Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) Order 2023

Lord Tunnicliffe Excerpts

Wednesday 19th April 2023 Grand Committee

I hope that the Minister can give me some of those reassurances. However, if all she does is answer the detailed questions of the noble Baroness, Lady Noakes, she will help me very considerably.

[Lord Tunnicliffe (Lab)]

My Lords, I am grateful to the Minister for introducing this order. I begin by reiterating the Labour Party’s thanks to the officials at the Treasury, the Bank of England and the regulators to secure a rescue deal for the UK arm of Silicon Valley Bank. While there will be important lessons to learn from SVB’s collapse, it was vital that swift action was taken to preserve financing for the life sciences and tech companies that will play such an important role in our future economic growth.

I also thank the noble Baronesses, Lady Kramer and Lady Noakes, for bringing out areas of concern, which I certainly have not seen raised in the same sharp relief. I hope that the Minister will be able to give us some feel as to the extent to which this reach of the ring-fence will be of significance or not, and, if it is significant, why it is intended to be made perpetual by a subsequent order. Equally, when we are discussing lessons learned, the noble Baroness, Lady Kramer, shone a light on the issue of the speed of collapse. The physical queues outside Northern Rock created time; today, very little time need be created between an area of significant concern turning into total collapse. I hope that the regulators, when doing a proper lessons-learned exercise on this will ponder on that point, to see what, if anything, we need to do to be better able to manage the rate of collapse that is potentially available.

The collapse of SVB was the catalyst for several other major events in the global financial system, including the very serious difficulties faced by Credit Suisse. In many senses, the UK regulatory system has functioned as hoped, which we welcome. It certainly makes the many hours spent on previous legislation worthwhile. Financial institutions and regulators in other countries have taken their own steps in recent weeks to deal with issues with entities in their own jurisdictions. The collective action seems to have calmed the markets, which is important for us all. However, I hope that the Minister can assure us that the Treasury, the Bank and the regulators continue to monitor the situation very closely, and that they stand ready to act, should that be required. With inflation still in double digits, and with the implications that is likely to have on interest rates in the short to medium term, will the Treasury finally commission a review of the risks that this could present to the financial system?

On SVB itself, the Government have thus far been unable to provide a proper justification for exempting the bank from ring-fencing requirements, which makes the four-year transition period turning into a perpetual one all the more puzzling. In another place, the Minister sought to reassure colleagues that they need not worry about the potential implications of this exception, as the number of SVB UK customers is low, particularly as a percentage of HSBC’s total client base. Is that really the most that the Treasury can say, or does the Minister have more to offer, given that this debate comes three and a half weeks after the Commons one?

Another question in that debate was on potential reform to ring-fencing requirements in this country. Andrew Griffith promised that

“there will not be any tinkering, but there might … be appropriate reforms”.—[Official Report, Commons, First Delegated Legislation Committee, 27/3/23; col. 7.]

I am not sure that those words are particularly reassuring. We expect news on those reforms in advance of the Autumn Statement, but can the Minister be a little more specific about dates and processes? How swiftly would any reforms be implemented once announced, for example? Will changes require primary legislation? If so, could this come in the Financial Services and Markets Bill, or would the Government bring forward a further Bill?

The action taken to protect SVB UK worked because it provided certainty. Customers of that bank knew within days that they would be able to continue their relationship with it, because of the acquisition by HSBC. However, in other areas, certainty is in short supply. The Prime Minister says he has a plan to halve inflation and bring interest rates down, but inflation remains in double digits and the Monetary Policy Committee is expected to announce a 12th consecutive rate hike. Under this Government, our economy is weaker, prices are out of control and never have people paid so much to get so little in return.

[Baroness Penn (Con)]

My Lords, I thank all noble Lords for their detailed questions on this statutory instrument. While everyone agreed that we reached a good resolution in this instance, it is absolutely right that we look at how it was delivered in detail and how we should reflect from this instance on the resolution regime in our wider regime. The noble Baroness, Lady Kramer, asked explicitly—but I think all noble Lords wanted to know—what the Government will do to ensure that we can learn lessons from the events around SVB UK. The Treasury and the Bank of England are working together to ensure that we properly reflect on these events and will consider how best to draw on the lessons learned and share them as needed in future.

