Bank Resolution (Recapitalisation) Bill [HL]

Baroness Bowles of Berkhamsted Excerpts

Committee stage
Tuesday 10th September 2024 Grand Committee

Moved by

[Baroness Bowles of Berkhamsted]

13: Clause 1, page 2, line 3, at end insert—
“(6) Use of the Financial Services Compensation Scheme for bank recapitalisation and associated costs must not reduce bank depositors’ entitlement to the full amount of Deposit Guarantee Insurance.”

[Baroness Bowles of Berkhamsted (LD)]

My Lords, it falls to me to open proceedings again. This is very much a “what it says on the tin” amendment. If it were phrased as the question “Will the deposit guarantee always be honoured?”, I would expect the answer to be yes.

Last week, we discussed that there may be more than one recapitalisation dip. For a moment, let us imagine a worst-case scenario where there is more than one but things are worse than expected due to market circumstances—maybe contagion or other unforeseen circumstances—and the insolvency route has to be taken. Can we be certain that there would be no change to bank depositors’ entitlement—I do not think that is intended in any way, but I would like to hear the Minister say it—and that the system would have the capacity for whatever is thrown at it, if not cash capacity then some form of underwriting in addition to whatever borrowing is available? Does the overall capacity extend beyond the borrowing that is already set up or is it fundamentally underwritten by the Government? As they will get it back, I do not object to that; I am just inquiring as to what the mechanism is, although maybe one does not want to think about that until we get there, if we do.

Are the state of the Financial Services Compensation Scheme and the affordability of the levy, if there had already been recent large calls, for example, a factor in the analysis of whether to mount a recapitalisation rather than allowing the insolvency? There could be public interest factors that relate not merely to the bank under consideration per se. Does the public interest consideration also extend to the state of the compensation scheme? I beg to move.

[Baroness Vere of Norbiton (Con)]

My Lords, I rise to make a few comments about this, many of which have already been made by the noble Baroness, Lady Bowles. I am determined to make my comments none the less, so I shall use different words in a different order. The amendment does what it says on the tin—that is absolutely right—and I am confident that the Minister will state that there will be no diminution in the benefit of the deposit guarantee scheme, but is that in and of itself sufficient comfort? The framing of this Bill and the Minister’s exposition of it are shaped by a mindset that there will be a single resolution event; it will be an isolated occurrence; it will clearly be in the public interest, and it will be a single financial institution following specific issues relating only to that bank. That seems to be the vibe that I get when I read the information, particularly that which accompanies the Bill, and I remain concerned that there are insufficient checks and balances in place to enable Treasury input when the measures are used as envisaged, but also where there are multiple failures during a wider systemic event—a reasonable worst-case scenario.

A reasonable worst-case scenario can develop quickly, or it may become apparent only over time. In a slow burn and developing situation, decisions relating to banks facing challenges early on in a prolonged event will be made in a very different context from those whose challenges perhaps developed over a longer period. In essence, decisions will be made, but in very different environments, given what might have happened in the intervening period. It may well be that there is significantly less money left with which to play, so to speak, to ensure financial sustainability.

Whether a reasonable worst-case scenario is a one-off event or a slow burn, FSCS resources are going to come under significant pressure should two or more banks face insolvency or resolution, and choices will surely have to be made. Who makes those choices and based on what guidance? Will the FSCS prioritise DGI entitlements over the resolution of a bank or banks? What would happen in circumstances where the public interest test is at best marginal? There will be many circumstances when it is very clear, black and white, but there will be some when it is not quite so clear. On one hand, one might have a bank which needs to go through the insolvency procedure and therefore one set of obligations fall on the FSCS and, on another, a bank could go through resolution and it is a bit marginal whether the public interest test has been met. How are all those decisions going to be worked through, given the lack of direct oversight from the Treasury?

We have been told that the FSCS will be unfettered when it comes to decisions relating to the allocation of existing resources and borrowing from sources other than the Treasury for DGI or recapitalisation. Therefore, it seems that until the FSCS needs to go cap in hand to the Treasury to get more money over and above what it can already borrow, there is an obligation on the FSCS only to consult the Treasury and others and the decision-making essentially remains beyond the reach of Ministers. I will be interested in the Minister’s response.

