Bank Resolution (Recapitalisation) Bill [Lords]

Mark Garnier Excerpts

Wednesday 22nd January 2025 Commons Chamber

[Mark Garnier (Wyre Forest) (Con)]

I welcome the new Minister to her place. I think this is her first Bill that she has taken through as Economic Secretary and, interestingly, she is absolutely right. This is one of the frequent occasions on which we will agree on pretty much everything. This Bill was obviously written by the previous Government who, I think we all agree, delivered 14 years of strong and stable government.

Broadly speaking, we will not disagree on this Bill. As the Minister set out in her opening speech, this legislation was born out of the learnings of the failure of Silicon Valley Bank. The failure came out of the US parent company, with a contagion that quickly spread to its UK subsidiary. Although the Bank of England had initially planned to use insolvency procedures, HSBC emerged as a buyer thanks to the tireless work over the course of a weekend in March 2023, and much credit must be given to the former Chancellor of the Exchequer, my right hon. Friend the Member for Godalming and Ash (Jeremy Hunt), and the former Economic Secretary to the Treasury, my hon. Friend the Member for Arundel and South Downs (Andrew Griffith). They secured an outcome that has not cost the taxpayer any money at all, and which protected millions of pounds’ worth of customer deposits, primarily in the tech sector. The bank’s customers would face an uncertain financial future were it not for that intervention, so I am sure that the House will join me in commending the action that was taken by the previous Government.

The failure and subsequent transfer of Silicon Valley Bank UK shows how robust our post-2009 banking reforms have become. The Bank of England has used its resolution powers only three times since 2009, and this was the first time since the Southsea Mortgage and Investment Company failed in 2011. It is fair to say that the process worked absolutely as it should have done: the transfer of Silicon Valley Bank UK to HSBC was done in an orderly manner, there was no wider contagion in the banking sector, and withdrawals and panic did not spread to other banks. In short, it demonstrated why the UK is such a financial centre of excellence, and we must continue to champion that point.

However, we can continue to uphold our world-leading reputation only if we review and learn from when the system is stressed in real life. In some ways, we were very fortunate. HSBC was the only credible bidder for Silicon Valley Bank that did not require financial support or guarantees from the Government or the Bank of England. In addition, HSBC’s level of capital and liquidity resources greatly reduced the risk to public funds, delivered stability and boosted market confidence. However, had HSBC not come forward, the only option for the Bank of England was the bank insolvency procedure. This Bill comes out of the subsequent root-and-branch review, and it went for industry consultation under the previous Government. I thank the current Government for supporting it.

The Opposition recognise that some banks may fail due to issues outside their control and should have pathways to continue as a going concern if transferred to another entity, and it is right that the Bank of England has more tools in its arsenal to support the financial system. We are therefore delighted to support the Bill—it is one that we started. As it made progress in the other House, it benefited from considerable scrutiny from noble peers. The successful amendments and new clauses enhanced the Bill and will significantly improve transparency.

This was a point addressed by my right hon. Friend the Member for North West Hampshire (Kit Malthouse) during the Delegated Legislation Committee on Monday, which finalised the transfer of Silicon Valley Bank UK to HSBC with no compensation to shareholders. He rightly raised some of the unanswered questions on what changed the Bank of England’s decision between announcing that the Silicon Valley Bank UK was going into insolvency procedures on the Friday and being transferred under resolution by the Monday. These additional transparency arrangements will ensure that colleagues in this House remain confident in the independence of the Bank of England. Will the Minister confirm that the Government intend to support those amendments in this House? I would be amazed if he said no, actually.

I will move on to what could be the crux of any potential disagreement. When this Bill was introduced in the other place, there was no limit to the scope of this regime. We can safely categorise our banks into three different groups. First, there are the large-scale institutional banks that have reached the end-state minimum requirement for own funds and eligible liabilities, or MREL, as it is known. Secondly, there are the challenger banks such as Monzo and Starling that are working towards end-state MREL. Finally, there are the smaller banks that do not meet the threshold for MREL, such as Silicon Valley Bank.

The Banking Act 2009 provides a robust framework for dealing with banks that have achieved end-state MREL status, and while there is a sensible argument for saying the new mechanism could provide top-up funding for banks working towards end-state MREL, it is not fair or reasonable to expect the mechanism to be used for the largest banks. The consequences of such a decision could be extremely costly for banks and their customers, and if an institutional bank failed and this mechanism were used to facilitate a transfer, our fear is that there could be a recapitalisation requirement that was many times the annual cap of the financial services compensation scheme. The only decision left to the FSCS would therefore be to borrow from the national loans fund via the Treasury. The ex-post levy set out in this legislation would therefore be charged not only in the year in which the levy was first implemented but potentially for many years thereafter. MREL requirements should ensure the safety of our largest institutions. Bank directors should be ensuring sound compliance of MREL, not taking comfort in the fact that they can fall back on to an ex-post levy of the banking sector in times of trouble.

The Opposition took reassurance from a policy statement that the mechanism would be used for the largest banks only in exceptional circumstances. However, this still left the key question as to why the legislation allowed large-scale banks to trigger the mechanism. In her opening speech, the Minister referred exactly to this. Baroness Vere’s amendment makes it clear that this mechanism cannot be used on the largest banks—those that have achieved end-state MREL. That amendment was opposed by the Government in the other place. I was hoping that the Minister would update the House today on the Government position and she has done that, but we may want to talk about this at greater length. Concerns were also rightly raised by peers that this mechanism, and using resolution to transfer failing banks, should not become the default position of the Bank of England, which is important.

