Banking Act 2009 (Restriction of Special Bail-in Provision, etc.) Order 2014

Lord Tunnicliffe Excerpts

Monday 15th December 2014 Grand Committee

[Lord Flight (Con)]

My Lords, I would just like to put on record some concerns about the bail-in arrangements and what they are broadcast as achieving.

My first point is that, as the CEO of the Association of Corporate Treasurers recently said to the Lords EU Economic and Financial Affairs Sub-Committee, once there is any whiff of concern about a bank, any company will withdraw its deposits immediately. It is not going to hang around and wait for the bank to be subject to a bail-in. One thing that the bail-in arrangements do is actually accelerate the possibility of runs on banks. It will not be just corporate deposits; any form of lending to a bank will be subject to bail-in. If there is any whiff of trouble about that bank, that money will be withdrawn as soon as possible.

The second point, which perhaps has not been learnt from the recent banking crisis, is that the key thing that hugely accelerated the downturn in the economy in 2009 was allowing the money stock and the money supply to contract substantially, just as happened in America in the 1930s. If you are going to do a bail-in on a bank and its capital is going to get exhausted, it will have to contract its balance sheet dramatically, all other things being equal. While I note the comment that the Bank of England will come in and help, effectively it would have to be the state that came in and recapitalised banks or, again, the result would be a massive contraction of the money supply if any of the major banks were in trouble and thus required bail-in. Unless that happened, again, it would have the knock-on effect of a major economic contraction.

The bail-in arrangements make sense—we know what they want to achieve, which is to eliminate or at least reduce the extent to which the taxpayer has to bail out banks in a crisis—but people are kidding themselves if they believe that it is as simple as that. Fundamentally, even as a result of how the bail-in arrangements operate, unless the Government are there to replenish capital—whether they do so as the Bank of England or directly—you would have a huge monetary contraction, which would be damaging to the economy.

[Lord Tunnicliffe (Lab)]

My Lords, it is a privilege to be in Grand Committee again—and its packed rows—to address some affirmative orders. I thank the Minister for setting out the orders and indicate, as a generality, that the Official Opposition welcome the ideas behind the various Acts and the orders that make them operational. I will not make a contribution on the individual orders, but just a few comments about the concepts that are swept up in the orders, taken together.

I put on record my thanks to Catherine McCloskey, who was unfortunate enough to have her telephone number beside her name in the Explanatory Memorandum. Although I have sat through most of these banking debates and participated modestly in some of the amendments, I have to say that if you are not continuously involved with this, the whole shape of this legislation is impossible to retain in one’s mind. As a result of her tutelage, I think I have a reasonable view of the shape of the legislation and the orders and that I can claim that the Opposition have done their duty in probing the overall direction of the legislation and the effectiveness of the orders in bringing that legislation into effect.

However, I have some comments. As I understand them, the orders give effect to the BRRD and refine it for the UK environment—a sort of merging of our thinking and the thinking behind the directive. Everything becomes effective from 1 January next year, which strikes me as a good piece of clarity. As I recall, it was originally envisaged that there would be a period of British-only rules and then European rules, and so on. I commend the Government on meeting those timetables.

--- Later in debate ---

[Lord Tunnicliffe]

Forgive my enthusiasm for money but it is a fascinating subject. The Minister says that the Bank of England has a series of tools in its locker. It would be unfair to ask him about them now but I wonder if he could do a small illustrative note to myself and the noble Lord, Lord Flight, about what particular tools he has in mind for that situation. Creating money supply would be a real challenge in those circumstances, and for us—and indeed the market—to know that the Bank of England had considered this and felt that it had the adequate armoury to tackle such a situation would be very good for my happiness and perhaps the wider happiness of the money environment.

[Lord Newby]

My Lords, I am very happy to write to the noble Lord in those terms. His happiness is always at the forefront of my mind.

The noble Lord, Lord Tunnicliffe, mentioned the effect of the exercise of these powers on funding for SMEs. In the immediate term, SMEs’ deposits would be protected, but in the aftermath of 2008 we certainly saw a big squeeze on funding for SMEs, which is now at best being only partially reversed. Part of the answer is that we are keen to see a much more broadly based and competitive environment so that SMEs are not forced, as they have been, to go to one of the handful of banks if they want funding. That is why we are so keen to see the establishment of new challenger banks for SME lending and the growth of peer-to-peer lending, which means that over a period we envisage that the proportion of SMEs that will be at risk from the small number of large banks will be greatly reduced.

The noble Lord, Lord Tunnicliffe, raised two broad questions about the way in which the orders will be implemented. The first related to the fact that it is virtually impossible to understand the orders because they amend other bits of legislation—how on earth is anyone to make any sense of them? We are in the worst possible position to make sense of them for the simple reason that, because the regulations are not yet in place, there is not readily available the kind of consolidated version of the Act, particularly the 2009 Act, that will rapidly be available via commercial databases—I was going to say “within seconds”, but more probably within a very small number of hours—after the orders have been approved. More generally, the National Archives is working on the production of amended versions of the primary legislation, which will be available to all, although I am not quite sure of the timing of that. If you are a depositor with a bank and you are worried about how this works, I would not actually direct you to the primary legislation in any event; even when it is consolidated, it is very difficult for the lay person to make any sense out of primary legislation all. People will need to look at the more general advice that will no doubt be available by googling “resolution”, “depositor protection” and the features of this scheme, because I am sure that many firms—banks and others—will have some commentary available on their websites as well. Of course, although I have not had a chance to look at it, I am sure that the Treasury will also have much relevant information available.

The noble Lord asked about contingency planning and resources. These are areas that he has, quite rightly, asked about in the past. In anticipation of him asking about them again, I have asked the Treasury the following questions. What is the name of the team in the Treasury and the Bank dealing with contingency planning? How many people are in it? Have they actually done any and, if so, what form did it take? The answer is that the financial stability group in the Treasury is responsible for identifying and analysing emerging risks to the financial stability of the UK and preparing and responding to them. In particular, it is responsible for the effective stewardship of government-supported banks; delivering structural reform in the UK banking system; developing the necessary legislation; and contingency planning for the possible failure of UK banks and putting those plans into action in the event of failure.

The group co-operates closely with the resolution directorate of the Bank of England. The resolution directorate co-ordinates the Bank of England’s resolution of failing UK banks. It also has responsibility for identifying the broad resolution strategy that outlines how a firm will be resolved, and for preparing the resolution plans that set out in detail how a firm will be resolved. The legislation introduced since the crisis requires banks to provide the authorities with information that will enable them to exercise their resolution powers and this includes detailed information about the firm and the identification of any substantial barriers to resolution that must then be addressed. This is an ongoing process, with the banks submitting information on an annual basis and the Bank of England updating its plans accordingly. The introduction of the recovery and resolution plans was a recommendation of the Turner review of the regulatory response to the financial crisis.