Bank Resolution (Recapitalisation) Bill [Lords]

Emma Reynolds Excerpts

2nd reading
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.

[Sir Ashley Fox (Bridgwater) (Con)]

I welcome this Bill, but can the Minister assure the House that, at all times, the aim of the Government is to minimise the liability of the taxpayer? Where losses have to be sustained, they should be borne first by the shareholders, secondly by the bondholders and perhaps thirdly, and regretfully, by the deposit holders. That should be the order in which losses are sustained.

[Emma Reynolds]

I agree with the hon. Gentleman, who puts it very well. He will know that there was a different order in the case of Credit Suisse, but the then Government said at the time that that would not be their order of priority. We are seeking to protect the taxpayer in this Bill, and he is right: had there been a cost associated with the transfer of SVB, it would have fallen first to those people before falling to the taxpayer. If we pass this legislation, for which I hope there is cross-party support, we will avoid that eventuality, because if we follow the order of priority and get to the financial services compensation scheme, the cost will be paid through a levy on the banks in that scheme. I thank the hon. Gentleman for his question.

The resolution regime is a critical source of stability when banks fail, because it ensures that public funds and taxpayer money are protected. This Bill delivers a proportionate and targeted enhancement to the resolution regime to ensure that it continues to provide that important stability. As I said at the start of this debate, it is therefore an important Bill that underpins the Government’s vision for economic growth, and I commend it to the House.

[Madam Deputy Speaker]

I call the shadow Minister.

--- Later in debate ---

[Kit Malthouse (North West Hampshire) (Con)]

I draw attention to my entry in the Register of Members’ Financial Interests. I have no desire to detain the House for long, but I have some questions that I hope the Economic Secretary can address, continuing our conversation in the Delegated Legislation Committee earlier this week.

The Economic Secretary and I are both alumni of TheCityUK, so she will know that what financial services want most of all is certainty of regulation and decision making. They need to know that the playing field is level and predictable. While we are all patting ourselves on the back about Silicon Valley Bank, the consensus that everyone did a good job makes me slightly suspicious.

The Bank of England effectively made three decisions during the unravelling of Silicon Valley Bank that I want to put on the Economic Secretary’s desk for her to consider. Is more certainty required from the Bank of England on the triggering of those decisions?

First, the Bank of England denied Silicon Valley Bank short-term funding. SVB UK was solvent, as it would have to be as a UK subsidiary regulated by the Bank of England. It applied for £1.8 billion of short-term funding when it became clear that its parent company was in trouble. That funding was denied by the Bank of England, and I do not think there has ever been any significant examination of why the Bank took that decision.

Obviously, there was a run on Silicon Valley Bank, with depositors seeking to pull out their money, and the bank was unable to honour those withdrawals, which is why it applied for short-term funding. A possible alternative route could have been a temporary freeze on withdrawals and/or the provision of short-term funding, which could have allowed the bank to remain solvent in the UK. Understanding what triggered that decision, and how other banks in similar circumstances might be handled by the Bank of England in future, is key.

Secondly, as the shadow Minister said, the Bank of England initially decided to put Silicon Valley Bank UK into insolvency and rely on the £85,000 depositor guarantee and the £170,000 joint depositor guarantee. We do not know why the Bank changed its mind.

[Emma Reynolds]

I can tell I am going to enjoy discussing these matters with the right hon. Gentleman. I have looked into this since our exchange on Monday, and I want to clarify what happened on the Friday before the Monday in March 2023. The Bank of England issued a statement on the Friday evening saying that it intended to apply to the court to place SVB UK Ltd into a bank insolvency procedure, absent any meaningful further information. However, a buyer came forward over the weekend, which is what changed between the Friday and the Monday. It was judged to be both in the public interest and in the interest of SVB UK customers that this resolution on the Monday morning was preferable to the insolvency procedure that had been announced on the Friday.

[Kit Malthouse]

That is useful information about the Bank’s decision making. However, the Bank still decided to go for insolvency prior to a resolution mechanism. I find it hard to see that, within that 36-hour period, it had not canvassed whether there was a market for the bank. My point remains: if I were an investor or an overseas bank trying to establish and invest significant funds in a UK branch, I would like to understand why the Bank of England makes these decisions, and the criteria and parameters by which it is likely to make a decision either way. Then, of course, the final decision was taken to sell or transfer the bank to HSBC—for a minimal consideration, I think. I really want to understand what value was placed on that bank going to HSBC, as opposed to any of the other banks that might have been bidding for it.

At the heart of this is my worry about competition. When a bank is put in this resolution position, obviously it needs to move to another bank that has significant assets and can fulfil the rightful demands of its depositors to withdraw their funds. That will naturally be a bigger bank, and there is a possibility—although hopefully this will not happen, as we will not use resolution very often—that small, higher-risk challenger banks will find themselves unable to obtain short-term funding from the Bank of England because of their size, and will therefore be gobbled up by the leviathans of the banking system. Over time, there might be a natural move back towards where we were prior to all these challenger banks appearing—to having four or five massive banks that dominate the system in an uncompetitive way.

I am asking the Minister not necessarily to change the legislation, but to consider setting out in a code of conduct what consideration the Bank of England has to give to the competitive landscape when it is resolving a bank. When it transfers one small bank to another small bank as part of a resolution, for example, that wheel might be oiled with a bit of short-term funding, in the interests of maintaining that competitive landscape. The cost of that should not fall on the taxpayer; effectively, it should be a loan for repayment. One of the benefits, if you like, of the 2007-08 crash—one of the silver linings of that cloud—is that we have a much more diverse banking landscape than before. There was recognition that having these huge organisations that crash the entire global economy if they fail was dangerous for the western economy, and that a much more diverse landscape was therefore desirable. The problem with that, obviously, is that there is more inherent risk in those smaller banks. If there is more inherent risk, we are likely to see more resolution, and in time we may end up back where we were.

I support the Bill. I think that resolution is exactly the right way to go, and we should obviate the risk to the taxpayer. There are also negatives to the system, though, so I hope that the Minister, who I am sure will do the job with aplomb, will think carefully about the impact on the world of the Bank of England’s decision making and predictability; about what the Bank can do to provide transparency, whether through a code of conduct or indicators of practice; and about the impact of resolution on competition.

Bank Resolution (Recapitalisation) Bill [ Lords ] (First sitting)

Emma Reynolds Excerpts

Committee stage
Tuesday 11th February 2025 Public Bill Committees

[The Chair]

Copies of written evidence that the Committee receives will be made available in the Committee room and will be circulated to Members by email.