The noble Lord, Lord Tunnicliffe, remarked on wider financial stability events, including Credit Suisse. I reassure him that the UK financial sector is fundamentally strong. The resolution of SVB UK on 13 March highlights how the resolution regime can be effectively used to protect UK financial stability. However, we continue to monitor the situation closely and remain in close contact with the Bank of England, the Prudential Regulation Authority, the Financial Conduct Authority and relevant foreign and international authorities. We are absolutely committed to protecting the stability of the UK banking sector, which is key for supporting economic growth and for the UK’s world-leading financial sector.

The noble Lord, Lord Tunnicliffe, also asked whether we would commission a review of the risks that higher interest rates pose to the financial system. I reassure noble Lords that the Bank of England already has in place processes to monitor and assess risks to our financial sector and banking system. In particular, each year, the Bank of England carries out a stress test of the major UK banks, which incorporates a severe but plausible adverse economic scenario. The 2022 stress test scenario includes a rapid rise in interest rates, with the UK bank rate assumed to rise to 6% in early 2023, as well as higher global interest rates.

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[Baroness Noakes (Con)]

Before my noble friend leaves this point, I do not think she has addressed the question of why the ring-fence resources had to be used to do this. HSBC is very large and has very large UK operations that are not within the ring-fence, so I have been probing—and I know that the noble Baroness, Lady Kramer, is also interested in this—why the ring-fence has to be used. Why did the ring-fence exemption have to be used, because it is clearly not necessary in any absolute sense for HSBC to provide liquidity support to Silicon Valley Bank out of the ring-fence?

[Lord Tunnicliffe (Lab)]

In bringing this back to us, as the Minister will have to do for the second SI, and responding to these questions, can we have some analysis of the competitive advantage that HSBC will get out of this transaction?

[Baroness Penn (Con)]

That point was also raised by my noble friend, and I was hoping to come to it. Whether my answers mean that we will not have a further discussion on it either on the Bill or when the future SI comes forward remains to be seen. I shall try to address some of the points around the ring-fenced bank, the need to go down that route and whether SVB UK needed to be purchased by HSBC’s ring-fenced bank. That was a commercial decision made by HSBC, and it would not be appropriate for me to comment further on it.

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I reiterate that the changes made in response to dealing with SVB UK were specific to the conditions needed to allow that sale to go ahead and are not an indicator of the Government’s wider policy approach here. We do have a wider policy approach, but that pathway has been set out clearly and is the response to both the independent review and further consultation or, in the case of more fundamental reforms, a call for evidence even before any consultation. We will work with the regulators to understand the response to those calls for evidence and then look at the appropriate way forward.

[Lord Tunnicliffe (Lab)]

Can the Minister confirm whether I have understood this correctly? My understanding was that we are assured that any impact on the ring-fence regime will be brought about through primary legislation.

[Baroness Penn (Con)]

It is important to distinguish between the near-term reforms that the Skeoch review recommended—I listed some examples of what can be taken forward through secondary legislation—and any more fundamental changes, which are the subject of the questions in the call for evidence, which would need primary legislation to be amended to take forward. So it is possible to make alterations to the ring-fence regime through secondary legislation; in fact, the Government have been quite clear about their intention to do so. We will consult on that before we do so, and we will set it out then. However, the call for evidence sets out more fundamental options, and that would require primary legislation. So there is a mix, but anything such as abolishing the ring-fencing regime, or other more fundamental changes, will be set out in primary legislation. I hope that provides sufficient clarity on that point.

The noble Baroness, Lady Kramer, asked about the interaction between SVB UK and its parent in the US. I will write to her on that subject. It was a UK subsidiary, was subject to UK regulation, and had its own requirements under that regulation. However, to provide absolute clarity on that point, I will write to her. I will also look back on this debate because it has been detailed and technical—as well as very important—and will endeavour, where I can, to improve on my answers to noble Lords in writing. However, there may be areas where there is nothing further to add, even if that is not to the satisfaction of noble Lords.

It is worth concluding on the more positive note that most noble Lords started with: that the outcome of the Government’s action, together with the Bank of England, to facilitate the sale of SVB UK protected its customers and UK taxpayers. It was a good result in that respect, but the Government will continue to monitor the financial system and consider ongoing events. The final note of reassurance I offer is that the Bank of England has confirmed that the UK banking system remains safe, sound and well capitalised. I beg to move.