Bank Resolution (Recapitalisation) Bill [HL]

Baroness Bowles of Berkhamsted Excerpts

Committee stage
Thursday 5th September 2024 Grand Committee

Moved by

[Baroness Bowles of Berkhamsted]

1: Clause 1, page 1, line 8, after “institution” insert “that is not required to hold Minimum Requirement for Own Funds and Eligible Liabilities (MREL) or is below a level of total assets of value of £15 billion index linked from 1 January 2016”
Member’s explanatory statement
This amendment seeks to ensure that the bill applies primarily to smaller banks, using Minimum Requirement for Own Funds and Eligible Liabilities (MREL) as a definition.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I am pleased to open the Committee stage of this Bill. I expect this to be the only longish speech that I will make, so noble Lords should not worry about getting six of this length.

I have two amendments in this group but, first, for the benefit of anybody following these discussions either now or later, I shall mention the scope issue that has reared its head for several noble Lords in trying to formulate amendments. The Long Title, which defines scope, is:

“A Bill to make provision about recapitalisation costs in relation to the special resolution regime under the Banking Act 2009”.


The Bill’s provisions have effects that reach into resolution decisions, bail-in and capital structures, but various amendments’ attempts to take that into account in other relevant ways have been ruled out of scope. Indeed, in the light of this amendment-drafting experience, I wonder whether all the bits of the Bill pass the scope test; that may become clearer as we work through the amendments, in particular my Amendment 22 in this group and Amendment 23 in the final group.

I turn to my Amendment 1 and the similar amendments in the rest of the group. They have a common theme: making sure that the provisions really are limited in application to small or smaller banks, which is what we have been told they are about following on from the actions taken for Silicon Valley Bank. However, there is no such small bank limitation in the Bill. Clearly, the question arises: how small is “small or smaller”? Like other noble Lords, I have taken the view that the only clear distinction is for non-systemic banks—that is, those required to hold MREL, bail-in bonds or whatever you wish to call them, which represent the only regulatory division we have.

Of course, as raised by me and others at Second Reading, we then have the issue that the PRA has extended the MREL requirements far lower down the bank size range than systemic banks, well into the “smaller bank” range. This may well be the reason that there is no differentiation in the Bill: so that, in theory, the Bill applies to any bank and everything rests on the Bank of England’s decision. It seems that the majority of us here disagree with that and think that it should be limited by a defined measure; the obvious one is the level at which MREL is required. If the PRA causes the resolution provisions to be impeded by its MREL choices, that will be something for it and the Bank of England to consider and live with.

My Amendment 1 has another little tweak, in which I suggest that the cutoff is linked to the index-linked value of the net assets at which MREL was originally set in 2016: £15 billion. In numbers, that would mean the size now would be £22 billion if it were index linked, not £15 billion, and it would not continue to dwindle, relatively speaking, as is happening with the PRA MREL threshold. My amendment therefore overlaps with regimes that can do bail-in, although my real hope, as I have already suggested, is to make the PRA see that, for various good reasons, it should increase the MREL threshold at least by indexation, and ideally to the level where it applies only to banks that have full capital market access, so that bail-in instruments are not disproportionately expensive for them. However, if we want to coalesce around MREL as the dividing line, I am not going to rock the boat. Indeed, I tabled an amendment to that effect, but it got lost somewhere. I think the Bill Office thought that my other amendment was an amendment to my amendment.

I turn to my Amendment 22. This deletes Clause 4(3), which is not needed in the event that there is limitation to application only to non-MREL banks. I will explain how I came to that conclusion. The subsection references Section 12AA of the Banking Act 2009, which in turn references Article 47.3(b) and (c) of the EU’s Resolution and Recovery directive. Most compliance with EU directives has been put into the 2009 Act.

I happen to think, especially nowadays, that it would be much better to say more clearly what we actually meant in Clause 4(3) than to have to pedal all the way back to a European directive. I have another amendment on it, Amendment 23, right at the end of our considerations next week. I will let noble Lords know what it is all about. Article 47.3(b) of BRRD is the amount by which the authorities assess that common equity tier 1 items must be reduced to the relevant capital instruments written down or converted, pursuant to Article 61. The latter gives the order of writing down priority. Article 47.3(c) is the aggregate amount assessed by the resolution authority, pursuant to Article 46. To save noble Lords the misery of me reading out Article 46, it is the sum of write-down and recapitalisation.