We will now begin line-by-line consideration of the Bill. The selection and grouping list for today’s sitting is available in the room. That shows how the clauses and selected amendments have been grouped together for debate. Amendments and clauses grouped together are generally on a similar issue.

Please note that decisions on amendments do not take place in the order in which they are debated, but in the order that they appear on the amendment paper. The selection and grouping list shows the order of debates. Decisions on each amendment, and on whether each clause should stand part of the Bill, are taken when we come to the relevant clause.

The Minister is called first. Other Members are then free to catch my eye to speak on all or any of the amendments or clauses within that group. A Member may speak more than once in a single debate. At the end of a debate on a group, I shall call the Minister again.

Clause 1

Recapitalisation payments

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

I beg to move amendment 1, in clause 1, page 1, line 21, leave out subsection (3).

This amendment would remove subsection (3), which prevents recapitalisation payments from being required where the Bank has directed a financial institution to maintain an end-state minimum requirement for own funds and eligible liabilities exceeding minimum capital requirements.

[The Chair]

With this it will be convenient to discuss amendment 3, in clause 1, page 1, line 24, at end insert—

“(3A) No application to the scheme manager for recapitalisation payments may be considered by the Bank of England for a financial institution which has been directed to maintain an end-state Minimum Requirement for Own Funds and Eligible Liabilities (MREL) exceeding minimum capital requirements, unless permission has been given, through regulations, by the Chancellor of the Exchequer.

(3B) Regulations made by the Chancellor of the Exchequer, subject to subsection (4), shall be made through Statutory Instrument under the negative procedure.”

This amendment would ensure financial institutions that maintain an end-state Minimum Requirement for Own Funds and Eligible Liabilities exceeding minimum capital requirements are excluded from the provisions of the Bill, unless permission has been given through regulations.

[Emma Reynolds]

It is a pleasure to serve under your chairmanship for the first time, but I am sure not the last, Ms Jardine. Government amendment 1 ensures that the Bank of England will have the flexibility to use the mechanism provided in this Bill in a broad range of circumstances. It does that by removing the provision added in the other place that prevents the Bank of England from using the new mechanism in relation to firms that have been directed to hold additional loss-absorbing resources, also known as MREL, or minimum requirement for own funds and eligible liabilities. I will also speak to amendment 3, tabled by the hon. Member for Wokingham, which aims to ensure that the mechanism is used only for small banks.

I appreciate that this issue is of interest to many hon. Members, as we discussed it on Second Reading, and also to those in the other place, where it was debated. However, the Government’s position on the matter is clear: as I set out on Second Reading, the intention is for the mechanism to be used primarily to support the resolution of smaller banks. The Government reaffirmed that position in their draft updates to the code of practice to which the Bank of England must have regard when using its resolution powers, and in the written statement that my predecessor, my hon. Friend the Member for Hampstead and Highgate (Tulip Siddiq), made to the House on 15 October 2024.

The Government appreciate the intent of the amendment passed in the other place and of amendment 3, and are conscious of the intent to preserve flexibility to use the mechanism on firms transitioning towards holding their full allocation of MREL. I also appreciate the remaining key concern that, without restriction on the scope of the mechanism, the Bank of England could use it on the largest banks. I make it absolutely clear that that is not the Government’s primary policy intention. The Bank of England should always, first and foremost, rely on a firm’s MREL resources, ensuring that its shareholders and investors bear the losses, rather than turning to this mechanism.

However, having considered the matter carefully, the Government believe that it is still not desirable to limit the mechanism’s scope in the Bill. That would in effect hardwire in legislation the principle that the mechanism is unavailable for larger banks, and it is that hardwiring that the Government are concerned about. As we have seen and experienced, bank failures are highly unpredictable. The Government’s concern is that if the legislation is overly restrictive, that might mean that the mechanism is unavailable in the very unlikely circumstances of large bank failures in which public funds may still be exposed. We must remember, in relation to this Bill, that the primary objective is to protect the taxpayer. The Government consider it important that the mechanism’s use is not overly constrained in the legislation, ensuring that it provides comprehensive protection for public funds—that is, the taxpayer.

To explain the Government’s thinking on this issue in more detail, I will make three points. First, there may be very limited circumstances in which the flexibility to use the mechanism on larger firms would help to protect public funds. The largest and most complex firms are required to hold additional resources to be bailed in—known as MREL—which aim to provide a robust level of self-insurance for larger firms. The Bill’s mechanism can be used only where a firm is transferred to a buyer or a bridge bank upon failure—something that is not envisaged for a large bank, which is expected to be bailed in instead. To take the points together, large banks should therefore have sufficient of their own resources to meet their recapitalisation costs, and the mechanism is unlikely to be available for use on large banks, even with the scope in the Bill remaining broad.

However, it is theoretically possible that circumstances could emerge for which a larger bank is not sufficiently resourced, although these are highly unlikely. One example would be if the firm were subject to a large redress claim, resulting in a higher recapitalisation amount than envisaged. Another example would be if the market value of the firm’s assets changed over time. That could result in more losses than expected at the point of failure—again, resulting in a higher amount of recapitalisation. Those examples, however unlikely they may be, show that there is a clear benefit in having the flexibility to source additional resources from the mechanism, having already written down the firm’s available MREL. Restricting the scope in the Bill would prevent the mechanism from being available in these types of scenario, leaving public funds and therefore the taxpayer exposed instead.

Secondly, I reiterate that the Bank of England would first look to write down or otherwise expose to loss available MREL and would then consider use of the mechanism only if a sale to a buyer or transfer to a bridge bank were needed. Funds from industry are therefore not expected to be used to cover a large bank’s full recapitalisation amount. Instead, they are expected to be needed only for an additional shortfall over and above that which the firm’s resources could fulfil and once these resources have been written down or exposed to loss. Use of the mechanism would simply be a “top-up” to achieve recapitalisation, rather than covering all of a firm’s recapitalisation costs.

Thirdly and finally, the Government agree with the intent behind amendment 3, in that it is important for there to be sufficient safeguards to prevent any inappropriate use of the new mechanism on larger firms. I reassure the hon. Member for Wokingham that a range of safeguards is already in place, which the Government believe provide the necessary checks and balances. For example, the Treasury is involved in the exercise of any resolution powers through being consulted about whether conditions for resolution have been met. The Treasury would also need to approve any resolution action with implications for public funds. If the Bank of England requested a large sum from the financial services compensation scheme, which it could not provide through its own resources, it would have implications for public funds, as the financial services compensation scheme would need to borrow from the Treasury. This means that, in practice, Treasury consent would be required if the Bank of England had requested a large sum.

