Bank Resolution (Recapitalisation) Bill [Lords]

David Pinto-Duschinsky Excerpts

Report stage
Thursday 24th April 2025 Commons Chamber

In conclusion, we support the overall aim of the Bill. It will strengthen our banking system and our banking resolution framework. As I said, the Bill was originally drafted by the previous Government and retains cross-party support. We have highlighted several key areas that require further consideration, and I hope the Minister will consider them. From ensuring that the mechanism is not extended to MREL banks to protecting mutual societies and credit unions and safeguarding the Financial Services Compensation Scheme against inflation, our amendments aim to improve the Bill’s effectiveness and fairness, which is entirely in line with the promises made by the Labour party before the general election. I very much look forward to Labour supporting its own manifesto promises.

[David Pinto-Duschinsky (Hendon) (Lab)]

I rise to speak in opposition to amendments 1, 3 and 4. Under the previous Government, the country was subjected to years of economic chaos. This Government have made restoring stability a cornerstone of our strategy to boost long-term growth. Ensuring macroprudential stability, underpinned by an effective recovery and resolution regime, is a key part of that. Changes undertaken in the UK and globally through the Basel III reforms have made our large banks safer and more resilient, and we should welcome that. The reforms have improved solvency and reduced risks for the taxpayer.

However, the collapse of Silicon Valley Bank in 2023 has demonstrated the need for new tools to help minimise the risk to consumers, taxpayers and broader financial stability posed by small bank failures. We need an approach that goes beyond the bank insolvency procedure, and that is why the proposals in the Bill enjoy so much support across our financial services sector, as I know from my role as chair of the all-party parliamentary group on financial markets and services. But in designing this new approach, we must make sure that the proposals reflect the lessons of experience. In all candour, I am concerned that the amendments do not do that, and will impede the functioning of the new regime, rendering it less effective at moments of crisis.

I was an adviser in the Treasury to Alistair Darling during the global financial crisis, when we had to resolve and recapitalise a number of major banks. The action that the Labour Government took then—often in the face of resistance from Conservative Members—helped to save our financial sector from catastrophe and stabilise not just the UK, but the global economy. There are many lessons to be learned from that period, but in relation to the Bill, one stands out. When we had to act to save our banking sector, we learned that successful resolution relies, among other things, on two key factors: speed and flexibility. It was the combination of those factors that was so important in 2008, and since then, I would argue, they have only become more important.

In 2008, we watched banks’ liquidity and solvency deteriorate by the day, but now, as the collapse of Signature Bank in the US in 2023 shows, the combination of banking apps and social media mean that a full-scale banking run can develop in hours or even minutes. If we are to resolve banks successfully, regulators must be able to move as quickly. Speed has become more important than ever. So, too, has flexibility. As we see increasing financial innovation and diversification among banks, with new challengers, new forms of institutions and new types of markets and assets emerging, allowing regulators sufficient flexibility has become more essential, not less.

The value of flexibility was demonstrated in the case of Silicon Valley Bank’s UK subsidiary. The creative use of powers to resolve that bank through a sale, rather than putting it into the bank insolvency procedure, protected consumers, minimised market turbulence and shielded the public purse. Contrast that with the US regulators’ approach to the parent company, SVB. There, rigidity and a mechanistic failure to apply major bank rules led to failures of regulatory oversight that contributed—as US regulators have acknowledged—to the bank’s failure. I raise this matter because I fear that amendments 1, 3 and 4 will militate against speed and flexibility, and will reduce the effectiveness of the Bill, especially in acute crisis situations.

Let me start with proposed amendment 4. This would require the Bank of England to consider competitiveness and the growth impact on the market before directing resolution through the FSCS. However well-intentioned the amendment is, it could have a catastrophic effect. At a time of crisis—policymakers have sometimes just hours to act—it would place a duty on them to make a market assessment, which, by the way, could presumably be challenged. This is simply impractical and could fatally slow down action to restore financial stability. As someone who has sat in the room during a bail-out process, I have to tell the proposer of the amendment that spending time on this kind of exercise during a disorderly bank failure is simply a luxury that we do not have.