To cut this long story short, the subsection refers to things that happen only when you are in a bail-in situation. So, if we limit it to non-MREL banks, it would seem to be superfluous, because there cannot be any bail-in as they are not required to hold MREL. Of course, if we use my Amendment 1 with the index threshold of MREL, we might need it or need to rewrite it.

However, thinking about it further, I also query whether this subsection is properly in scope as it seems to relate to changing bail-in requirements and not to recapitalisation. That is made clear in the Explanatory Notes, which state that Clause 4(3) basically amends the bail-in sequence and conversion of capital instruments to allow adjustment to the contribution of shareholders and creditors when exercising the bail-in write-down tool. We should bear in mind that there are other parts of legislation that tell you the sequence in which you must do one, and how you exhaust the first before you move on to the next, and all those kinds of measures.

The end result that it has a knock-on effect of increasing recapitalisation costs that are then to be met by the FSCS. As I said, that seems to depart from what I envisaged was the purpose of the Bill. I did not have in my mind that it was about levying banks to help rescue shareholders or bail-in bond holders of another bank. I understood that it would be more like the Silicon Valley Bank rescue, where the point would be to rescue unprotected depositors.

Overall, we can do without this clause in all circumstances and I wait to hear the Minister’s explanation. It would be useful, before we get to Report, if we could have some kind of laid-out worked examples of where this might come in and what might happen. I understand why the Government wish for flexibility but it is a flexibility that goes way beyond what I have understood to be the intents of the Bill. I beg to move.

[Baroness Noakes (Con)]

My Lords, I have Amendment 5 in this group, to which I will speak. I regret that I was unable to take part at Second Reading in July, but I have read the Hansard report of the debate and I can see that there is a lot of common ground on the Bill between those of us not on the Government Benches.

As this is the first time that I have spoken in Committee, I draw attention to my interests as recorded in the register of interests, in particular that I hold shares in banks which, under the terms of the Bill, will end up footing the bill if the bank recapitalisation power is used.

My Amendment 5 is slightly different from Amendment 1 in the name of the noble Baroness, Lady Bowles, and slightly different from Amendments 8, 10, 12 and 18 in the names of other noble Lords. Those amendments basically seek to confine the use of this power to small banks—typically using MREL as the deciding point. Mine does not rule out using the power for larger banks but instead inserts the requirement for Treasury consent.

The Government clearly sold this legislation, as the noble Baroness, Lady Bowles, explained, as being about smaller banks, referring to it as being a better route for a better outcome compared to using the bank insolvency procedure, which is the current default assumption for smaller banks. As is often the case with legislation, however, the stated aim then gets converted into a very broad power. This power is so broad that if the RBS failure happened again it could cover the recapitalisation of RBS, which, I remind noble Lords, cost £45.5 billion in 2008. The Bank would have that power with nothing in the Bill to prevent it.

There is a constraint on the amount of annual FSCS payments set by the PRA, which I think is £1.5 billion a year, but that can be changed by the PRA at any time, and the PRA is not, of course, independent of the Bank of England; it is fully part of it.

I am not surprised that the Treasury does not want to narrow the drafting of the Bill to cover only those banks that do not have MREL. The Government have themselves talked about wanting to cover the case where MREL has been set but the banks are on a glide path and have not yet achieved the full amount of their MREL. It seems reasonable for the power to be used in those circumstances, but the Government have not even offered to amend the Bill to confine it in that way.

I broadly accept that there may be a good case for using recapitalisation schemes beyond non-MREL banks or those that have not yet raised their full amount of MREL, because it is genuinely difficult to predict circumstances where such a power would be extremely useful. However, when the Government draft broad and unconstrained powers, they have a duty to put checks and balances in place, and there are none in the Bill. If they do not put checks and balances in place, we must take that on as part of our duties in scrutinising legislation. My amendment has opted for Treasury consent, but there could well be better ways of putting guard rails in place. Treasury consent is not an onerous requirement when the Bank of England is handling a potential bank failure. It inevitably works closely with the Treasury; the Treasury has to be consulted whenever a stabilisation power is used, and we should be in no doubt that when, for example, SVB UK was in trouble, the Treasury was intimately involved in the arrangements to deal with HSBC very rapidly. Therefore, obtaining Treasury consent need not cause a delay or any other real problems.

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[Lord Livermore (Lab)]

I am told that the answer to that is no.