The Bill also includes some important mechanisms to ensure transparency and parliamentary scrutiny. For example, the Bill now requires the Bank of England to report to the Chancellor on the use of the new mechanism, and it requires the Chancellor to lay those reports in Parliament. The Bill also requires the Bank of England to notify the Chairs of the relevant parliamentary Committees—namely, the Treasury Committee and the House of Lords Financial Services Regulation Committee—following the use of the mechanism. Those measures will ensure that Parliament can scrutinise the Bank of England’s actions in relation to the new mechanism. They were added to the Bill during the debate in the other place.

I hope that my explanations go some way to providing reassurance that the Government’s approach is the right one, and that ultimately, flexibility in the legislation is better for economic and financial stability, and for limiting the risk to public funds, which is what the Bill is all about. As a result, I hope that hon. Members can support the Government’s amendment, and I ask the hon. Member for Wokingham not to press his amendment.

[Mark Garnier (Wyre Forest) (Con)]

It is a great pleasure to serve under your chairmanship for the first time, Ms Jardine. I also thank the Minister, because we have had a fantastic time of agreement so far—but not on this particular point.

I will speak to Government amendment 1 and amendment 3 from the hon. Member for Wokingham. Government amendment 1 is aimed at reversing an amendment that was put in place by those in the other House. It was proposed by my colleague Baroness Vere, so we refer to it as “the Vere amendment”.

The Minister made quite a strong and convincing case for why the Bank of England feels that it needs the ability to use this type of financial services compensation scheme redress in the case of some of the larger banks. But what worried me, as I was listening to the Minister’s words, was that she was highlighting the fact that the MREL regime could fail. I spent three and a half years or so on the Parliamentary Commission on Banking Standards, coming up with this MREL stuff in the first place, and also on the Treasury Committee, analysing the banking crisis. We completely accept that there is no way we can legislate for any possible type of failure in the future. However, we can try to learn from mistakes. The Minister is suggesting that there is an exception—that the MREL regime is not right—but I would prefer the MREL regime to be looked at again to make sure that it operates properly.

The Minister makes the very good point that a bank could issue an MREL convertible bond, which converts into equity in the event of a default; and that the bank could be successful during the course of its life and the MREL bond is not, in fact, sufficiently big enough to meet the liabilities in the event of a default. To me, the answer is not to try to squeeze into place another bit of legislation that tries to fudge it. We should look more carefully at making sure that the MREL regime is right, although I completely understand her point that the regime is only going to make up the top-up. However, the problem is that if the Government are going for a growth agenda—we all know that the City of London and financial services institutions can grow quite quickly—we could end up with a situation in which quite a lot of money is being asked for by the other banks to be able to support this.

We will press this amendment to a Division and vote against it. I am glancing towards my Liberal Democrat friend, the hon. Member for Dorking and Horley, and I hope that enthusiastic nod means that we will not be by ourselves in doing so.

Liberal Democrat amendment 3 would bring back, in a slightly different form, the amendment proposed by Baroness Vere in the other place, but it adds something else that we are slightly worried about. Having looked at this on the Parliamentary Commission on Banking Standards for a number of years, I have become quite a purist about it. The amendment restores a fundamentally important point but what worries me is that it looks to have a negative resolution statutory instrument to ensure that that happens.

--- Later in debate ---

[Chris Coghlan (Dorking and Horley) (LD)]

I thank the hon. Gentleman for his remarks and for supporting our amendment 3. We tabled that amendment because, when the Bill was first debated, the Minister spoke about it enhancing the resolution regime in response to the failure of small banks. We believe that that is appropriate. I guess it is an assessment of risk between mission creep—whether we allow this mechanism to apply to larger banks, with the risk of unnecessary costs falling on banks—and, as the Minister says, having an additional mechanism available in the event of a bank failure. I have a few things to say on that.

First, if the MREL capital of a bank is exhausted, frankly, we are probably looking at a public bailout in any case. I am sceptical whether the additional mechanisms in the Bill would absolve the taxpayer from needing to bail out the bank, so the risk of the Bank of England going beyond the intention of the Bill by imposing additional costs on banks seems to be higher than that.

The hon. Member for Wyre Forest is right about the need for speed. I should declare that I was a hedge fund manager during the Lehman collapse in 2008—I did not cause it—and I saw, first, how fast it happened, and secondly, that the consequences of not bailing out Lehman were far worse than they would have been had the US Government bailed them out. For me, that prompts the question why, 16 years later, we are looking at this mechanism being an effective device to prevent banking collapses, when a whole raft of reforms made from 2009 through to 2012—so the evidence would suggest, at least—have been effective, in that we have not had any bank failures in the UK since that date, as far as I am aware.

For those reasons we tabled amendment 3, but to the point made by the hon. Gentleman, I think the Government might be better served by doing a full review of banking regulation in the UK overall and assessing whether it is indeed effective in preventing the risk of a banking collapse, rather than tacking on small mechanisms beyond the intention of an existing Bill. We will therefore press our amendment to a vote.

[Emma Reynolds]

I thank the hon. Members for Wyre Forest and for Dorking and Horley for their contributions. Let me turn to the last point made by the hon. Member for Dorking and Horley and the first made by the hon. Member for Wyre Forest, the shadow Minister: the Government continue to have confidence in the regime for managing the failure of larger, more complex banks. The bail-in regime remains the right strategy for such firms to ensure that a firm’s shareholders and investors, rather than taxpayers, are on the hook if it fails.

The hon. Member for Dorking and Horley asked why we are doing this now, The reason we are doing this now is, first, the lot opposite started it—and we agree with them. [Laughter.] No, to put it more formally: the previous Government started down this track of reviewing what happened with Silicon Valley Bank. Rightly, in our view, they looked at what happened over that weekend; the shadow Minister has mentioned this.

The case of Silicon Valley Bank shows us a couple of things, and we were keen to learn lessons from it. First, the resolution regime works pretty well. However, we were fortunate that Silicon Valley Bank was an attractive proposition to HSBC. In the end, therefore, although these things are never easy, there were officials in the Treasury and the Bank who worked all weekend, and Ministers were involved; one of them is now a shadow Minister and one of them is a Back Bencher. However, if SVB had not been an attractive proposition, things might have been different. And this measure is to protect the taxpayer in that scenario.

We do not wish to throw all the pieces up in the air and see where they land; we are not doing a wholesale reform of the resolution regime. This is an important tweak but, in the scheme of things, a relatively minor tweak to what is a much broader regime to deal with these circumstances. I hope that reassures the hon. Member for Dorking and Horley. And we note that he had nothing to do with the global financial crash. [Laughter.]

[Chris Coghlan]

indicated assent.