Ultimately, banks are businesses. They have shareholders that bear the responsibility and the burden of risk, and we should not create a system where banks can always expect to fall back on industry-funded life support. The code of practice, alongside this Bill, rightly states that using the insolvency procedure should be the default position. I would welcome the Minister’s comments on whether there could be further need for that to be strengthened in the legislation.

The introduction of this mechanism is another example of a banking industry in strong health. In 2007, it was the taxpayer bailing out the banks. Now we have a system whereby the industry is expected to cover the cost of a failing bank. This raises questions as to whether the Government need to review how we can make the UK banking sector more internationally competitive—we have had an informal chat about this.

Let us take the bank levy as an example. It was introduced for three main reasons. First, it was introduced to help repay the cost of the banking bail-out, and it has raised something in the region of £25 billion since it was first introduced. Second, the bank levy acted as a kind of insurance premium in case the post-financial crisis stability of the banking sector were to falter and fall and there needed to be another bail-out. Finally, it was almost a quasi-punishment to the banking system for the failures that led to the financial crisis. It was there to reassure unhappy shareholders that there were consequences for a sector in which there was bad practice. If we add up the total cost to the UK taxpayer of the financial crisis, it was £137 billion, according to the House of Commons Library, as of 2023. That has been reduced to £33 billion now, so there still is some outstanding cost.

On top of the bank levy, other post-2009 reforms include much more stringent ringfencing and capital requirements. That might not be a subject for this debate, and I am not calling for the bank levy to be abolished, but I would certainly welcome the Minister’s comments on whether there could be scope to review the international competitiveness of the banking sector alongside the Chancellor’s growth agenda. The international competitiveness of the City of London should be an absolute priority for this Government—I believe that it is—yet according to UK Finance’s 2024 banking sector tax report, produced by PwC, UK banks face the highest tax contribution since the study started a decade ago.

In terms of international competitiveness, according to PwC, the total tax burden of a model bank operating in the UK is currently 45.8%. That is significantly higher than our competitors in Frankfurt at 38.6%, in New York at 27.9%, or in Dublin at 28.8%. The City, as I am sure Ministers and the whole House will agree, is an extraordinary asset for this country. For a Government who are seeking a growth agenda, the City is the oil in the engine of that economic growth.

Banks do a very important job, and it is a job of significant social and economic importance. Banks take money from where it has accumulated and distribute it to where it is needed for investment. This is crucial to fairness across our economy and delivering growth. They transfer overnight deposits into 25-year mortgages that provide hope and opportunity for people to bring up their families in safety. So we should not demonise banks, and we must remember that shareholder returns on bank investments are as important as shareholder liability in the event of a failure. We must ensure that there is a good return, given the fact that bank shareholders bear the ultimate risk of losing everything.

This Bill is a shining example of the fact that the banks and regulators are now in a position to keep their industry in order. As I said at the start of this speech, I believe that there is cross-party support for the Bill, and I look forward to working with the Government as these reforms progress through the House. They are magnificent, because of course they came from the previous Government, but I thank the Ministers for continuing with them in the spirit with which they were intended.

--- Later in debate ---

[Mark Garnier]

It gives me great pleasure to wind up this debate, with the leave of the House, on behalf of the Opposition.

First, I thank the handful of Members present, who have made very helpful contributions. The hon. Member for Newcastle-under-Lyme (Adam Jogee) rightly asked questions on behalf of his constituents. He asked whether they will be under the cosh if a bank goes bust again—they should not be, under this legislation—and what banks will do to generate economic growth in his area. The Liberal Democrat spokesman, the hon. Member for St Albans (Daisy Cooper), rightly raised a point about the legislation being extended to and used for the larger banks, which is not its intention. As ever, my right hon. Friend the Member for North West Hampshire (Kit Malthouse) has brought an intelligent scepticism to the question of what could happen with this legislation, and has demonstrated why Parliament is such a brilliant place, with intelligent people like him scrutinising what goes on.

I also welcome the Parliamentary Secretary to the Treasury. He has had a glittering career, and has done extraordinarily well in his meteoric rise to Minister in not one but two Government Departments in his first Parliament. He is double-hatting already; he is a clever chap. We have come across each other in the past.

I will not take too much of the House’s time, as I was on my feet just a few minutes ago, but I would like to come back to three points that I hope the Minister will address. The first is the amendment to the Bill; the Economic Secretary to the Treasury made the point that the Government do not want to support that amendment. This may come up later, and we may have more conversations about it. Secondly, does the Parliamentary Secretary to the Treasury feel that the Bank of England’s code of practice provides enough reassurance that the bank insolvency procedure remains the default option for failing smaller banks? Finally, how does he weigh up continued use of the bank levy and regulation of our banking system against the Chancellor’s growth agenda? I appreciate, however, that that is beyond the scope of the Bill.

As I said in my opening remarks, the Bill retains surprisingly strong cross-party support. It is a good thing for the Bank of England to have more tools at its disposal during periods of heightened stress, and the version of the Bill before us today—the version amended in the other place—is more robust than it started out. We look forward to getting clarity from the newly appointed shadow Minister. [Hon. Members: “The Minister.”] My apologies—it will be a few years before that. I congratulate the newly appointed Minister on his appointment.