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[Lord Livermore (Lab)]

As the noble Baroness said, we touched on this briefly in the first day of Committee. If it is okay with her, I will write to set out the precise way in which the mechanism would work in that instance.

[Baroness Bowles of Berkhamsted (LD)]

I thank the noble Lord for his reply, which was broadly as I expected. We can draw from it that, in a situation in which the scheme will be used for recapitalisation, it will not set any precedents, because we do not know how much money will be in the pot if there have been other events. It will be considered case by case.

On the one hand, that has to be so, otherwise you might fall into the sort of trap perceived by the noble Baroness, Lady Noakes: that it is a perpetual pot, which the banks will have to fill, no matter what. That is not satisfactory but, at the same time, it is nice to have as much clarity as possible about the expected outcomes. We come back to the same point about what goes into the code of practice or other versions of it, whatever they may be.

My final point—I do not need to labour points that we have been around before—is that, in his answer about eligible depositors, the Minister said that this is enshrined in PRA rules. I just wish that it was enshrined in primary legislation, as it used to be. I had not absorbed how that was in the rules and was therefore changeable by the PRA. I thought that it would be fixed in primary legislation, but that is something else to think about. With those comments, I beg leave to withdraw my amendment.

Amendment 13 withdrawn.

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[Lord Eatwell (Lab)]

My Lords, perhaps I might suggest that it would be wise of the Minister, if I may be so bold, to look warmly on the amendment. Discussions around the accountability issue were a persistent theme in the debates on what is now the Financial Services and Markets Act 2023, and led as the noble Baroness, Lady Noakes, pointed out, to the creation of the Financial Services Regulation Committee of your Lordships’ House, charged with the responsibility for maintaining parliamentary accountability of financial services regulators. I can assure him that if the Treasury does not accept this amendment, he will become weary of the number of times that it will come back again and again—the reason being simply that the committee feels strongly that its role is now a crucial part of the regulatory framework in the UK and that the reports to the committee effectively establish the groundwork of its role in pursuing the accountability agenda.

[Baroness Bowles of Berkhamsted (LD)]

Not surprisingly, I too support this amendment. I congratulate the noble Baroness, Lady Noakes, on her exposition of the genesis of the terms of Section 38 of the 2023 Act. Of course, I am a member of the committee that came as a consequence of that. In her presentation, although not in the amendment—wisely so—she suggested that maybe there would be some hearings and questions, and the possibility that they would be in camera.

I urge the Minister, the Treasury and, indeed, the Bank not to shy away from such suggestions, because it would not be the first time that I have heard mutterings about things being confidential and not wanting to talk about them to parliamentary committees. In Germany, its parliamentary committees can look into the books of the banks and get all kinds of confidential information and—do you know?—it does not leak out. It is quite possible for committees of this House to behave just as well. I put that in as some impetus for how you can get better accountability, oversight and, I suggest, help from the committees, where everybody, ultimately, is pulling in the same direction.

[Baroness Vere of Norbiton (Con)]

My Lords, there is not an awful lot more to say. This is a very elegant amendment from my noble friend Lady Noakes, and it was very elegantly explained. I am the sole member of this Committee today who is not a member of the Financial Services Regulation Committee—no, neither is the Minister—and I am sorry about that. All noble Lords involved in getting the committee set up have an enormous amount of experience in the field of financial services regulation and, looking at the inquiries that it is already doing, I think it will be a very valuable part of our regulatory infrastructure. I look on this amendment with warmth and favourability and I should imagine that the Minister will do so, too.

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[Baroness Noakes (Con)]

I support the amendment that the noble Lord, Lord Vaux, has put forward, and in particular the request for worked examples, preferably with numbers in, because the noble Lord, Lord Vaux, and I are accountants and we like looking at numbers rather than words. Having read the proceedings of the first Committee day in Hansard, I realised that I did not know how some of these things work in practice, so I think that it is important to have those worked examples.