[Baroness Bowles of Berkhamsted (LD)]

I know that the notes have no effect, but those regarding Clause 4(3) say that it

“amends section 12AA … to allow the Bank to take into account the funds provided by the FSCS when they are calculating the contribution of shareholders and creditors required when exercising the bail-in write-down tool”.

That says that you will be able, and consider it positive, to adjust the contribution of shareholders. That is because you are using incoming capital. I think that the shareholders and bail-inable creditors should be written down as they are supposed to be, then, when you still do not have enough money for capitalisation, there is the money from the Financial Services Compensation Scheme. I understood that and have no problem with it, apart from the size issues. Saying no to the question just put by the noble Lord, Lord Vaux, contradicts what is written in paragraph 26 of the Explanatory Notes.

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[Lord Livermore (Lab)]

On the noble Baroness’s first point, we are committed to updating the code of conduct, to doing so swiftly and to consulting with industry thoroughly on it. I cannot give her a timescale today. On the commitment to write letters, of course I will make sure those letters are copied to all noble Lords.

[Baroness Bowles of Berkhamsted (LD)]

I thank everybody who has spoken in this debate. Not surprisingly, we have had quite a lot of good points. I am still not reassured that the Bill’s scope is right. I understand entirely wanting to give the Bank of England flexibility. Ultimately, it is in the best place to judge what is the best thing to do, taking into account public interest, not setting off a systemic failure and all those kinds of things. At the same time, I have this instinctive dislike of something that enables the Bank to do something that I think it definitely should not be allowed to do, which I have said is in paragraph 26 of the Explanatory Notes. I will not repeat it.

I noticed, as the Minister spoke, that he very carefully said “primarily small banks” the whole time. There is this issue of “primarily” and where it stops. There could be other ways to include up to medium-sized banks. The code of practice could be one way of doing it, or a strategy, as the noble Lord, Lord Vaux, had as part of one of his amendments. I do not think it can be passed in this case which, as was said by the noble Lord, Lord Eatwell, could start a whole systemic issue. It is really built for the idiosyncratic case, or maybe for a couple of small banks, but that is it. It is basically about saving the uninsured depositors and people like that, in the public interest, rather than, as unfortunately it says, saving the shareholders and creditors. We have to look carefully at which creditors and at the definitions. I would like to see that laid out, because my reading is that, when we looked at the sections I quoted that date back to the BRRD, we looked at the bail-in things that happen in big banks, not at the other liabilities generally held by small banks. I might have got that wrong, but I would really like to see this properly laid out.

So I still have some issues. There needs to be something in the Bill that takes account of the concerns raised, however that is done. I can be flexible about it, but I think that my Amendment 23, when we get to it, would be one way to do it.

I am afraid that I will withdraw my amendment at this stage, but I expect to return afresh on Report. We have all been hampered by the fact that this has been a first-up Bill after vacations—and this will happen again on Report, when we will have been back for only one week. That makes it very difficult to have communications and meetings with the Minister.

Amendment 1 withdrawn.

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[Baroness Noakes (Con)]

My Lords, Amendment 2 is a probing amendment. It would delete new Section 214E(2)(b) of FSMA. Under new subsection (2), a “recapitalisation payment” includes the cost of recapitalisation; that is at new paragraph (a). There is clearly no issue there because that is what the Bill is about. However, new paragraph (b) would allow the Bank to include

“any other expenses that the Bank or another person has incurred or might incur in connection with the recapitalisation of the institution or the exercise of the stabilisation power”.

This raises a number of questions.

First, who are these other persons who can incur expenditure in connection with the recapitalisation? The Government’s consultation referred to the Treasury, the Bank of England and a bridge bank. If that is the case, it seems that the paragraph ought to be confined to those persons, as I could not think of any other person who could make a case for receiving money under the auspices of the recapitalisation payments power.

Secondly, why is there not more precision about exactly which costs could be covered? Again, the response to the Treasury’s consultation gives the sorts of expenses that could be covered—legal fees, consultancy fees and the like—but is virtually silent on what should not be covered. The only example cited for what is not covered is the cost of preparing in parallel for an insolvency process, but that leaves a huge swathe of costs that could well be brought within the ambit of the recapitalisation payments. As drafted, it could certainly include many expenses that no one could reasonably label as being related to recapitalisation.