[Emma Reynolds]

Coming on to the amendment, I am a little bit confused by the shadow Minister, because he rightly says—I agree with him about this—that it would not have been possible to use a negative SI, for example, during the weekend when everything was happening with Silicon Valley Bank. The Government at the time and the Bank of England rightly moved during that weekend to reassure the markets and everything was sorted, really—well, I say everything was sorted, but there was still more to do. However, the big decisions were made over that weekend.

If the Government had to lay an SI in order to give the Bank the permission to do that, it would not have been a good scenario. I think the shadow Minister is saying that he will back the other amendment, but not this one. I am a bit confused by his position.

[Mark Garnier]

To be absolutely clear, the Minister and I are absolutely as one on that particular point: to have a negative resolution SI, or indeed any SI, would hold up progress and create a lot of hassle. The substantive part of the amendment, which is the MREL bit, prevents us from being able to support the amendment, so we will vote against it. It is the other amendment—the growth amendment—that we will support. My apologies to the Chairman; I hope that is clear.

[Emma Reynolds]

I thought that was what the shadow Minister was saying, but it is good to get some clarification. I think I am not the only one who was a little confused.

As I said in my opening remarks, we do not support the amendment that the hon. Member for Wokingham tabled, but I understand the intent behind it and the concern that the hon. Member for Dorking and Horley raised.

A couple of other issues were raised; they go slightly beyond the bounds of the Bill, but I will respond to them anyway. As the hon. Member for Dorking and Horley knows, there is a consultation by the Bank of England on the MREL thresholds. That consultation closed recently and, as he would expect, the Treasury is working very closely with the Bank as it looks through the feedback to that consultation. That is not in the substance of this Bill, but it is a relevant consideration and I hope that reassures the hon. Gentleman that we are working closely with the Bank on this issue.

I hope that I have addressed the concerns raised by Opposition Members, but I am sure that they will tell me if I have not done so.

[Mark Garnier]

Yes.

[Emma Reynolds]

I think we will get on to the amendment on growth and competitiveness in the next stage of line-by-line consideration of the Bill.

Question put, That the amendment be made.

--- Later in debate ---

[Clive Jones (Wokingham) (LD)]

I beg to move amendment 4, in clause 1, page 2, line 3, at end insert—

“(5A) As a further objective to the special resolution objectives in section 4 of the Banking Act 2009, when discharging its functions in respect of the exercise of recapitalisation payments under this section, the Bank of England must observe the competitiveness and growth objective.

(5B) The competitiveness and growth objective is facilitating, subject to aligning with relevant international standards—

(a) the international competitiveness of the economy of the United Kingdom, and

(b) its growth in the medium to long term.”

This amendment would place a further objective on the Bank of England to consider the competitiveness and growth of the market before directing the recapitalisation of failing small banks through a levy on the banking sector.

It is a pleasure to serve under your chairship, Ms Jardine, in my first Public Bill Committee, which is a moment I suspect no MP forgets—or perhaps not. Amendment 4 would introduce a secondary objective for the Bank of England, which would require the Bank to consider market competitiveness and growth before directing the recapitalisation of failing small banks via a levy on the banking sector.

Amendment 4 seeks to address a few of the existing concerns with the Bill. For example, there are no clear limitations on how the Financial Services Compensation Scheme can be used as a source of funds for resolution, which means that there is no time limit on the extra levy imposed by the banking sector to repay the scheme. The amendment seeks to ensure that the Bank of England takes a holistic view of market competition and growth before making a resolution decision. It would therefore provide a strategy to reduce risk and to protect the sector. If the Bank of England determines that not issuing the mechanism could threaten market stability, the amendment would direct it towards resolution.

The amendment seeks to support market growth while ensuring that the financial burden on the banking sector remains fair and proportionate. It encourages a measured approach to financial resolution that protects both small banks and broader financial stability. I urge the Government to take the amendment on board when progressing the Bill.

[Emma Reynolds]

Growth and competitiveness—

--- Later in debate ---

On resuming—

[Emma Reynolds]

Growth and competitiveness are fundamental priorities for this Government. Financial and economic stability are essential for growth and lie at the heart of the Bill. Risks to financial stability arising from bank failures, and the disruption they cause to continuity of critical services, can be seriously detrimental to growth and competitiveness. It is an obvious point, but one of the principal ways in which the authorities can impact economic growth is by maintaining financial stability.

Amendment 4, tabled by the hon. Member for Wokingham, seeks to ensure that the Bank of England considers competitiveness and growth when using the new mechanism in the Bill. It does so by introducing a new objective that the Bank of England would need to consider alongside the special resolution objectives. This objective would be to facilitate the international competitiveness and growth of the UK economy, subject to aligning with relevant international standards.

The Government resist the amendment because we believe that, while well-intentioned, it may have profound consequences. I should start by noting that the aim of the Bill is to enhance the resolution regime, but in a way that avoids making more fundamental changes to the regime and the way in which the Bank of England exercises its resolution powers. As I said to the hon. Member for Dorking and Horley previously, this is more of a significant tweak than an overhaul, which it certainly is not. That is because the Government consider that, broadly, the regime works well, as demonstrated by the successful resolution of Silicon Valley Bank UK. The Government believe that attaching a new objective such as this to the use of the mechanism in the Bill could complicate matters for the Bank of England in using the mechanism alongside its stabilisation powers.

This is the key argument: we know that, when managing a firm failure, the Bank of England may need to take a decision at pace in a highly complex and uncertain environment. That is distinct from the regular policymaking of the Prudential Regulation Authority and the Financial Conduct Authority, which of course have a secondary growth and competitiveness objective—for which there is cross-party support—but one that is applicable in the context of their general rule-making and policymaking roles. It would be quite different to say that this objective should apply to the Bank of England when taking urgent crisis management action in relation to an individual distressed or failing firm.

That reflects the different nature of the decisions that regulators take compared with the resolution authority, which has to act quickly and decisively in a crisis. It is therefore important that the Bank of England, as the resolution authority, has a clear and unambiguous basis on which to make such decisions. The Government believe that the special resolution objectives already provide that. As Members will appreciate, it is important to strike the right balance between ensuring that the Bank of England can respond quickly and flexibly to a firm failure, and that any impacts on growth and competitiveness are properly considered. The Government believe that the existing framework strikes the right balance.

I would add that the question around how the Bank of England and others support growth and competitiveness is a complex matter, and it is not one that the Government believe should be, or can be, addressed in the Bill. I hope that I have provided a helpful explanation of the Government’s view on this issue, and I respectfully ask that the hon. Member for Wokingham withdraws his amendment.

[Clive Jones]

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause, as amended, stand part of the Bill.