I am also concerned that such a requirement would have a chilling effect, staying regulators’ hands when they have to act quickly. This could not only increase the risk of disorderly collapse, but raise the cost to the FSCS of a recapitalisation if it does proceed. Experience tells us that the longer we put off a resolution, the more expensive it becomes. This is a recipe for higher risk and higher cost. Moreover, leaving aside the practical difficulties, the underlying logic is flawed. First, in seeking to analyse the market before deciding on whether to resolve an institution or wind it up, we are putting the cart before the horse. Surely a much better course of action is to prevent the potentially disorderly collapse of the institution, and then to work out its long-term future and the role, if any, it should play in the market.

Secondly, the amendment fails to take into account other objectives that the Prudential Regulation Authority should properly consider in deciding whether to act, including the protection of retail savers, the prevention of contagion and the safeguarding of macroprudential stability. As drafted, the amendment, however well-intentioned, could distort PRA decision making. Its intentions may be good, but its impact might not be.

The same is unfortunately true of amendments 1 and 3. Both seek to circumscribe the use of the FSCS via statute, to prevent it being used to bail out larger institutions. The amendments would rob regulators of the flexibility to use the instrument in unusual or unforeseen circumstances, in the name of solving a problem that does not exist.

The powers provided by the Bill are already aimed squarely at smaller banks, and there are various safeguards in the Bill to prevent the use of those powers for larger banks in most scenarios. For example, the Bill states that the FSCS-funded resolution may be used only for institutions that are placed in a bridge bank or transferred to a new institution, and this would not be applicable for larger bank in most scenarios, as they are expected to be resolved through an MREL bail-in. The Bill also provides for de facto Treasury sign off, requires the Chancellor to report to Parliament on the use of the powers and mandates the bank to inform the Chairs of the relevant parliamentary Committees whenever an FSCS-funded resolution is undertaken. As such, it is already well-policed and circumscribed. There is little danger of this approach being regularly or routinely used with large banks. Adding a statutory prohibition on using this approach with firms meeting their minimum MREL thresholds would add little, but it would create risk.

My experience in the Treasury during the global financial crisis, and in my work across financial services since then, is that we cannot say that the highly improbable will never happen, and we cannot always predict what form the next crisis will take, or what will trigger it. Conservative Members should surely understand this lesson better than most. After all, it was Liz Truss’s disastrous mini-Budget that sparked market chaos through a product—liability-driven investments—that most people had never even heard of, and were thought to be very stable and low risk. Given this, it would be exceptionally unwise to statutorily bar the Bank from being able to use all the tools at its disposal in exceptional circumstances. There are eventualities that, however unlikely, are possible, such as a well-capitalised bank suffering a very rapid deterioration of its position due to a mass redress event. We must allow the Bank flexibility to access the tools that the Bill provides in exceptional circumstances, in order to ensure stability and protect the taxpayer. We must not bind its hands in a crisis.

The power of the Government’s proposals lie in their ability to be deployed rapidly and with flexibility. That is what will give them their traction and help safeguard our financial stability. It is critical that we preserve those facets of the Bill. For that reason, I urge the House to join me in rejecting the amendments.

[Clive Jones (Wokingham) (LD)]

The Liberal Democrats are supportive of the Bill, because the last thing taxpayers need to worry about are the consequences of an under-regulated banking sector. I have brought amendment 3 back from Committee, because the size of banks eligible for the new mechanism has been a key debate through the Bill’s passage.

The Minister has regularly set out that the Bill’s stated aim is to enhance the resolution regime, so that we can respond to the failure of small banks. However, the Bill does not restrict the regime to small or medium-sized banks. If applied to large banks, it would create high costs for banks and customers. The costs would persist for many years, adding a significant long-term burden on the banking sector and consumers. Amendment 3 would ensure that the Bill does not apply to banks that have reached the end-state minimum requirement for own funds and eligible liabilities—put more simply, the largest UK banks. That would mean that only small and medium-sized banks could be supported by the mechanism. That would protect consumers and the banking sector from unnecessary financial burden.

Amendment 4 has also been brought back from Committee. It would place a further objective on the Bank of England to consider the competitiveness and growth of the market before directing the recapitalisation of a failing small bank through a levy on the banking sector. We believe that further consideration of the effect on the competitiveness and growth of the market is important before directing the recapitalisation of failing small banks.

To conclude, I would be grateful if the Minister could expand on the remarks made in Committee and explain how precisely the amendment would complicate the process of managing a bank failure.