Bank Resolution (Recapitalisation) Bill [Lords]

Adam Jogee Excerpts

Wednesday 22nd January 2025 Commons Chamber

[The Economic Secretary to the Treasury (Emma Reynolds)]

I beg to move, That the Bill be now read a Second time.

The Bank Resolution (Recapitalisation) Bill will enhance the UK’s resolution regime by giving the Bank of England a more flexible toolkit to respond to bank failures. The Bill creates a recapitalisation mechanism that ensures that certain costs of managing the failure of banking institutions do not fall to the taxpayer. It strengthens protections for public funds and financial stability, while supporting the competitiveness and growth of the UK financial sector by avoiding placing new up-front costs on the banking sector. It is therefore an important Bill that underpins this Government’s vision to promote growth and economic stability.

The policy in the Bill builds on the proposals set out in consultation by the previous Government. I thank the previous Government—I do not always do that, by the way—for the work they did with the Bank of England on the consultation and on the resolution of Silicon Valley Bank UK, back in March 2023. The Bill provides the Bank of England with greater flexibility to manage the failure of small banks, and thereby embeds lessons learned from the volatility in the UK banking sector in 2023, notably that arising from the failure of SVB UK. I hope, given their origins, that these proposals will be welcomed by hon. Members from across the House.

The resolution regime was created by the Banking Act 2009 in the wake of the global financial crisis. It provides the Bank of England with a set of tools to manage the failure of financial institutions in a way that limits risks to financial stability, public funds and the UK economy. The regime was introduced in recognition of the global consensus that reforms were needed to end “too big to fail” and to ensure that, where necessary, financial institutions can be supported to fail in an orderly fashion. This regime has been developed and steadily added to by a series of successive governments over the past decade. That work has given the UK a robust regime that reflects relevant international standards and supports the UK’s role and reputation as a leader in financial regulation, enhancing confidence in our financial system and making the UK a more secure and attractive place in which to invest.

The resolution regime was last used to resolve Silicon Valley Bank UK, the UK subsidiary of the US firm that collapsed in March 2023. The Bank of England used its transfer powers under the Banking Act 2009 to effect the sale of Silicon Valley Bank UK to HSBC. That delivered good outcomes for financial stability, customers and taxpayers. All the bank’s customers were able to continue accessing their bank accounts and other facilities, and all deposits remained safe, secure and accessible. The Bank of England achieved the continuity of banking services, and maintained public confidence in the stability of the UK financial system.

The case of Silicon Valley Bank UK demonstrated the effectiveness and robustness of the resolution regime. However, as would be appropriate following any bank failure, the Treasury, the Bank of England and their international counterparts reflected carefully following this period of banking sector volatility, and following that reflection, the Government concluded that there was a case for a targeted enhancement to give the Bank of England greater flexibility to manage the failure of smaller banks such as Silicon Valley Bank UK.

At this point, I should explain that the Bank of England generally expects to place failing small banks into insolvency under the bank insolvency procedure, because their failures are not generally expected to meet the conditions that must be satisfied for the Bank of England to exercise its resolution powers. One of those conditions is that winding up the bank would not achieve the resolution objectives to the same extent as they would be achieved through the use of the resolution powers. Those objectives include protecting UK financial stability, covered depositors and public funds. When a failing firm enters insolvency, its eligible depositors are paid out up to £85,000 each within seven days by the Financial Services Compensation Scheme, with higher limits for temporary high balances. This compensation is funded initially through a levy on the banking sector, and then, to the extent possible, recovered from the estate of the failed firm.

As was seen in the case of the Silicon Valley Bank, it is the Government’s view that in some cases of small bank failure, the public interest and resolution objectives are better served by the use of the resolution powers than by placing the firm into insolvency. Smaller banks are not required to hold additional funds and liabilities that could be bailed in during a resolution, so in a case in which a small bank does need to be resolved, additional capital may be required to support a successful resolution. For example, funds may be required for the bank in resolution to meet the minimum capital requirements for authorisation, or to sustain market confidence. At present, these recapitalisation costs have to be borne by public funds. The Government believe that that situation should be avoided to protect taxpayers from bearing those costs, and I hope that the Opposition agree; we shall see very shortly. To that end, the Bill aims to strengthen the protections for public funds when a small bank is placed into resolution.