[The Chair]

With this it will be convenient to discuss clause 4.

[Emma Reynolds]

As we have already discussed in considering Government amendment 1, as well as amendments 3 and 4, clauses 1 and 4 introduce the recapitalisation payment mechanism that is the core of the Bill. Clause 1 inserts a proposed new section into the Financial Services and Markets Act 2000, which will allow the Bank of England to use funds provided by the FSCS to cover certain costs associated with resolving a failing banking institution. This proposed new section also allows the FSCS to levy the banking sector to recover such funds.

Finally, the proposed new section requires the Bank of England to consult the FSCS before requesting funds, and it specifies the type of firms in the scope of the Bill. Clause 1 therefore gives the Bank of England the necessary power to protect taxpayers from risk when certain banking institutions fail. In turn, that will allow the Bank of England to protect financial stability, which of course supports the Government’s top priority of growth, by strengthening our economic stability. As has already been debated, clause 1 has been amended to remove a limitation on the scope of the mechanism, which was introduced in the other place. The Government are of the firm belief that, while this mechanism is not intended to be used for large banks, the unpredictable nature of bank failures warrants appropriate flexibility for the Bank of England to ensure that taxpayers and financial stability continue to be comprehensively protected.

Clause 4 sets out that the Bank of England must reimburse the FSCS for any funds the latter provided that are not needed to cover the relevant costs of resolving an institution. This includes funds that were not required, either because the costs and expenses were lower than the Bank of England expected or because the Bank of England recovered some funds during the resolution—for example, through the sale of the institution. This will provide clarity on how excess and recovered funds should be dealt with, and it provides a mechanism for ensuring that the FSCS does not contribute more than is necessary in support of the resolution. This is important to ensure that the mechanism works as intended, and that there is a process for returning funds to industry where possible. Together, clauses 1 and 4 form the backbone of the Bill and put in place the mechanism to further protect taxpayers from risk. I therefore commend both clauses, as they now stand, to the Committee.

Question put and agreed to.

Clause 1, as amended, accordingly ordered to stand part of the Bill.

Clause 2

Reporting

Question proposed, That the clause stand part of the Bill.

[The Chair]

With this it will be convenient to discuss clauses 3 and 5.

[Emma Reynolds]

Clauses 2, 3 and 5 relate to the reporting and accountability requirements on the Bank of England when it uses the recapitalisation mechanism. The Government added these clauses to the Bill in the other place, reflecting the understandable concerns raised about how the Bank of England will be held to account when using the new mechanism. Together, they aim to ensure that there is effective transparency and scrutiny when the mechanism is used, helping to provide important assurances following a resolution to the Chancellor, Parliament, industry and the public.

Clause 2 requires the Bank of England to report to the Chancellor following its use of the mechanism. These reports must relate both to the exercise of the mechanism and the stabilisation option it is used in connection with. The “final report” produced by the Bank of England is intended to be a comprehensive account of the use of the mechanism, with the content and timing of the report to be specified by the Treasury.

As alluded to in the published draft updates to the Bank of England’s code of practice, the Government expect such final reports to include a number of important points: first, an explanation of the choice to use the new mechanism; secondly, how the resolution conditions and objectives were considered and given regard to; thirdly, an assessment of the costs of using the mechanism compared with placing the firm into insolvency; and finally, an explanation of why any ancillary costs were considered reasonable and necessary.

Clause 2 also requires the Bank of England to produce an interim report within three months of using the mechanism, if the final report has not been provided within that period. This guarantees that scrutiny of the Bank of England’s actions takes place in short order after a resolution involving the mechanism. The Chancellor will be required to lay any reports before Parliament, ensuring that there is appropriate transparency and accountability regarding the use of the mechanism. The Chancellor, however, will have the discretion to omit certain information from such reports when they are published if doing so is deemed to be in the public interest—for example, if reports contain commercially confidential information, or if disclosure could potentially frustrate an ongoing resolution process.

Clause 3 requires the Bank of England to notify the Chairs of the Treasury Committee of this House and the Financial Services Regulation Committee of the other place as soon as is reasonably practicable after the recapitalisation mechanism has been used. This means that Parliament will be engaged promptly following the use of the mechanism. Finally, clause 5 requires the Government’s code of practice, which sets out how the resolution regime is expected to work in practice, to include guidance on the contents of the reports of the Bank of England, which it is required to produce under clause 2. Clause 5 places an important obligation on the Treasury to ensure that there is transparency over what the Bank of England should expect to include in such reports.

At this point, I note that the Government published draft updates to the code of practice, which set out the sorts of things that are expected to be included in reports by the Bank of England. For example, reports would be expected to include an explanation of the choice to use the recapitalisation mechanism, as well as an assessment of the costs of using the mechanism compared with putting the failing firm into insolvency. The Government will issue a full update to the code of conduct in line with the provisions in the Bill that are coming into force. As mentioned at the start, these clauses provide important clarity for the Bank of England, industry and Parliament on the accountability mechanisms that apply when the recapitalisation mechanism is used. I therefore commend clauses 2, 3 and 5 to the Committee.

[Mark Garnier]

I will be brief, because I do not want to take up too much of the Committee’s time. I reiterate that accountability is an incredibly important part of the Bill; accountability of the Bank of England and the Treasury to Parliament is absolutely crucial. Having had the experience of spending my first five years in Parliament scrutinising this sector, the more information Parliament has when making legislation, the better it is for us all in producing good legislation.

--- Later in debate ---

[The Chair]

With this it will be convenient to discuss the following:

Clause 7.

Government amendment 2.

Clause 8.

[Emma Reynolds]

I will briefly speak to clauses 6, 7 and 8, which cover the more technical aspects of the Bill. Clause 6 makes amendments to the Financial Services and Markets Act 2000. It ensures that, where the FSCS makes a recapitalisation payment to the Bank of England, its ability to levy the banking sector is extended to cover such a payment. This is key to recouping the FSCS’s funds, and thus achieving the Bill’s aim of reducing potential risk to public funds in a resolution. The clause also stipulates that credit unions are exempt from levies for this purpose, which I am sure Members will agree is a sensible and proportionate approach, given that credit unions are out of scope of the resolution regime.

The rest of clause 6 makes minor amendments to existing legislation. It clarifies that a recapitalisation payment is not classed as a management expense of the FSCS, and it clarifies that payments that are made in error, in connection with the recapitalisation funds provided to the Bank of England, can be levied for, which is consistent with the approach for the other statutory functions of the FSCS.