The Minister will be aware that UK Finance has expressed very real concerns that the banking sector will be left exposed to litigation or regulatory costs that emerge once a failed bank is in a bridge bank. In a bank insolvency procedure, such litigation or regulatory action would lead nowhere, as there would almost certainly not be any spare funds to cover any costs arising in that way. However, once the possibility of financing via the recapitalisation power arises, a new deep pocket appears, which could act as a magnet for litigation. Does this legislation mean that the banking sector is writing a blank cheque for whatever litigation emerges and which the Bank then chooses to engage in? Can there be any constraints on the Bank’s decision to fight or concede litigation? What are the incentives for the Bank to seek the optimal outcome, which may or may not be to concede a case in litigation? How is the banking sector to be protected in these circumstances?

Costs arising from regulatory action is even trickier. Let us assume that, following a small bank failure, the FCA decides to take regulatory action in relation to non-compliance with the consumer duty prior to the failure. As anybody who has been involved in one of the regulatory actions taken by the FCA, or indeed the PRA, will know, these are long, drawn-out and very expensive processes. Who should decide whether to fight regulatory action or concede and pay fines or redress? These could end up being funded by the recapitalisation payments. If the PRA were involved in regulatory action, rather than the FCA, how can the conflict of interest within the Bank be dealt with so that the costs falling on the banking sector are seen to be fair?

Lastly, new paragraph (b) allows the Bank to include costs that “might” be incurred. I completely understand why, when the recapitalisation calculations are made at the outset, that will involve an element of forecasting, because the formulation is not confined to, say, costs that are reasonably expected to be incurred. Instead, the Bank is allowed to include any costs that “might” be incurred, however improbable that might be. An overly conversative approach to working out what costs might be incurred will result in the banking sector bearing too much cost up front. It is not good enough to just say that, if there is a surplus left at the end of the day, it will be returned via the FSCS.

To sum up, the formulation in new subsection (2)(b) is simply too wide. As I said at the outset, this is a probing amendment and I shall listen carefully to what the Minister says, but my instinct is that new subsection (2) needs some guard-rails drafted into it. I beg to move.

[Baroness Bowles of Berkhamsted (LD)]

I only need to say briefly that I am in agreement with the noble Baroness. This is drafted too widely. Part of me thinks that some of this should be covered by the ordinary banking levy, and that the PRA and the Bank of England have to manage their budget, as anybody else would have to, in expectation of sometimes having adverse effects, rather than there being some bottomless pit, or pool, of money into which they always have access. The truth of the matter might need to be somewhere half way in between, but it is too open at the moment.

[Lord Vaux of Harrowden (CB)]

My Lords, I briefly add my support to what the noble Baronesses have said. This is drafted extraordinarily widely. The words

“another person has incurred or might incur in connection with the recapitalisation”

could theoretically include the legal costs of the shareholders of the bank that is going bust, for example. We have to find some way of reducing that scope. I had attempted to deal with this in Amendment 12 on reporting, but having heard what the noble Baroness said I do not think that does it. We need to find some way of narrowing it.

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[Lord Vaux of Harrowden (CB)]

My Lords, I rise again briefly. The noble Baroness has made some really important points. Once again, I have attempted to deal with this as a reporting question in Amendment 12, which states that a report would be required each time a recapitalisation payment was made; that should stand anyway.

This can become quite significant if, for example, there is a situation where the Bank of England expects to be able to sell a bank immediately but that falls over and then goes into a bridge bank for two years—or, indeed, more—and picks up all those costs along the way. One can see a situation where you could have, for example, an annual payment covering the costs of the bank until the Bank eventually decides to put it into insolvency. The critical factor must be that, any time a recapitalisation payment is being considered, whether it is the first one or a subsequent one, the insolvency route is reconsidered at each point and this does not become an open-ended default drag on costs—but the reporting point, which we will come on to later, stands as well.

[Baroness Bowles of Berkhamsted (LD)]

The noble Baroness, Lady Noakes, made a good point. I agree entirely with what the noble Lord, Lord Vaux, said.

I raised double-dipping at Second Reading and got the answer, “Well, yes, you could double-dip”. Of course, if you go from thinking that you are going to do the bridge bank or whatever to having to move into insolvency, there will be another dip if there are deposits to cover; I have a later amendment on that but it is all part of the same conversation. I am sure that the noble Lord, Lord Vaux, knows a lot more about this than I do because he is an accountant, but things always get worse than you expect. How is the Bank going to deal with that? Initially, it is probably going to have to ask for more than it thinks it could possibly ever need.

