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Banking Bill

I await with trepidation to receive Hansard to discover how inadequately I answered the question of the noble Lord, Lord Lamont. However, I am much more confident that I can correctly answer the question of the noble Lord, Lord Higgins; namely, that we cannot undermine our legal commitments and obligations under the relevant directive. I am grateful to the noble Lord, Lord Howard of Rising, for asking about a definition. If I was challenged to define ““temporary””, I am certainly even more challenged to define ““enterprise value””. As it is customarily used in business and finance, the enterprise value of a company usually comprises a number of elements, including the market capitalisation of the equity of the institution; that is, the market value of the shares in issue, and the market value of debt financing and other liabilities. This concept is much easier to apply to a non-financial institution in which the vast majority of the enterprise value lies in debt instruments rather than equity. It is extraordinarily difficult to interpret this concept of enterprise value as customarily used in business to give effect to the amendment proposed by the noble Lord, Lord Newby. As he took the opportunity to digress a little to talk about the plight of bank shareholders, I hope that I might do likewise. Certainly from my perspective that is sometimes more appealing than reading the notes prepared for me telling me that I should reject the noble Baroness’s amendments, from which I am occasionally willing to deviate. The noble Lord, Lord Newby, said that he sometimes had difficulty expressing sympathy for shareholders of failed banks. However, he was also absolutely right to point out that those shareholders are in most cases institutional investors and that the funds are used to provide our pensions, protection and insurance and to meet future needs. The media may well have an image of shareholders as fat cats, speculators and hedge funds but that simply is not the case. No doubt we shall discuss Equitable Life later this week. I am reminded that Lord Penrose, who produced a report on it, said that the members of that society were the authors of their own misfortune. I say to the noble Lord, Lord Newby, that I think there is a parallel to some extent here, in that there is a challenge to the owners of banks as to whether they were appropriately engaged in asking questions about what the banks were doing, why they were increasing their leverage and why they were accepting progressively lower returns on assets. Did they have a good appreciation of the risks associated with the products that they were creating and purchasing? Did they have a good grasp of the overall impact of the remuneration arrangements that they had set in place and the possibility for those remuneration arrangements to have dysfunctional consequences as far as the shareholders were concerned? While I have sympathy for shareholders in respect of what has happened, there are some important questions to be asked about how institutions conduct their own engagement with companies and how they relate to boards of directors. I do not believe that a core objective of the SRR should be to protect enterprise value in terms of measuring the value of a firm. When a failing bank enters the SRR, the stabilisation options in the Bill are deployed because the authorities believe that they are necessary in the public interest. At this point, the wider public interest of financial stability, depositors’ interests and the protection of funds may well outweigh the commercial interest of the bank. This need to balance the public interest in exercise of the SRR tools against the interest of the bank itself and its creditors is implicit in objective 5—to avoid interfering with property rights in contravention of the convention rights. This objective ensures that any interference with the rights of the company and its creditors must be in the public interest and that the interference must be proportionate. Therefore, I reassure noble Lords that a number of specific features of the SRR will operate to safeguard and protect the value of the failing bank. The Bill is designed so that the stabilisation options of the SRR can be applied before the insolvency threshold has been reached. This has been specifically designed to allow the authorities, in pursuing a successful resolution of a failing bank, to preserve residual value that may remain in the business. I draw the attention of noble Lords to Clause 58, to which amendments have been tabled. The clause introduces the bank resolution fund. This fund, which is compulsory for a bridge bank but optional when taking a bank into temporary public ownership, is designed to ensure that the proceeds of any resolution, minus deductions necessary adequately to safeguard public funds, whether actually applied or put at contingent risk, must flow back to the failing bank. If the Bank of England or the Treasury put in place a bank resolution fund, the resolution fund order may place a duty on the authorities to maximise the proceeds available for distribution subject to meeting the special resolution and bridge bank governance objectives. This mechanism should also help to achieve the result that the noble Lord, Lord Newby, is looking for in the amendments. I ask him to consider withdrawing the amendment.