Bank Resolution (Recapitalisation) Bill [HL]

Baroness Penn Excerpts

2nd reading
Tuesday 30th July 2024 Lords Chamber

[Baroness Penn (Con)]

My Lords, as has been the case with certain previous Treasury Bills, we have had a small but expert group of contributions today, and we have heard some common themes. From the Opposition Front Bench, I say first and foremost that we support the Bill. That should come as no surprise, given that it draws on proposals that were consulted on when we were in government.

As we heard, the genesis was the response to the period of banking stress in spring 2023, particularly the failure of Silicon Valley Bank. It is worth recalling that, at the time, Silicon Valley Bank was successfully sold to HSBC—I do not know whether the pound was actually paid—customers were able to access normal banking services and their deposits were protected in full, at no cost to the taxpayer. This was a significant success.

However, those events raised several questions, one of which is being addressed today: the potential risk to public funds of any resolution action for a small bank, given that, unlike larger banks, they are not required to hold a portion of their own equity and debt above minimum capital requirements to support their resolution. The solution put forward in the Bill is the use of the Financial Services Compensation Scheme levy to meet the costs of recapitalisation that may be needed to support the operation of a bridging bank or facilitate a sale to a private sector buyer.

As I have said, we are supportive of the Bill, but it would be helpful to our scrutiny of it if the Minister were able to give further detail on three areas. The first, which we have had some debate on today, is the approach to resolution versus insolvency. The PRA has set out that it does not seek to operate a zero-failure regime, but rather to work with the Bank of England to ensure that any firms that do fail do so in an orderly way. Prior to the failure of SVB, for smaller banks this was assumed to involve insolvency. With resolution now a viable alternative for smaller banks, it would be useful to understand the extent to which the Government expect resolution to be used, as opposed to insolvency.

The second area is the question of costs. A number of concerns were raised in response to the Government’s consultation with regard to the costs of the new FSCS levy. In particular, reassurance was sought that the most cost-effective mechanism would be used by the Bank of England in considering what course to take. Of course, those two questions are related. I was pleased to see the Government publish a cost-benefit analysis alongside their consultation response—although, as the noble Lord, Lord Eatwell, has noted, it is not without its limitations. That analysis seeks to provide reassurance that resolution, rather than insolvency, will often be the less costly option, both in terms of direct costs and the wider benefits of customer continuity and public confidence in the banking system. Although that may be welcome, it is hard not to conclude that resolution may become the default option when it comes to managing the failure of a small bank; indeed, the noble Baronesses, Lady Bowles and Lady Kramer, have said they would welcome such a move. If that is the case then the proposals we are debating amount to more than just a minor modification of the resolution regime—as is contended by the Government.

This is also an important point as the Government put forward the alternative of insolvency as a check against the inappropriate use of resolution in the case of small banks. For example, in addressing concerns around recapitalisation being used alongside the private purchaser tool, where it may otherwise be reasonable for the purchaser to recapitalise the bank, the Government point to insolvency as an alternative option, providing

“an important safeguard against any inappropriate use of the new mechanism alongside the Private Sector Purchaser stabilisation option.”

That argument is also deployed with respect to any impact of the proposals on market discipline. The Government

“considers this to be a manageable risk when set in wider context, given that insolvency remains an important part of the toolkit.”

Therefore, when the Minister responds, it would be useful for him to set out whether resolution will be the preferred approach to failure over insolvency for small banks. If not, can he give an example of a scenario where insolvency may be used over resolution?

I expect the Minister will likely refer me to the framework in which the Bank of England can deploy its resolution powers in order to answer that question. It will be for the Bank to determine the appropriate response within the resolution conditions and objectives set out in the Banking Act 2009, and in particular the use of the public interest test, which seems to bear significant weight for guiding the operation of the resolution process and providing safeguards to the Government and the banking industry in providing value for money. Again, that may be wholly appropriate, given the need for flexibility in response to scenarios that can be planned for but which invariably play out in unexpected ways. However, we have already heard from the noble Lord, Lord Macpherson, about some of the risks, or misalignment of incentives, with so much of the decision-making lying with the Bank of England.

That brings me to the third area where further detail from the Minister may be of help: the scrutiny of and accountability for the use of these powers—a favourite theme from our discussions on the then Financial Services and Markets Bill. The consultation response acknowledges the importance of this, and points to Sections 79A and 80 of the Banking Act 2009, which require the Bank to report to the Chancellor of the Exchequer where it has used resolution powers to transfer a bank to a private sector purchaser or a bridge bank. The report must comply with any requirements specified by His Majesty’s Treasury, which could include requiring the Bank to disclose the estimated costs to industry of the options that were considered.

I am pleased that the Government have said they intend to update the Special Resolution Regime code of practice to reflect the introduction of this new mechanism, and expect that they will confirm that His Majesty’s Treasury will stipulate that reports produced on the use of this new mechanism would require the Bank to disclose the estimated costs to industry of the options considered. I also welcome the expectation that the Treasury will expect to make such reports publicly available, including laying them before Parliament where required to do so under the Banking Act.

However, given the importance of this, it would be useful to see proposed updates to the SRR code of practice alongside this legislation, rather than once it is complete. Could the Minister commit to publishing the proposed updates ahead of the Bill reaching Committee? There is an expectation that such reports would be made public, including laying them before Parliament, but would Minister commit to strengthening this expectation to a commitment? Could he elaborate on where the Banking Act requires such reports to be laid before Parliament and, crucially, where it does not?

The Government have also committed that the update to the Special Resolution Regime code of practice will address the fact that, for larger banks, the new FSCS levy could be seen as charging them twice for the same risk, given that revenues from the existing banking levy can already be drawn upon to support resolution, if needed. One could argue that larger banks are paying for the same risk not twice but three times, as they meet their own MREL requirements to support their resolution. While I understand the Government’s desire to spread the cost of this mechanism across the whole sector to avoid disproportionately burdening smaller banks, as the noble Baroness, Lady Kramer, asked, what consideration have the Government given to the impact on medium-sized banks that are required both to meet their own MREL requirements and contribute to this new levy?

Finally, I share the concern of many noble Lords that the Bill does not limit the use of this mechanism to the resolution of small banks. Can the Minister confirm that the Government remain of the view that MREL remains the appropriate route for the resolution of larger banks? Is the intention that this mechanism cannot be used for that purpose but is reserved only for smaller banks without MREL in place? This is important to understand whether the scope of the Bill is just a minor adjustment to the resolution regime or a more fundamental shift in how we are approaching failing banks.

These Benches support action taken to update the resolution regime. We acknowledge the need to have a flexible system in place that allows for action to be taken swiftly in response to rapid changes in circumstances, but it is also important that the costs and benefits of such action are properly understood, and that there is transparency and accountability in place for when such powers are deployed. I look forward to the Minister’s response.