Some kind of structure around this, with points at which it is revisited and good reporting, appears to be the only solution. I initially thought, “Yes, maybe HMT intervention is the solution”, but I take the point that the Minister made earlier on about HMT intervention and independence. The fact is that, really, they are all in it as a club taking the decisions together already, so I am not sure that that would necessarily be the decisive factor one would want. It is about what the procedures are; the way things are being done and being understood; and how the reviews and reporting happen so that, when the worst happens and another dip comes along, one is not totally taken by surprise.

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[Lord Eatwell (Lab)]

My Lords, I am somewhat puzzled by the amendment in the name of the noble Baroness, Lady Noakes, in this case. Surely, under the Basel accord, the UK regulator is responsible for the regulation of a subsidiary that is legally established in the UK. If “subsidiary” were changed to “branch”, the foreign regulator would indeed be responsible for regulation in that case. It seems to me that this particular amendment would violate the Basel accord to which His Majesty’s Government are committed.

[Baroness Bowles of Berkhamsted (LD)]

I will just comment that we have seen capital being sucked out of subsidiaries and taken back to the States and have been left with the collapse here. Basel accord or not, there ought to be some kind of mechanism of group support. I wonder whether there has been any international progress on that. What other mechanisms could be used to ensure that those kinds of things do not happen? Ultimately, it is going to be quite difficult to do this unless you somehow put on some extra capital requirements–and then you then start to get into all kinds of international difficulty. Perhaps the Minister could say something about what levers, if any, are available.

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[Lord Livermore (Lab)]

My Lords, I note that a number of other amendments have touched on the topic of Treasury consent before the Bank of England exercises its powers. I hope to fully address the Government’s position on that matter now.

I start by addressing the amendment laid by the noble Baroness, Lady Noakes; I will touch briefly on some points that I have made previously. The Government believe that the existing division of responsibility between the relevant authorities in resolution works well. It is important to maintain the position that the Bank of England can take decisions on the appropriate resolution action independently, guided by the objectives given to it by Parliament under the Banking Act and in line with relevant international standards.

There would be two key risks if that system were to change. First, it would confuse the lines of accountability for resolution decision-making, in effect making the Treasury the de facto resolution authority in the case of certain banks that may be subject to the new mechanism. This would undermine the Bank’s role as the resolution authority and may be seen as out of step with the intent of the relevant international standards. Secondly, a resolution is more likely to succeed when it is conducted by a single decision-maker backed by the right resources and expertise. The Bank of England is ultimately best placed to make those judgments and, therefore, to ensure that there is market confidence in resolution action.

However, there are safeguards to ensure that the Treasury can engage with the Bank of England’s decision over resolution matters, including any use of the new mechanism. As I have noted before, the Bank of England must consult the Treasury during any resolution action as part of its assessment of the resolution conditions, which are required by statute. This is an important legal requirement and ensures that the Treasury is meaningfully engaged in the Bank of England’s decision-making process. The Treasury and the Bank also maintain a productive ongoing dialogue.

Finally, the Treasury retains absolute approval in any resolution with implications for public funds, ensuring that the interests of taxpayers are appropriately reflected in resolution decisions and the Chancellor’s ultimate accountability for public funds to Parliament. The Government view this as an appropriate and proportionate framework in the context of the new mechanism.

The noble Baroness, Lady Noakes, asked about the Bank’s accountability to Parliament. I note that the Bank must inform the Treasury and share copies of legal instruments when taking resolution action. The Treasury must lay those in Parliament. The Bank must also report to the Treasury on the use of those powers; in some cases, the report must also be laid in Parliament.

I turn to the amendment in the name of the noble Baroness, Lady Vere—I note what we might describe as a slight change of heart from her position in government over the past 14 years. Her amendment would require the Financial Services Compensation Scheme to seek the approval of the Treasury in circumstances where it has to levy in subsequent financial years after the mechanism under the Bill has been used. I should clarify that, in principle, the mechanism provided by the Bill could be used to manage multiple firm failures at once; of course, the Bank of England would carefully consider the implications of doing this when assessing the resolution conditions, having regard to the special resolution objectives.