Overall, this is a prudent set of reforms to ensure that the resolution regime continues to effectively limit risks to financial stability and, indeed, to taxpayers. The Bill does not make widespread changes to a regime that is working well, and it is important to emphasise that the bank insolvency procedure will continue to play an important role in managing the failure of small banks. That said, the Bill reflects the Government’s belief that a targeted set of changes is needed to ensure that, if necessary, existing resolution powers can be applied to small banks to achieve good outcomes for financial stability, while also protecting taxpayers. It achieves that by introducing a new recapitalisation mechanism, which allows the Bank of England to use funds provided by the banking sector to cover certain costs associated with resolving a failing banking institution.

The Bill does four main things. First, it expands the statutory functions of the Financial Services Compensation Scheme, giving the Bank of England the power to require the FSCS to provide it with funds to be used to support the resolution of a failing bank. Secondly, it allows the FSCS to recover the funds provided to the Bank by charging levies on the banking sector. This mirrors the arrangements for funding payouts to covered depositors in insolvency, with the exception of the treatment of credit unions, to which I will return. Thirdly, the Bill gives the Bank of England an express ability to require a bank in resolution to issue new shares, facilitating the use of industry funds to meet a failing bank’s recapitalisation costs. Finally, following constructive debate in the other place, the Bill sets out a number of accountability measures that apply when the Bank of England uses the recapitalisation mechanism.

The Bill consists of eight clauses to deliver those key components. Clause 1 inserts a new section into the Financial Services and Markets Act 2000, which introduces the new mechanism. It allows the Bank of England to require the Financial Services Compensation Scheme to provide the Bank with funds when using its resolution powers to transfer a failing firm to a private sector purchaser or bridge bank. It sets out what these funds can be used for, namely to cover the costs of recapitalising the firm and the expenses of the Bank of England or “relevant persons” in taking the resolution action. “Relevant persons”, for this purpose, means the Treasury, or a bridge bank or asset management vehicle operated by the Bank of England. The clause also allows the Financial Services Compensation Scheme to recover the funds provided through levies.

Clause 2 sets out the reporting requirements for the Bank of England when it uses the recapitalisation mechanism, added to the Bill by the Government in the other place. The Bank must report to the Chancellor on the use of the recapitalisation mechanism and the stabilisation option that it was used in connection with. The Treasury can specify the content and timing of these reports, although if a final report is not produced within three months, the Bank of England must produce an interim report within that three-month period. The Chancellor must lay all reports before Parliament, although the clause allows discretion to omit any information that it would not be in the public interest to publish.

Clause 3, added by the Government in the other place, requires the Bank of England to notify the Chairs of the relevant parliamentary Committees in this House and the other place—the Treasury Committee in the House of Commons, and the Financial Services Regulations Committee in the House of Lords—as soon as reasonably practicable after using the mechanism. Clause 4 requires the Bank of England to reimburse the Financial Services Compensation Scheme for any funds it provides that were not needed. Clause 5, also added by the Government in the other place, states that the Treasury must include guidance on the contents of reports on use of the mechanism in the code of practice, a statutory document that the Treasury must publish and to which the Bank of England must have regard, which explains how the resolution regime is intended to work in practice.