[Baroness Bowles of Berkhamsted (LD)]

I support this amendment as well, or something like it, and I would be very pleased if the Minister was prepared to try to work out something that might go in the Bill, because we need to have some clarity around these issues. We come back, as has been suggested, to our shareholders being advantaged at the end of the day. I find who is getting what in insolvency remarkably difficult to follow anyway; I certainly defer to the noble Lord, Lord Vaux, who is an accountant and a lot better at it than I am. I suggest that, if the noble Lords present cannot get their heads around it or are wondering, it needs laying out somewhere for clarity, ideally in legislation.

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[Baroness Bowles of Berkhamsted (LD)]

I have mixed feelings about this amendment. I am grateful for the comments of the noble Baroness on why it was an objective; I understand that. Very definitely, the costs should not be disproportionately larger, but, if it was a relatively small amount larger than an insolvency and there was a good public interest case, I would not want to bar it. I am not quite sure whether the words used and having it as an objective necessarily convey that; if we were to proceed further with it, we could somehow make it a little more explicit in that regard. It needs to be in the same order of magnitude, not hugely more. With that caveat, I am probably in the same position as the noble Baroness, Lady Noakes.

[Lord Vaux of Harrowden (CB)]

I was not going to speak on this amendment, but I am also slightly in two minds. One hesitation is that it is very hard to know on the day you do the recapitalisation payment what the cost of an insolvency situation would be. However, I understand where the noble Baroness is heading with this, and there is a lot of sense in the sentiment behind it. This gives more ammunition to the question around reporting—we need the Bank of England to give a very clear explanation as to why it has chosen recapitalisation over insolvency. That might be my preferred way of going about it, but I understand absolutely what the noble Baroness said and support the sentiment behind it.

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[Lord Vaux of Harrowden (CB)]

My Lords, on this amendment I agree with every word that the noble Baroness has just said. Like most noble Lords, I have an inherent preference that things should appear in a Bill, rather than relying on slightly woolly statements of Ministers that this is what they intend to do. There are circumstances when that is appropriate but in a case like this, where the code will be so important, there should be an obligation that the code is updated to take account of the recapitalisation process.

To repeat what I said on Thursday, and what the noble Baroness has said, it is deeply unsatisfactory that the Minister seems to be relying on the existence of the code and its updating to avoid detailed amendments being put down on Report and pushed through. If that is the case, it is surely important that we get a chance to look at the revised code before then, or at least a draft of it—or, at the very least, clear details of what Ministers are expecting to include in it. I urge the noble Lord to see what we can do to achieve that. Otherwise, he will face detailed amendments to deal with the issues that we have discussed, because we have nothing else on which to base our position.

[Baroness Bowles of Berkhamsted (LD)]

I agree with what both previous noble Lords have said. We cannot rely just on the fact that something is going to be revised. It is the same old problem that we have with primary legislation a lot of the time: it lays out something that could be good or bad, but it says, “Trust me, we will get it right when we come to secondary legislation or something else down the track”. That is not satisfactory and, in the absence of some more detail, we have to see something about the code of practice or similar—whatever one calls it—in the Bill, just to make sure that there is an understanding of the direction of travel for the sort of detail that we are asking about.

[Lord Eatwell (Lab)]

I should like to pick up on the request for detail put forward by the noble Baroness, Lady Noakes. I am concerned that the powers that the Bank of England has to act in an emergency, which this would presumably be, should not be constrained to any degree other than that which is absolutely necessary. In other words, we should not load up the code with detail, the reason being that the next crisis will be one that none of us has anticipated. It will be completely different.

If we look at the financial crises that have occurred, the major one in 2007-09 and some minor ones since, they have appeared in completely unexpected directions. The Bank must then have the freedom to adapt its procedures to whatever new challenge arises. I quite understand that we do not want just to say it can do anything it likes, but I feel strongly that we must be very careful about loading the code, and indeed the legislation, with excessive detail.

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Moved by

[Baroness Bowles of Berkhamsted]

23: Clause 4, page 3, line 20, after “question” insert “and, for such a bank, the shortfall may only be reduced insofar as necessary to cover recapitalisation.”
Member’s explanatory statement
This amendment seeks to ensure that the FSCS should only be used for recapitalisation not for bailing out shareholders.