Clause 7 makes amendments to the Banking Act 2009. It makes it explicit that funds provided by the FSCS, in resolution in connection with the new mechanism, would not count as extraordinary public financial assistance, reflecting that the new mechanism is intended to reduce risk to the kind of public funds described within this definition. The clause allows the Bank of England to take into account the funds provided by the FSCS when calculating the extent to which certain liabilities are bailed in, when the Bank of England exercises its bail-in tool alongside executing a transfer. Without this, the Bank of England would not be able to consider the funds provided by the FSCS in instances where it exercises its bail-in tool. That might mean that the Bank of England would have to continue to write down certain liabilities, potentially including uncovered deposits, where doing so could negatively impact and destabilise the continued operation of the failed firm.

Clause 7 also gives the Bank of England the express ability to require the failing firm to issue new shares, allowing FSCS funds to then be used to pay for those shares, thereby injecting the funds into the firm. This will ensure that the Bank of England can move swiftly to recapitalise the failing firm. The clause also ensures that funds provided by the FSCS can be taken into account appropriately when deciding whether sale proceeds or compensation are due to those who owned the firm before it was transferred. This would avoid including value that was contributed by the banking sector in any assessment of the compensation payable to former shareholders and creditors, which would clearly be inappropriate and increase the cost of compensation to taxpayers.

Finally, clause 7 disapplies a requirement for the Bank of England to notify the Treasury as to whether a certain condition for providing financial assistance to a failing firm has been met, otherwise known as the 8% rule. The 8% rule states that resolution financing arrangements may be used only where the shareholders and creditors of the bailing institution have made a contribution equal in value to at least 8% of the institution’s liabilities. The Government have disapplied that requirement in their updates to the code of practice, as it is unlikely that the condition could be met by small banks since they will not hold sufficient loss-absorbing resources to reach the threshold. As such, the statutory notification requirement is redundant.

Finally, clause 8 sets out the procedural matters of the Bill, which I trust will cause no concern to hon. Members. At this point, I should note the Government’s second amendment, which removes the financial privilege amendment inserted in the other place. That is standard procedure and I trust that hon. Members will raise no objections. I hope hon. Members agree that the clauses are sensible provisions to ensure that the Bill works as intended and, as such, I commend them to the Committee.

[Mark Garnier]

You will be delighted, Ms Jardine, as I am sure the whole Committee will be, to hear that my contribution will be even shorter than the last one. The Minister rightly says that we are considering a lot of procedural-type amendments to do with the delivery of the Bill. I thank the Government for listening to industry over excluding credit unions from falling within the scope. It is incredibly important that we do not find lots of other people emerging into these sectors and suddenly finding themselves being part of a much more complicated area. On the procedural point of the Government amendment, we will absolutely support that.

Question put and agreed to.

Clause 6 accordingly ordered to stand part of the Bill.

Clause 7 ordered to stand part of the Bill.

Clause 8

Extent, commencement and short title

Amendment made: 2, in clause 8, page 6, line 1, leave out subsection (5).—(Emma Reynolds.)

This amendment removes the privilege amendment inserted by the House of Lords.

Clause 8, as amended, ordered to stand part of the Bill.

Question proposed, That the Chair do report the Bill, as amended, to the House.

[Emma Reynolds]

I commend the Bill to the Committee.

[Mark Garnier]

I thank everybody for their work. It is a great pleasure to see so many new Members of Parliament and former hedge fund managers; it is terrific. On so many occasions, I have joked about being a former investment banker and hedge fund manager, and now that I am a politician, I have the hat trick of the three most unpopular jobs known to humanity. For a next job, I will be a traffic warden. I thank everyone for their hard work.

[Emma Reynolds]

May I also take the opportunity to thank the officials of the House and you, Ms Jardine, as well as the Treasury officials who have worked so hard on the Bill? We still have some stages to go, but it is an opportune moment to do that.

Question put and agreed to.

Bill, as amended, to be reported.

Bank Resolution (Recapitalisation) Bill [Lords]

Emma Reynolds Excerpts

Report stage & 3rd reading
Thursday 24th April 2025 Commons Chamber

[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.

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

It is always a pleasure to serve under your chairmanship, Mrs Cummins. I thank the hon. Members for Wyre Forest (Mark Garnier) and for Wokingham (Clive Jones) for their amendments and their constructive engagement throughout the Bill’s passage. The Bill will ensure that the Bank of England remains equipped with the necessary tools to effectively manage bank failures in a way that minimises risk to the taxpayer and to UK financial stability, protecting the taxpayer.

While there may be some disagreements on the finer detail of the Bill, what we have heard today, and on Second Reading and in Committee, demonstrates that there is cross-party support for the principles and overall objectives of the Bill. I thank the hon. Member for Wyre Forest and the hon. Member for Wokingham for supporting those.

The amendments cover a broad range of issues, and I will explain the Government’s position on them in turn, but first I thank my hon. Friend the Member for Hendon (David Pinto-Duschinsky) for setting out his experience of the banking crisis and stressing that the mechanism we are seeking to provide through the Bill must allow the Bank of England, in close consultation with the Treasury and other financial services regulators, to act with speed and flexibility at times of crisis. There are hours, not days, in which to make decisions during crises, and at the forefront of our minds when discussing the Bill should be that they often happen over the weekend, as happened under the previous Government with Silicon Valley Bank. I will turn to that example shortly, but I wanted to thank my hon. Friend the Member for Hendon for setting out his concerns about the amendments that would essentially stymie the effectiveness of the Bill.

I note that the shadow Minister, the hon. Member for Wyre Forest, raised a number of issues on new clause 3, on the Bill’s impact on credit unions. Some were not strictly relevant to the Bill, but I will come on to them. As he noted, the Government absolutely support credit unions. They play a vital role in providing saving products and affordable credit in local communities across the country. However, they are not in scope of the resolution regime that we are discussing, and therefore not in scope of the new recapitalisation payment mechanism introduced by the Bill. That is a benefit to the credit union sector. Indeed, it asked the Government to ensure that it was not included in the payment mechanism. Credit unions will therefore not be liable to pay towards the cost of a failure where the mechanism is used.

--- Later in debate ---

[Jim Shannon (Strangford) (DUP)]

I support wholeheartedly what the Minister has said about credit unions, because credit unions have a big role to play in Northern Ireland, as they do in other parts of the United Kingdom. My concern when it comes to crises in banks is that credit unions belong to their members, but banks have a different hierarchy—they have chief executives and directors to pay. I believe it is unfair for bankers to retain their bonuses while the pensioner who has saved his pennies all his life suffers. No matter what the crisis is, the executives still get their dividends and bonuses. I have a simple question: within this legislation and the rules we have here, can we be assured that the bankers—the ones at the top who may be responsible for the banks, or certainly act responsible for them—will find that their bonuses are not delivered to them?