Clauses 6 and 7 make several consequential amendments to reflect the introduction of the new mechanism. Clause 6 primarily ensures that existing provisions relating to the Financial Services Compensation Scheme apply to the new mechanism in the same way. The most substantive provision specifies that the FSCS cannot levy credit unions to recoup funds provided under this mechanism, and was added to the Bill before its introduction to Parliament in response to valid concerns raised by industry. In clause 7, which contains mostly technical consequential amendments, the most substantive change gives the Bank of England the power to require a failing firm to issue new shares. That will make it easier for the Bank of England to use the funds provided by the FSCS to recapitalise the firm, by using the funds to buy the new shares. Clause 8 deals with procedural matters, including the provision that the Treasury may make regulations to commence the provisions in the Bill. I am grateful to the Financial Secretary to the Treasury for shepherding the Bill through its successful passage in the other place. As I have mentioned, the Government made a number of amendments to the Bill in the other place following constructive debate, feedback and engagement. They include the insertion of the requirements for the Bank of England to report to the Treasury and notify parliamentary committees. The Government also amended the Bill to ensure that there was clarity over whose expenses could be covered by funds provided through the mechanism. In addition, the Government published a number of important documents during the early stages of the Bill’s passage, including a draft update to their code of practice setting out how the mechanism is expected to be used in practice.

There remains one area of the Bill that will require the attention of this House, namely the question of the scope of the mechanism—that is, which firms the Bank of England can use the mechanism on to support their failure. This was heavily debated in the other place, and reflects concerns about the risk of the mechanism being used on a wide range of firms, with the potential for large levies as a consequence. Those concerns led to an amendment to the Bill, intended to exclude from the scope of the mechanism those banks that already hold the full set of equity and debt resources—the so-called MREL, or minimum requirement for own funds and eligible liabilities—necessary to manage their own failure. The intent was to limit the scope to banks that are not required to hold additional capital resources, or banks that have not yet raised the full amount of additional resources to fully support their own failure. As I have alluded to, the Government note and appreciate the concerns being raised on this point, but as the Financial Secretary to the Treasury made clear during the Bill’s passage in the other place, the Government are clear that this Bill is primarily intended for smaller banks. My predecessor made a written statement to the House on 15 October to reiterate this policy position.

However, after careful reflection, the Government continue to believe that some flexibility should remain in the legislation on this point, in order to avoid constraining the Bank of England’s ability to use the mechanism in a highly uncertain crisis scenario. Narrowing the scope would constrain the Bank of England’s optionality, particularly where it might be necessary to supplement the bail-in of a firm’s own resources with additional capital resources. I note that this is considered an unlikely outcome, rather than a central case. Nevertheless, the Government consider it important to avoid constraining that optionality, given that the alternative may be to use public funds. Ultimately, we want to protect the taxpayer. The Government will therefore table an amendment in Committee to remove the constraint on the scope of the application of the new mechanism.

More broadly, I want to express my gratitude to the banking sector, with which the Government have engaged proactively and constructively both before and since the Bill was introduced. The Government appreciate the feedback from industry, and we have reflected on it carefully to ensure that the Bill delivers a proportionate reform. As alluded to earlier, in response to feedback from industry, the Government carved out credit unions from levy contributions to recoup funds provided by the financial services compensation scheme under the recapitalisation mechanism. That was deemed appropriate because credit unions are out of scope of the resolution powers. It would therefore be disproportionate to require them to contribute towards costs under the mechanism.

The Government have also sought to provide reassurances to industry on the impact of this Bill. For example, by modelling the mechanism on the existing funding framework for depositor payouts, industry will be liable to pay levies only after the point of failure, avoiding new up-front costs to firms. Alongside the Bill, the Government also published a cost-benefit analysis that sets out our general expectation that lifetime costs for levy payers will generally be lower under the mechanism outlined in the Bill, compared with insolvency. I note again the draft updates to the code of practice, which the Government have published to provide additional transparency to industry and Parliament on how the mechanism is expected to be used in practice.

[Adam Jogee (Newcastle-under-Lyme) (Lab)]

I am enjoying listening to the Minister’s speech, and I am learning quite a lot. Will she do me and the House a favour by sharing her thoughts on how I can best describe the benefits of this Bill to the people of Newcastle-under-Lyme when I go home tonight? I am sure she knows far better than me.