[Baroness Bowles of Berkhamsted (LD)]

I am afraid that I will have to spend a little time on this, although we will still close well before time. We are in a slightly new world. The noble Lord, Lord Eatwell, referred to how—although he did not say it like this—once upon a time, when there were problems, you left it to the Bank of England to do the right thing. By and large it did, within the state of knowledge of that time.

However, banking and the way that we deal with resolutions have moved on a long way since then. We are moving further with this small but significant Bill, using the funds of other banks to give to a bank that has failed. Beyond the public interest of depositor guarantees, which in their day were a new thing, we are using private money for what would in the past have been done with public money. That is a different place. Just as with insolvency, you put in the right safeguards about priority orders and so on, we need to put in priority orders for how that money is properly used.

Turning to my amendment, I will have to delve into realms where words have taken on different meanings over time. “Recapitalisation” now seems to incorporate bits of resolution; it does not just mean “putting capital in”. I used that sense of it in my amendment but I will carry the Committee through it as best I can.

The purpose of this amendment is to probe further whether the language used in the Bill, which ends up meaning “reducing the shortfall”, is too broad and therefore allows the FSCS funds to be used not only as new capital for the ongoing bank but to reduce the write-down of other capital instruments and correspondingly increase the amount that would otherwise have been taken from the Financial Services Compensation Scheme above the level that would have been needed if those other capital instruments were fully written down, as is the present presumption under the Banking Act 2009 and everything that feeds into it.

When I wrote the amendment, I was thinking of the ordinary meaning of recapitalisation—replacing capital—and not covering write-down manoeuvrings. So, please think about it as if I had said that and at the end it said: “and without reducing write-down of loss-absorbing capital instruments or shareholdings”, or some such wording. That was the intention of the amendment; if I go around the loop again, I will have a better shot at it.

Overall, I now come to the thought that my previous Amendment 22, which just deleted this, was probably a better option and a good thing for a variety of reasons. We need to avoid capture by the dubious “shortfall” wording from the Banking Act 2009 and the EU BRRD. The things that feed into shortfall are now synonymous with the things that are called MREL but they are looking at it from different ends. If we are going to tie back to the BRRD, I remind noble Lords that the shortfall is the sum of write-down of eligible liabilities to zero—that is what it says under Article 47.3(b)—plus the recapitalisation amount under Article 47.3(c). In essence, I am saying that the FSCS should be used only for amounts under Article 47.3(c)—that is the recapitalisation, which is what I am trying to capture—and that it cannot be used ahead of the writing down to zero of what is in Article 47.3(b). However, the trouble is that we are dealing in this world now where different things have been put in a pot, this time called the shortfall, linked by “and”, and we have no idea which bit we are allowing to be changed.

If we look at the broader picture of trying to cover banks with MREL, that is where it starts to get messy. It was quite simple if we just did it for the smaller banks, and we did not have to worry about things that were supposed to be written down to zero not being written down to zero again. It seems that that is exactly what the Explanatory Notes are telling us—I will quote from my copy to keep myself on track. They say that Clause 4(3)

“amends section 12AA”,

which goes back to the things I have just talked about,

“to allow the Bank to take into account the funds provided by the FSCS when they are calculating the contribution of shareholders”—

that is what it says at paragraph 26—

“and creditors required when exercising the bail-in write-down tool. This is to ensure that the Bank is not required to write-down more capital than necessary”.

However, as I read the law when it came from BRRD in the Banking Act 2009, you have to write down to zero unless you have so much that you get there before you have written it down to zero, and then you should not be going fishing in any other ponds anyway. So, there is some inconsistency or there is a hidden agenda.

There are some things in the insolvency stack that are worthy of rescue, as was the Silicon Valley Bank reasoning—such as uninsured deposits—but not things in that loss-absorption stack, especially not shareholders, because they are right at the top. Otherwise, what is the point of all the expense and effort that we go to to provide MREL, which is further on down, if we are then not going to use it? I really cannot understand what is meant to be going on by adding in this reference to the shortfall. I tried to amend it to say that it should not do bad things, in effect, but I think that we are a lot better off without it.

