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Banking Bill

My Lords, we now come to Clause 7, which is crucial in the context of the special resolution regime because the FSA is required to pull the trigger under this clause before one of the stabilisation options can be pursued. Two conditions have to be met before the FSA can do that and my amendment concerns the second, which is contained in subsection (3) which reads: "““Condition 2 is that having regard to timing and other relevant circumstances it is not reasonably likely that (ignoring the stabilisation powers) action will be taken by or in respect of the bank that will enable the bank to satisfy the threshold conditions””." My amendment replaces the words ““not reasonably likely”” in this formulation with ““highly unlikely””. We had an interesting debate in Committee at the end of which the Minister undertook to take the issue away to see whether an alternative form of words could be found. He has not done that, so I have retabled my amendment for further debate. This is not mere semantics. Our debate in Committee indicated that the Government were unwilling to give a definitive explanation of the meaning of ““not reasonably likely”” at the Dispatch Box, but indicated that it would be along the lines of a balance of probabilities. It was not, as the noble Lord, Lord Newby, extracted from the Minister, a test of what a reasonable man would think, but was rather in the direction of ““more likely than not””. That is not a very high hurdle and that is why bodies such as the BBA have expressed such concerns about it. We have to remember that this clause will trigger expropriation. In a civilised society, such powers should be exercised only when it is clear that it is necessary to use them. In many situations, it will be clear that a bank is incapable of a wholly private sector solution and that the FSA will have no difficulty in satisfying itself that the conditions are met. But our concerns are clearly around the borderline cases. Let us take the example of a bank which has got itself into a mess. It has perhaps made one bad judgment rather than has been through an era of reckless management. It might be easier to think about these things, not in the context of today’s unacceptable conditions in banking, but in looking forward to, we hope, more settled times. Let us suppose that this bank, which has had one bad event occur to it, does not today satisfy the threshold conditions, and that it needs its balance sheet strengthened and its cost base rationalised in order to survive. If it has a business plan, but has not yet executed it, and has the possibility of further capital, which has been negotiated but is not settled, what does the FSA do? The test of ““not reasonably likely”” would allow the FSA to assert that without all the outstanding issues being resolved it was not reasonably likely that the bank would meet the threshold test. The FSA would not have to positively reject the plans. It could say that, on balance, it did not think that they would work. Using my test, it would have to go further and reach a positive judgment that the plans would probably not work, that they were ““highly unlikely”” to work, and there is a crucial difference. In Committee, the Minister said that the test was designed to ensure that the special resolution regime powers could be used before a bank entered into insolvency, so that the Government could act early to preserve value. In the first instance, the shareholders should have the ability to act to preserve value and not face expropriation by the state unless it is very clear that that is the only way to go. The test for condition 2 fails to meet that expectation. The FSA’s consultation document on this issue, which was published in December, provides some crumbs of comfort, in that the FSA intends to look at reasonableness in relation to the time horizon, but it is still not clear whether it intends to operate the ““more likely than not”” balance-of-probabilities overall approach. That is disappointing when set alongside the Minister’s own interpretation of the words that we debated in Committee. I beg to move.