Moreover, any levies would be subject to the affordability cap set by the Prudential Regulation Authority, based on how much the sector can be safely levied in a given year; currently, that is £1.5 billion. In the event that multiple failures resulted in a recapitalisation requirement under that cap, the expectation is for the Financial Services Compensation Scheme to be able to levy safely for the funds within 12 months. It would not do that only if the Prudential Regulation Authority considered that it would carry issues of affordability, in which case the levies could be spread over a longer timeframe. In the event that the amount exceeded the £1.5 billion cap, the Government would expect the Financial Services Compensation Scheme to levy over multiple years, ensuring that it remains affordable for the sector.

It is important also to note that, in these circumstances, the Financial Services Compensation Scheme would be able to turn to the Treasury and request a loan under the National Loans Fund. The levies charged over multiple years would then be used to repay such a loan. Of course, borrowing from the National Loans Fund remains at the sole discretion of the Treasury.

I hope that I have been able to provide noble Lords with some reassurance on these points, and that the noble Baroness is able to withdraw her amendment as a result.

[Baroness Bowles of Berkhamsted (LD)]

I did not speak earlier because all the points I wanted to make were picked up, but there are two things on which I wish to comment. We have a change now in that, before, the Treasury would be more involved when the matter involved use of public funds; now, that has been transferred to the industry, so the Treasury is less involved and perhaps less concerned. Yet the Treasury remains the only possible constraint around and is far from perfect.

For the PRA and the FCA, there are plenty of powers to instigate reviews by government. The big mistake, apart from us not having proper oversight of regulators in general—there are various mistakes—is that those reviews have not been used a lot more often. They should be done almost on a rolling regular basis, not just when there has been a big disaster.

The other thing we have done differently is that we have made the central bank the resolution authority. Therefore, you cannot hold the central bank to account, because of its independence, in the same way that you could if you had constructed an independent resolution authority. That is, as you might suppose, the subject of a big debate that went on in Europe when I was ECON chair. There is an independent resolution authority there; it is not the central bank. That was one of the big considerations, because you cannot really hold a central bank to account. Ultimately, the sort of change that is envisaged in this Bill may move us further towards considering whether we need to do that.

[Baroness Noakes (Con)]

My Lords, I thank all noble Lords who have taken part. The predictions made by my noble friend Lady Vere on the content of the noble Lord’s response were pretty accurate in places. The noble Lord has not really engaged with the weak accountability that exists. The noble Baroness, Lady Bowles, is absolutely right about the use of the Bank of England as the resolution authority and giving it all those powers with almost no constraints whatever, other than consultation. Whoever chose to do that back in 2009—whichever Government were in power then—did not set up the right accountability environment for the use of those powers to exist. Once you put something inside the Bank of England, it is very difficult to engage in those issues, because it guards its independence on practically everything.

This is one of the big issues that will need to be addressed at some stage. There may not have been an instance yet that has caused people generally to realise how dangerous it is to have large, unaccountable bodies in the public sector with huge powers but relatively weak accountability. That is because we are still muddling through, and it is frustrating to some people who are dealing with these regulators, including Ministers, that they cannot fully engage. We have not had one of those big instances where everybody says that we have the wrong model. In a sense, I know that my pleas for a greater level of accountability to be included in statute are not really being heard, but that will not stop me raising them at every single opportunity I can. Indeed, I have some more amendments through which to talk about accountability further.

This has been a useful exchange. I will think about it further, having read the Minister’s response in Hansard. I will think further about whether I take this forward again on Report. For now, I beg leave to withdraw the amendment.

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Moved by

[Baroness Bowles of Berkhamsted]

7: Clause 1, page 1, line 20, at end insert—
“(2A) The Bank of England may only exercise the power in subsection (1) if it assesses that the use of the power would support the public interest, which may include but need not be limited by—(a) supporting market competitiveness, or(b) retaining or growing smaller banks.”

[Baroness Bowles of Berkhamsted (LD)]

The point that I am trying to get to with Amendment 7 is, again, more transparency around what the public interest issues are. It is fairly reasonable to say that, of course, the Bank will do things that are broadly what it considers to be in the public interest, but there are quite a range of factors involved. They include the specific ones that were utilised in the Silicon Valley Bank case because of the potential loss of the float that companies had for paying their workforce and all those kinds of things. I did not object to that; I thought it was jolly good.

We also have the issue of wanting to encourage market competitiveness while retaining and growing smaller banks, which is always trumpeted as an issue, so I put those in as possible factors. But my real call is to say, again, that we need more things to be put into the documentation, whether that is a strategy, a code of conduct or even discussion documents, about the types of things that can be contributory factors to this public interest. Something may always happen that is a surprise. Maybe the Silicon Valley Bank and the large amounts of payroll in a particular sector of the economy was a surprise.