I then went back and looked at the response the Minister gave me when I raised this on the first day in Committee. He said:

“The noble Baroness, Lady Bowles, asked whether the Bank of England should reduce MREL requirements in the knowledge that it could instead use FSCS funds. The Bank of England sets MREL requirements independently of government but within a framework set out in legislation … The Bank of England will consider, in the light of this Bill and wider developments, whether any changes to its approach to MREL would be appropriate”.—[Official Report, 5/9/24; col. GC 11.]


The Minister was answering a question that I did not ask, but it is an interesting response, which the larger banks should get quite excited about. Is a quid pro quo for chipping in through the FSCS that you end up having less MREL? What an interesting suggestion. I can read what was said that way. According to that interpretation, reading through what is in the Bill, it is perfectly open that you could then not write down to zero things that appear under article 47.3(b) of the BRRD.

I can skip a lot of the other things that I was going to say but, to summarise, if the Explanatory Notes are correct, the intention is to use the FSCS to reduce the amount of write-down for shareholders or other loss-absorbing capital instruments. That is almost going backwards to the days that the noble Lord, Lord Eatwell, was perhaps recollecting of the Bank basically choosing who it should favour in the capital and liability stack. That seems to be the power we are giving it. If we are returning to something like that, it should be done in the context of a proper review of the Banking Act 2009, not in a kiss-me-quick Bill like this one, which was sold to us as being rather more about saving uninsured deposits, not saving sophisticated investors who have enjoyed good returns from bail-inable bonds or who are at the top of the stack and are the shareholders in the failing bank.

The FSCS cannot just be a pot for general usage; it has to be targeted. I tried to amend it with this amendment, but I am now coming to the conclusion that linking back to shortfall has no place in this Bill because it introduces too many ambiguities. I beg to move.

[Baroness Noakes (Con)]

My Lords, I will be brief. The noble Baroness raises some important issues in her amendment. I think the Minister confirmed earlier that shareholders would disappear because the Bank of England would take over their share capital, so they could not benefit from the use of the recapitalisation, but if there is any suggestion that the recapitalisation amount will excuse the bail in of some of the bail-inable liabilities, that would be pretty unacceptable. I hope that the worked examples that I hope the Treasury will enjoy working on while we are on Recess can illuminate how all this is going to work.

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[Lord Livermore (Lab)]

Yes, absolutely; I will very happily meet. I will write a letter setting this out in greater detail, provide the worked examples, and then perhaps we can meet on that basis.

[Baroness Bowles of Berkhamsted (LD)]

I thank the Minister for his replies but I am still not satisfied, in part because of what is in the Explanatory Notes. They should be amended because they cannot stand alongside everything else that is said. I know that they have no legislative power but if we are looking for ways to interpret, they are there. The problem comes from, as I said, “shortfall”, which is defined in a way that has ambiguities. I know full well that “shortfall” was an unusual word; it did not need to be in the BRRD and was put in by the counsel—I think I know who did so because I was told to guard it with my life—for various operations that may still be needed. Now is the time to make it clear. The linkage back to it is not good.

Alongside worked examples, it would probably be quite useful to have a list of the instruments that we think are covered and those that are outside. MREL, which is loss absorption amount plus recapitalisation amount, covers common equity tier 1, other equity instruments, subordinated senior non-preferred instruments and ordinary unsecured senior instruments. It does not include repayable deposits and non-returnable deposits.

How have we ended up talking about bailing in unsecured depositors when we are talking about MREL, because they should not be there in the first place, as far as I understood things? If we cannot understand that, that is not right to put before the public. Can we have a list of the instruments that we think can be bailed in, where they are bailed in, and then the point at which in that stack the FSCS compensation can come in? Once we have worked out where that is and can see it clearly, I should be much better pleased if we could define that ab initio in the Bill rather than reference back to language that is flawed and risks either leading us up the garden path or not being able to understand it, even though I declare that I have confidence that the Bank of England will probably get it right.

It is splitting hairs, but I cannot make that wording work; I am sorry. Therefore, in hoping that I will get some more explanations, for the present, I shall withdraw the amendment, but it may well be that either this or my Amendment 22 in some form might need to reappear on Report. I beg leave to withdraw the amendment.

Amendment 23 withdrawn.