Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020

Baroness Kramer Excerpts

Tuesday 10th November 2020 Lords Chamber

[Baroness Kramer (LD) [V]]

My Lords, I recognise that this group of SIs largely deals with transposition, technical and in-flight issues, and therefore we do not intend to oppose them. I have questions, however, particular on the first SI on banking recovery and resolution. I am going to try to avoid the tangle of using the terms MREL—minimum requirement for own funds and eligible liabilities, used in the EU—versus TLAC, which is total loss-absorbing capital, used internationally and essentially US- driven. As the noble Baroness, Lady Altmann, made clear, they are not absolutely identical, but we can all recognise that they are essentially the same thing. My concerns are frankly more fundamental.

In response to the financial crisis of 2008, the Financial Stability Board set up by the G20 is requiring systemically significant banks by 2022 to raise the equivalent of 18% of their risk-weighted assets in loss-absorbing capital. I have no problem with that, but much of this in the UK has been in the form of bail-in bonds. How well is this programme working for the large systemically significant entities? I will come to smaller banks later.

There has been real concern about the capacity of the market to absorb the volume of bonds required, especially as recent revisions have required them to be more deeply subordinated. Covid-19 may have made these bonds temporarily more appealing because there are now so few ways to invest money and get any kind of return, but if this strategy of bail-in bonds is going to have problems because the market is stubbornly small, we need to know it now.

I want to probe the Minister on where we are going with medium and small banks, which are not systemically significant. The UK has gone well beyond the Basel requirements—and those of the 27 EU countries, even when we were a member of the EU—by stipulating that small and medium-sized banks that are not systemic should bear the same loss-absorbing capital burden as big banks. The Bank of England has the power to set this threshold without any scrutiny or approval required. This being the UK, it has decided that small and medium-sized banks—in effect, the challengers—did not deserve a more proportionate regime.

In reality, small and medium-sized banks can tap the bail-in bond market—if at all—only by offering huge coupons. They also lack the size to spread the cost of such high capital requirements over a diverse asset portfolio. I know that a review is going on, but can the Minister commit now to the concept of proportionality? The burden, as currently shaped, is making it near impossible for smaller banks to grow as they should. In turn, that undermines support for the recovery from Covid, never mind adding significant obstacles to the whole levelling-up agenda.

I have one more comment, on the final SI concerning bearer bonds. These unregistered instruments really are the backbone of money laundering. The sooner they are gone, the better.