[Emma Reynolds]

My hon. Friend flatters me. It is not that easy to explain in simple terms, but I will do my best. Essentially, if a small bank is in trouble, it is better for it not to go into insolvency but instead to go through resolution to protect its depositors. In the case of SVB, only 14% of deposits were covered by the financial services compensation scheme, because the scheme only covers deposits up to the £85,000 threshold. Had public funds been required to facilitate the sale of SVB to another purchaser—in this case it was HSBC, but it could have been another institution—it would have had recourse to public funds. We are seeking to avoid a situation in which taxpayers in all our constituencies are on the hook for the failures of small banks. Where a bank has high-quality assets, which was the case for SVB, we can avoid the insolvency situation and pay out to depositors who have deposits above the £85,000 threshold. That resolution would be funded by the financial services compensation scheme and ultimately the banks, which contribute to the scheme through a levy. I hope that answer helps my hon. Friend—I am sorry that it was a bit long.

Stability is at the heart of the Government’s agenda for economic growth, because when we do not have economic and financial stability, it is working people who pay the price. We have to bear in mind what we are seeking to do, which is ultimately to protect the interests of the taxpayer and to ensure that we do not have to have recourse to public funds.

--- Later in debate ---

[Adam Jogee (Newcastle-under-Lyme) (Lab)]

I would like to start by welcoming both the Economic Secretary to the Treasury, my hon. Friend the Member for Wycombe (Emma Reynolds), and the Parliamentary Secretary to the Treasury, my hon. Friend the Member for Swansea West (Torsten Bell), to their new positions. My hon. Friend the Member for Swansea West and I go way back, and I am enjoying now being able to address him as a Minister in His Majesty’s Government. I congratulate both of them. I did not quite agree with the shadow Minister’s description of the previous Government as “strong and stable”, but it was certainly worth a try—I mean that in all good spirit, honestly!

I thank the Minister for her speech and for her thorough but accessible explanation of the reach of the Bill. I shall look forward to talking about it with the people of Newcastle-under-Lyme tomorrow on the doorsteps of Town ward, where there is a by-election, which I look forward to the Labour candidate, Sheelagh Casey-Hulme, winning. I will make sure that I share the benefits of this Bill with the voters in my constituency when I knock on their doors tomorrow. This Bill has the good fortune of being supported by both sides of the House. We have heard that from the shadow Minister, so I want to reassure all colleagues that I shall speak very briefly indeed.

I have never received an invitation for a prawn cocktail in the City—although all good things come to those who wait—but the Bill and the issues contained in it are important and I am pleased to be here to speak in favour of them today. I have just a couple of points that I would like the Minister to touch on in his winding-up speech. Could he set out in greater detail how the payslips of workers in Newcastle-under-Lyme will be protected by the contents of the Bill? My constituents’ finances and livelihoods are obviously my focus, so I welcome anything and everything this Government do to protect and enhance their lives, or to promote growth across the economy. I would welcome anything the Minister can do to provide reassurance both on the growth agenda generally and on the specific benefits of the Bill.

Ahead of this debate, like all keen newbies, I read the Hansard report of the debate in the other place, and I hope Ministers have ensured that the legitimate points raised by the noble Lords were taken on board. I agree with the noble Lord who noted that small banks play a big role in our economy, and I thank the Economic Secretary and the shadow Minister for acknowledging that.

I echo the shadow Minister’s point about the importance of the City, which is an engine of growth that reflects the success of our country and the strength of our economy. However, my focus as the Member for Newcastle-under-Lyme is on ensuring that the growth, benefit and skill of that powerful engine reach up the M6 to junction 15, so that my constituents in God’s own county of Staffordshire can benefit from all that the City does.

This is a technical but important Bill, and I am pleased to be here today to give it my support.

[Madam Deputy Speaker (Ms Nusrat Ghani)]

I call the Liberal Democrat spokesperson.