Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018

Lord Tunnicliffe Excerpts

Wednesday 12th December 2018 Grand Committee

[Baroness Bowles of Berkhamsted (LD)]

My Lords, probably few if any other people would stand up and say that CRD IV is their favourite piece of legislation, but for a variety of reasons it is my favourite. I do not mean to alarm the Minister or his officials by that, because we seem to have stuck within the rules of onshoring and the transfer of powers in the way with which we are now familiar. However, inevitably that process opens the door to future changes without it having to return to Parliament, as is the case in the EU, because a lot can be done via the interpretation of binding technical standards—if not immediately then at the next stage. It is not entirely clear from the explanation and from what is set out in the Explanatory Memorandum whether the binding technical standards will essentially just replicate what we have at the moment or whether they will make additional policy changes; that is, is it going to stay entirely within the “no policy change” of the withdrawal Act, or will changes be made simultaneously or subsequently?

For now, I want to concentrate on two points of personal interest. The first is the change to what counts as zero-risk weighted sovereign debt. This has long been a pet subject of mine and now it has become mainstream—in particular, that zero-risk weighting is actually inappropriate for eurozone sovereign debt because the European Central Bank cannot print money, although it has done a pretty good approximation of that in recent years. It would be interesting to explore a little more the effect of moving the zero-risk weighting from non-UK sovereign debt, given that sovereign debt is the main tier 1 liquid asset for banks. Will that mean that there is an incentive to reduce diversification in liquid assets?

More generally, how are banks currently dealing with sovereign debt in their risk calculations? The international banks most likely to have other EU sovereign debt can, and probably should, be using internal models to calculate risk rather than rely on the standard model and therefore the zero-risk weight. However, when I looked at this a while ago, the risk allocated in that way seemed to be pretty minimal, and I wonder whether that is still the case. Will minimal risk in the internal models be affected once the near-zero justification has gone? Also in the past some large banks have availed themselves of permanent partial use as a standard model under Articles 149 and 150 of the CRR, the reasoning being that it would otherwise be rather complicated due to holding a lot of different sovereign assets. Of course, Articles 149 and 150 will now apply only to UK sovereign debt, so what will happen there? Can the Minister also advise whether any UK banks are still using Article 150?

The second point I want to raise out of interest is the country-by-country reporting which comes from Article 89 of the directive and has the distinction of being enshrined in the EU withdrawal agreement as part of the BEPS commitments. The particular matter I want to highlight is that the onshoring has replaced the reference to the EU directive 2006/43/EC on statutory audits and annual accounts with the words:

“International Standards on Auditing (United Kingdom and Ireland) issued by the Financial Reporting Council Limited or a predecessor body”.


Frankly, I wish that it had not done that. At present, we have both the Kingman inquiry into the future of the FRC and the Competition and Markets Authority inquiry into audit, which encompasses the FRC and standards matters. I would expect a certain amount of criticism of the way in which the standards as applied in the UK under the FRC have not measured up to the company law of either the UK or the EU. So is that a future-proof amendment, given that the inquiry reports possibly as soon as next week?

On bank recovery and resolution, I am very happy to see the FSB key attributes referenced as a default. I spent quite a lot of time in Brussels having to wave those around during negotiations when things were going in slightly the wrong direction from time to time. As a practical matter, does the Minister consider that there is a substantial difference caused by being in only the international crisis management groups of a bank rather than in the full EU resolution procedures? I repeat my references to what the BTS are going to be doing, given the reference in paragraphs 7.19 and 7.20 in the Explanatory Memorandum. Does that suggest two lots of consultation, or is it just the same lot?

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for presenting these two instruments. I cannot but agree with the early paragraphs of the Explanatory Memorandum—which is the same in all these Explanatory Memorandums—that, essentially, if these instruments end up being used, it will be in a no-deal scenario, which would be disastrous for the United Kingdom.

Having had an original career in aviation, I intellectually accept that it is right and proper to prepare for all credible scenarios. That is what we are doing today, and we will do it in the usual polite way about another 40 times between now and the end of March. But, today of all days, one has a feeling that the no-deal scenario has crept a little closer, and I have almost a sense of being asked to dig my own grave against the possibility that extreme Brexiteers will win the day and we will end up in a no-deal situation.

The European Union (Withdrawal) Act highly limits what we are doing here, and I hope that the constraints of that Act are being fully respected. We are not here, frankly, to debate the merits of the instrument; we are here to debate whether it stops within the agreed constraints, which are rehearsed in many places. Perhaps the strongest sentence is in paragraph 7.4 of the Explanatory Memorandum, which states:

“These SIs are not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this situation”.


The process called for by the Act, in a sense, divides into two. The first part of the process, which is true of all the things we discuss today, is to reassign responsibilities—in other words to recognise that appropriate authorities are necessary for the business of the various Acts to work and they have to be moved from EU institutions into UK institutions. The second is to make policy changes within the strict limitations of the sentence that I just read out.

Discharging our narrow duty to ensure that the Government have stuck to the rules is very difficult to achieve. In theory, we could go through each SI, line by line, regulation by regulation and Act by Act to see if that is possible. I recognise that the wisdom of the noble Baroness allows her at least in part to do that, but I am afraid that with our available resources that is not possible. A poor second to that is to skim the document and look at its structure and the language that it uses.

Let me take the bank recovery and resolution SI first. It looks as though the reassignment of responsibility has been discharged because, in page after page, one finds that it takes a responsibility from an EU institution and moves it to a UK institution. However, the area that I am particularly concerned about is where the instrument uses entirely new language, because it seems to me that, where there is entirely new language, I have no way of knowing whether policy variations have accidentally arisen. Therefore, I am very surprised to see areas of entirely new language, because I would have assumed that the object of the exercise is to take rules presently in place and translate them into English law.

The most dramatic example of that is on pages 41 and 42 of the bank recovery and resolution SI, where there are two pages of fresh language that talk about the recovery plan that institutions must put in place. Now, I assume that the requirements for that plan are already effectively enacted at this time. Why, then, is it not written over—or whatever the right term is—or why is it not referenced back into the law as it exists today, so that we can see that there is no change in policy? I ask that question to see whether there is any new thinking buried in the text, and I would value an assurance from the Minister that there is good reason why those parts of the instrument are written in fresh language, as opposed to being cross-referenced to language that already exists.

In the second SI, on capital requirements, there is a clear policy change, which is there because the situation demands it. The change, as has already been spoken about, is the recognition of EEA countries as not being of zero risk and hence requiring a capital buffer. In a no-deal scenario, after 29 March such sovereign debt will have to be assigned a risk factor. Surely this will put UK banks at a commercial disadvantage. It is no good to give as an excuse, as is done in the impact assessment—and it was great to see an impact assessment, by the way, so I must put that on record—that most institutions will use the “internal ratings based” approach. While assigning risk to EEA loans is not mandatory with the IRB banks, if they do not take account of the fact that, for other purposes, such assets will be recognised as having some degree of risk, one would hope that this would be challenged by the regulators. Does the Minister agree with that analysis? Why did the impact assessment not look at some way of maintaining the status quo? For instance, it might have contained a statement that the sovereign debt of EEA countries would be treated as zero risk, or it could have included an order-making power for the Treasury to define individual countries as having zero risk.