[Emma Reynolds]

The hon. Gentleman draws me on something that is not pertinent to the amendments, but I understand why he has asked the question. When a bank fails, there is a hierarchy of creditors. I can write to him with that hierarchy, as I do not have it in my head at the moment. The hierarchy ensures that if, for example, the bank is bailed in, those who have already invested in the bank become stakeholders, although it depends on the resolution scenario and where they are in that process. The people who have deposits in the bank—in more simple language, people who have bank accounts—are protected up to £85,000. Soon that will increase in the way that the shadow Minister suggested.

Amendments 1 and 3 in the names of shadow Minister, the hon. Member for Wyre Forest, and the hon. Member for Wokingham respectively both relate to the scope of the Bill, which has been discussed at length during the Bill’s passage through this House and in the other place. The Government’s position remains that the mechanism in the Bill is not intended to support the resolution of the largest banks. The hon. Member for Wyre Forest set that out in his speech, as did the hon. Member for Wokingham. The largest banks will continue to be required to hold MREL to self-insure against their own failure. For banks that are required to hold MREL, the Bank of England should in the first instance use those resources to recapitalise such a firm in resolution rather than resorting to the new mechanism in the Bill. It is right that shareholders and investors in the firm should bear losses before anyone else, which goes to the point made by the hon. Member for Strangford (Jim Shannon).

I return to the primary purpose of the Bill, which is to protect the taxpayer. Bank failures are by their nature highly unpredictable, as my hon. Friend the Member for Hendon said. In the unlikely circumstances where a top-up is needed to resolve a bank once all its MREL resources have been used, hon. Members must consider whether they want those costs to be borne by the taxpayer. It is the Government’s belief that the taxpayer should not be on the hook for those costs.

I made the point in Committee, and do so again today, that safeguards are in place to prevent inappropriate use of the mechanism. The Treasury, for example, is involved in the exercise of any resolution powers through being consulted about whether conditions for resolution have been met. It would also need to approve any resolution action with implications for public funds. If the Bank of England requested a large sum from the Financial Services Compensation Scheme that the scheme could not provide through its own resources, additional amounts would need to be borrowed from the Treasury and would therefore require the Treasury’s approval. Therefore, in practice, Treasury consent would be required if the Bank of England had requested a large sum.

The shadow Minister attempted to draw me into many different subjects related to MREL. You rightly reminded him, Madam Deputy Speaker, of the scope of the Bill and the amendments under discussion. I will always be happy to have those discussions with him—as he knows, the Bank of England recently consulted on the thresholds—and I note what he said before he was called to order. He also tried to draw me into questions about the Financial Services Compensation Scheme, which are also for a different day; as he said, there will soon be increases.

[Matt Rodda (Reading Central) (Lab)]

I appreciate that the Bill’s scope is limited, and the Minister is making an excellent case for the Government. I realise that bank collapses are unusual and that the Government take a range of steps to try to protect the interests of consumers, but could she write to reassure me on the related point of bank branches there were a bank collapse?

[Emma Reynolds]

Perhaps my hon. Friend and I could have a discussion outside the Chamber so that I can better understand his question. The mechanism in the Bill is about what happens when the resolution regime is triggered. Four different conditions have to be met for that to happen. The Bill seeks to continue the work that the Opposition started to take forward when they were in government before the election about what we do in cases like that of Silicon Valley Bank. In that case, there was not any recourse to public funds, but this is about how we protect the taxpayer in a scenario where there is. Perhaps we can have a discussion about bank branch closures, which is obviously of great concern to Members across the House.

I appreciate that amendment 3, tabled by the hon. Member for Wokingham, aims to introduce an additional safeguard by permitting the Bank of England to use its new power on the largest banks only if the Treasury permits that through regulations. He talked about that in his speech. However, there may be risks associated with that approach, particularly if the Bank of England needed to take a decision at pace in a crisis. Indeed, my hon. Friend the Member for Hendon was in the Treasury when many such situations arose. [Interruption.] Well, let us not rake over the history. We discussed some of these issues in Committee.

As the shadow Minister suggested, we are trying to avoid a window of uncertainty during which a statutory instrument would be laid. The Bank of England, working in close partnership and consultation with the Treasury and the other financial services regulators, needs to be able to act swiftly and decisively—often over the weekend. I ask hon. Members, and the hon. Member for Wokingham in particular, to cast our minds back to the weekend when Silicon Valley Bank UK was failing. The Bill derives from the lessons learned from that event.

What we saw from that incident is how quickly the authorities—the Bank of England in consultation with the Treasury, the PRA and the FCA—must move to find a solution before markets open and resolve a failing firm in a way that protects financial stability, depositors and the taxpayer. That has to be at the forefront of our minds when we are thinking about the amendments.

Amendment 3 could add a further stage to that process, whereby the Treasury must lay regulations to enable the Bank of England to act. That may well—it is most likely that it would—hamper those efforts to implement a solution swiftly to achieve those objectives. Had Silicon Valley Bank UK been caught by such requirements, that certainly would have made achieving the solution by Monday morning, before the markets opened, much more challenging. Again, the priority is to protect the depositors and to protect financial stability.

Overall, the Government firmly believe that it is better to leave flexibility for the Bank, noting the safeguards in place that I have already mentioned. On the basis of those points, I hope that hon. Members will be persuaded to support the Government’s position on this matter; I know that it is an issue of some contention.

Amendment 4, also in the name of the hon. Member for Wokingham, is on whether the Bank of England should have a growth and competitiveness objective when exercising its new power—another topic that we have discussed previously during the Bill’s passage. Growth and competitiveness are fundamental priorities for the Government, and as I stated in Committee, a disorderly bank failure could pose a serious risk to the growth and competitiveness of the sector and to the UK economy. The Bill seeks to mitigate that risk.

Bearing that in mind, the Government do not believe that they should impose a requirement on the Bank of England to consider growth and competitiveness when it is taking urgent crisis management action in relation to an individual distressed or failing firm. At such a time, the situation that it would have to manage would be challenging enough without an additional broad objective of that kind. The resolution objectives set out in the Banking Act 2009 already provide a solid basis on which it must make its decisions, including protecting financial stability, protecting covered depositors and protecting the taxpayer. As my hon. Friend the Member for Hendon reminded us, the Bank of England, in close partnership with the Treasury and the other financial services regulators, needs to act with speed and flexibility to maintain financial stability. Those considerations are very different from those that the PRA and the FCA make in their policymaking roles. The Government strongly support the existence of their secondary objective on facilitating growth and competitiveness.