We need some kind of expectation and oversight of how these things are to be weighed up. That is the main force behind me putting this particular amendment in. Can we specifically mention, somewhere in the Bill, that it is in the public interest? As I said, it is accepted but I do not think that it is written down. I beg to move.

[Lord Livermore (Lab)]

My Lords, before I turn to the specific amendment from the noble Baroness, Lady Bowles, I note that the Government fully recognise the importance of market competitiveness and the critical role played by small and growing banks in serving customers across the UK.

On the specifics of this amendment, I note that, before undertaking resolution, including when using the new mechanism, the Bank must be satisfied that the resolution conditions in the Banking Act have been met. The third resolution condition is that resolution is necessary having regard to the public interest in the advancement of one or more of the special resolution objectives. Those objectives are set out in detail in the Banking Act and are intended to reflect the key objectives of the resolution regime across all in-scope firms. For instance, this includes maintaining financial stability, protecting public funds and enhancing confidence in the stability of the financial system.

The objectives do not explicitly reference market competitiveness or supporting small banks. This reflects how, in undertaking resolution, the Bank of England should be appropriately focused on managing the significant risks to financial stability that can arise in a highly unpredictable scenario. As set out in their consultation response, this has informed why the Government believe that the broader resolution framework works well, including the existing balance of special resolution regime objectives, and why we have not proposed to change them.

I note, however, that the Government actively considered both the role of small banks and market competitiveness when developing the policy approach for this Bill. In particular, market competitiveness is a key reason the Government chose to pursue a solution whereby banks must contribute to the costs of recapitalisation only after a failure has occurred. Crucially, this means that the new mechanism does not create any upfront costs for the banking sector.

As noted at Second Reading, the Government have also committed to updating the code of practice to ensure there is a clear process by which the Bank of England calculates the costs that could arise for industry if the new mechanism is used. In addition, the Government believe that the new mechanism supports the UK’s small banks. It ensures that there is a robust system in place for resolving them and maintaining continuity, when that is judged to be in the public interest. This should help support wider confidence in the regulation of the sector.

The mechanism in the Bill is also designed to be proportionate. This is why any levies associated with recapitalisation will be spread across the entire banking sector, ensuring that it is affordable for small banks. Overall, the Government believe this strikes the right balance in that these wider policy issues have influenced the design of the Bill, but that in using the mechanism the Bank of England is ultimately guided by the existing special resolution objectives. I therefore respectfully ask the noble Baroness to withdraw her amendment.

[Baroness Bowles of Berkhamsted (LD)]

I thank the Minister for that response. Again, I make the point that, through the Bill, we are changing from an inherent public interest in public money into using private money to do the rescue. I am not sure that the Banking Act was drafted with that in mind and I doubt that we could amend relevant sections through the Bill. It is just worth having another look with those eyes, maybe after a period of time, to see whether some kind of adjustment is needed because this safeguard check that exists around the use of public money has been taken away. It has not been replaced by anything; it has not even necessarily been replaced by more transparency. With those comments I beg leave to withdraw my amendment.

Amendment 7 withdrawn.

--- Later in debate ---

[Baroness Noakes (Con)]

My Lords, as the noble Lord, Lord Vaux, has said, I have Amendment 14 in this group. In substance, it is the same as the noble Lord’s amendment. The only real difference, as he pointed out, is that mine is less prescriptive. I am entirely happy with either version, but it is important that we deal with the specific reporting requirements, because the existing provisions are simply not adequate. At Second Reading, the Minister basically said that the Government would use the existing reporting requirements in the Banking Act, but the time involved is simply too long. It could take at least a year after the powers have been exercised. When the recapitalisation powers are used, that deserves more immediate scrutiny and, unless there is awareness of it by way of a report, that is simply not going to happen. So I stand completely behind whichever of these amendments the Minister cares to choose.

I also completely support what the noble Lord, Lord Vaux, has tried to do with his Amendment 24. It is a pity he cannot do it more generally in relation to Section 79A, but at least it rectifies what is clearly an anomaly that Parliament should not have allowed through when the Act was brought in. When the recapitalisation power has been used, it should be a requirement to lay a report before Parliament. This is in line with what the Minister said at Second Reading would happen, so I expect the Minister to accept the amendment with alacrity.

