Committee asked?

Baroness Noakes: It might help the noble Lord to know that I have an amendment to that precise effect later on in the relevant clause dealing with transfers.

Lord Davies of Oldham: It might also help the noble Lord to know that I have an answer to that amendment.

Viscount Eccles: I shall try to settle into the position that concerns me. I understand the need for flexibility and, in times of crisis, nobody would wish that there were no flexibility. On the other hand, it is at odds with certainty. If you are looking at assets that you wish to sell, it is much better that the market has a degree of certainty about what you are doing and the way that you are doing it. The Minister said that this was being done by asset transfer. That is more convenient than share transfer because share transfer brings all the liabilities while assets come as they are and you have a chance to value them. With share capital, you do not know; there may be 16 pieces of litigation in the United States about which you know nothing when you acquire the shares. That is a benefit and makes the Bank of England’s task somewhat simpler.

In my career, I have been involved with many businesses that were in trouble, mostly in the third world, and not banks, with one or two marginal exceptions. It is important that when you enter a rescue you know how you will exit and the rules about what you are expected to do in order to create an exit. When people used to ask me about this, I said, “Please read Hamlet. The exits are much more exciting than the entrances”. Polonius had a rather unhappy exit, but the exits are many and various. They can involve writing things off and throwing them away, as in house clearances. The good assets are easy to deal with—the children want them—but who is going to clear out the bad assets?

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