I note and accept that there is a broader question about how the Bank of England can support growth and competitiveness, but this is a complex matter, and one that is well beyond the scope of the Bill. We will be resisting the amendment for those reasons.

Finally—[Interruption.] I see that our debate has attracted quite a lot of discussion around the edges; if I could hear myself think, it would be nice. I turn briefly to amendment 2, tabled by the shadow Minister. First, I reiterate that the Government have made clear their strong commitment to support the mutual sector, and I reassure him that we take our commitment in the manifesto to double the size of the mutual and co-operative sector very seriously. Many hon. Members on the Government Benches who serve as Labour and Co-operative MPs have a great interest in this matter, as has been demonstrated.

I also direct the shadow Minister—to be fair, he referred to a couple of them—to the package of measures that the Chancellor set out at Mansion House, which included the consultation on the potential to reform common bonds for credit unions in Great Britain. The Chancellor asked the Financial Conduct Authority and the Prudential Regulation Authority to produce a report on the mutuals landscape by the end of the year. She also welcomed the establishment of an industry-led mutual and co-operative business council, the first meeting of which I attended earlier this year.

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[Gareth Snell (Stoke-on-Trent Central) (Lab/Co-op)]

Will the Minister give way?

[Emma Reynolds]

I am afraid I am being urged to wrap up. I remind Members that the Bill is fundamentally about protecting the taxpayer—

[Gareth Snell]

We have Third Reading—it’s fine.

[Emma Reynolds]

We have not come to that yet; my hon. Friend can intervene on Third Reading. [Laughter.]

Taking what I was saying into account, although the Government appreciate the point raised by the sector and by the shadow Minister, we do not believe it is necessary to hardwire in legislation a requirement to update the code of practice on this matter. I understand, however, that the mutual sector feels strongly about this issue, and my officials and I will continue to engage with the sector on it. I commend to the House our position on the new clauses and amendments, which is to resist them.

[Mark Garnier]

With the leave of the House, I wish to address one or two of the points made in the debate. The hon. Member for Hendon (David Pinto-Duschinsky) is an incredibly valuable contributor to the debate because of his experience back in the days of the 2008 financial crisis. If I remember correctly, that was largely a result of the Financial Services and Markets Act 2000, which almost compounded the problem by having a tripartite regime that looked after the banking sector at the time. If I remember rightly, the Chancellor of the Exchequer at the time found it so scary that his eyebrows nearly turned white. One of the surprising things about that crisis was that just 10 years earlier we had seen the Asian banking crisis, which basically laid the groundwork for what subsequently happened in the west. Perhaps we in the west were too arrogant to believe that it could happen to us, yet it sure did.

In my role as a member of the Treasury Committee from 2010 to 2016, and on the Parliamentary Commission on Banking Standards, I looked at all these issues very extensively. It is incredibly important that we resolve the issue. As it has turned out, the Financial Services Act 2012 and the Financial Services (Banking Reform) Act 2013 have worked well in respect of some of this resolution.

On the point about LDIs and the financial crisis as a result of the Budget, we dealt with the problem pretty swiftly and pretty brutally. When one of our leaders gets it wrong, we get rid of them fairly quickly. I suggest to the Labour party that if Government Front Benchers get things wrong, it is worth cauterising the problem and moving on.

On credit unions and mutuals, we absolutely recognise the point about the mutual sector. We are not asking for demutualisation to be ruled out; we are asking for the prospect of avoiding demutualisation to be part of that very swift process. That is why we will press amendment 2 to a Division. I met the credit unions yesterday, and they are keen that the principle of new clause 3 is voted on, so we will press that as well.

Question put, That the clause be read a Second time.

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[Emma Reynolds]

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

We can hopefully do Third Reading in a more relaxed fashion. As we have discussed through the Bill’s passage, the Bank Resolution (Recapitalisation) Bill will strengthen the UK’s bank resolution regime by providing the Bank of England with a more flexible toolkit for responding to the failure of banking institutions.

As volatility over recent weeks has shown, global uncertainty can have a real impact on financial markets across the world. That is why it is important that the UK remains equipped with an effective financial stability toolkit. The primary objective of the recapitalisation mechanism introduced by the Bill is to protect the taxpayer; it will provide more comprehensive protection for public funds when banks fail. I think both sides of the House can agree that this is of vital importance to ensure that our constituents are not left on the hook when a bank collapses. The Bill achieves that without placing new up-front costs on the banking sector, and therefore strikes the right balance between protecting financial stability and supporting the Government’s No. 1 priority of driving economic growth.

I would like to thank all those in this House and the other place who have contributed to the scrutiny of the Bill. In particular, I would like to thank the Opposition for their constructive engagement. As I said on Report, there is broad agreement on the primary objectives and principles of the Bill, but differing views have been expressed on the scope of the mechanism and certain finer details. I reiterate the Government’s position: it is important to learn the lessons from the case of Silicon Valley Bank UK, which demonstrates that the implications of a firm’s failure cannot always be anticipated, and things move very quickly. It is important that the legislation avoids overly restricting the Bank of England’s ability to use the mechanism in unpredictable and fast-moving failure scenarios, and can achieve its primary objective of protecting the taxpayer. I hope that those in the other place will agree with the Government’s position when the Bill returns there for their consideration.

I thank the shadow Minister, the hon. Member for Wyre Forest (Mark Garnier), the hon. Members for Dorking and Horley (Chris Coghlan) and for Wokingham (Clive Jones), and others who were on the Committee. I thank the right hon. Member for North West Hampshire (Kit Malthouse), and the hon. Members for St Albans (Daisy Cooper) and for Bridgwater (Sir Ashley Fox), for their contributions on Second Reading. I thank the Minister with responsibility for pensions, my hon. Friend the Member for Swansea West (Torsten Bell), who assisted me on Second Reading, and my hon. Friend the Member for Newcastle-under-Lyme (Adam Jogee) for his input. I thank my hon. Friend the Member for Hendon (David Pinto-Duschinsky) for his speech on Report.

I would like to extend my gratitude to my officials in the Treasury for their hard work in developing this highly technical Bill, which could not easily be rushed, and for supporting me throughout the Bill’s passage. I am also grateful to the House staff, parliamentary counsel and all other officials involved in the passage of the Bill.

This Bill supports the UK economy’s resilience to the risks posed by bank failures. We all remember the damage caused by the financial crisis, and the Bill, alongside other measures that allow failures to be managed in an orderly way, upholds the economic and financial stability that will deliver on the Government’s growth mission. I am pleased that the Bill has received broad cross-party support in this House and the other place, and I look forward to its enactment. I commend it to the House.

[Madam Deputy Speaker (Ms Nusrat Ghani)]

I call the shadow Minister.