I am not quite sure why the noble Baroness, Lady Bowles, allowed her amendment to be brought into this group. That said, I do think it is an important opportunity to look again at MREL, in particular because those banks that do not have MREL now become potentially subject to the use of the bank recapitalisation power. There ought to be more transparency about how banks can be categorised in that way and more understanding by those in the banking sector of which institutions they might have to pick up the tab for in due course.

It is generally a contentious issue in the banking sector, and the way in which banks trip from no MREL to MREL can be a deciding factor in whether they can scale up, because the cost of raising MREL when you are a very small bank, if you trip over into needing to raise it, can have a very significant impact. I have certainly heard smaller start-up institutions say that they deliberately do not grow above a certain size in order to avoid coming within the MREL provisions, and that cannot be good for the UK. So I am not quite sure about the wording of the noble Baroness’s amendment, but I completely support the principle.

[Baroness Bowles of Berkhamsted (LD)]

The noble Baroness, Lady Noakes, asked why I allowed my amendment to be grouped in this way. I was simply trying to expedite matters for us and I thought we did not need another whole group, which would get the Minister up and down again. I agree with the other amendments and everything that has been said on this group. They deal with issues around conflicts and so on, and transparency is one of the best weapons we have that presumably will be allowed or in scope.

My amendment is one of those that do not read as I originally wrote it, because again we came into scope issues. I could not get the exact amendment that I wanted, so this was the best that I could do. Obviously, it is a companion to the amendments in the first group, which were saying that the majority of us want to limit to a threshold equal to MREL. If you therefore want to resolve banks that are a little bigger, you would have to shift MREL. I am not going to cry over that; I will cheer.

That may be an improper tactic but we do not have any other tactics to try to focus the PRA on the damage being done to the growth of smaller banks by putting MREL where it was not intended to be. We are out of line internationally and we do not really have any good justification for that. If there is a division between those banks that can be resolved and those that cannot, I still think that it goes there and the Bank will therefore have to give its view as to why. Perhaps it wants an extension in some way, so that it can get at bigger banks. What do we get back from that? That is the thought process that lies behind my amendment.

I support all these amendments. If they are knocked into a format that is suitable for Report, they would be very good additions to the Bill.

[Baroness Vere of Norbiton (Con)]

My Lords, I am particularly grateful to the noble Lord, Lord Vaux, and to my noble friend Lady Noakes for thinking carefully about reporting and tabling amendments accordingly. I had to support one of these amendments and I am afraid that I picked the noble Lord’s on this occasion. This is not favouritism; I was purely trying to spread the love a little. But as we approach Report, we might want to go back and check that whatever we end up putting into the Bill is future-proofed.

Sometimes one can put in too much detail, then people can slide round the edges by saying, “Oh, you didn’t tell us to do that”. Alternatively, there is being too broad, when people slide round another edge by not putting in the detail that you want to see. There is a balance, but this is certainly worth taking forward and looking at. Obviously, the accountability element is key here.

Another thought I had around this was on timing. Again, sometimes one can go too far and have a report too far in the distance, so by the time it comes out no one remembers what the problem was in the first place. The amendment tabled by the noble Lord, Lord Vaux, says “three months”; I was thinking “as soon as practical” or, in any event, within six months. I do not know, but in very complicated and complex circumstances there might still be issues and context to resolve to produce a report that is relevant in timing terms, but also incorporates everything that stakeholders wish to see.

When I was a Minister, my heart would sink when an amendment was put down about producing a report. I would think, “Another report—are we really going to read it?” To me, the question is: we might produce a timely report in a good fashion and with the right amount of detail, et cetera, but how do we then ensure the scrutiny of that report? It goes back to the issue of expenses which, as we agreed, could be quite significant. But who is going to look at those expenses and suck their teeth? Will they look at the legal fees of firm XYZ and say, “Do you know what? That’s too much”. Who is going to do that? Is there any body at all—not anybody—which would be able to look at it and do that? It has been suggested to me that the National Audit Office might occasionally pay attention to this sort of thing. This is about trying to get us beyond “Just produce a report”. Well, just produce a report and then somebody can look at it. I am sure that these are going to be great reports, but even so it is a concern.

I am looking forward to the response of the Minister. I believe that this should be our last group today, fingers crossed, but I am not sure that many of us want to go outside, given the weather.