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Banking Bill

My Lords, in Committee the Government committed to reflecting on the most suitable form of words to respond to the concerns of the House on this matter. I can report that thought has gone into this. Alas, however, having reflected on the debate, the Government believe that the wording in the Bill as drafted is the most suitable form of words. I shall set out again why the term ““not reasonably likely”” in respect of whether a bank will meet its threshold conditions is the most appropriate form of words to use in this context. The clause is about identifying the point at which the authorities decide that voluntary and regulatory action cannot turn a bank around. It has the consequence that, should there be a sufficient public interest justification under Clause 8 or 9, stabilisation options may be exercisable in relation to the failing bank. I appreciate that there are obvious and serious risks to a bank being put into the SRR too early. The market must therefore have confidence that these actions will be taken only once it is clear that a bank is failing. That is why the independent regulator is leading on this decision, and why the general conditions under Clause 7 include not only an assessment against the threshold conditions but a decision on the likelihood of turnaround. However, there are also risks with putting this decision at too late a stage. Indeed, I believe that the noble Baroness’s party’s official position on the SRR trigger has long been that it should be given to the Bank of England as there is a risk that the regulator might be unwilling to pull it too early for fear of admitting a failure of regulation. The stabilisation options are designed so that the authorities can intervene before insolvency is reached and, as was noted during the debate in Committee, while there is still some residual value remaining in the bank—a point that has some relevance to our earlier discussion about the interests of creditors and shareholders. Acting at this stage increases the chances of a successful resolution and, I would argue, is particularly important for achieving a private sector solution, which will normally be the authorities’ preferred approach. Acting at this stage is also necessary to achieve the objective, much supported by the noble Baroness, Lady Noakes, and the noble Lord, Lord Newby, as well as by the banking sector, of ensuring continuity of service, a matter that we addressed earlier when I agreed to go away and reflect further. I believe that noble Lords will agree that a balance needs to be struck. The ““not reasonably likely”” formulation currently included in the clause appropriately strikes that delicate balance. In reflecting on this matter we have considered the points made in Committee. The noble Baroness and others questioned what the phrase ““not reasonably likely”” meant in terms of probability. The general conditions—correctly, we believe—contain both quantitative and qualitative considerations in the assessment of threshold conditions. The question of the reasonable likelihood of the provision regarding turnaround is necessarily a matter for expert evaluation, based on a series of complicated and interrelated considerations. It is a multitextured assessment of future events that cannot be predicted with complete certainty. The noble Lord, Lord Newby, made the point that language matters in legislation. I entirely agree with him. He also said that as the phrase ““not reasonably likely”” was effectively the same as ““highly unlikely”” in layman’s language we should adopt the latter construction and be done with it. Here, I am afraid that I cannot agree. With respect, we are debating primary legislation, not the everyday language of laymen, to use the noble Lord’s word. Nor, to use the example given by the noble Baroness, Lady Noakes, in an earlier debate, are we talking about pricing a horse race. I have eschewed the temptation to offer a tip to the noble Baroness today as race meetings are so limited by the adverse weather, but perhaps tomorrow will provide me with a further opportunity. It is important that the language we use has the precise legal effect that is intended. ““Reasonable likelihood”” is a term which is used in legislation. For example, before a court grants an administration order, it must be satisfied that the order is reasonably likely to achieve the purposes of administration as set out in paragraph 11 of Schedule B1 to the Insolvency Act 1986. Given this explanation of the term, I would argue that it encapsulates exactly the threshold that this decision should be set at, and indeed the level of consideration from the FSA that noble Lords were seeking in their questions and comments in previous debates. Let me give an explanation of why the imposition of the higher test of ““highly unlikely”” would be undesirable and could even cause dangers to the public policy objectives represented by the special resolution objective, in particular of protecting financial stability and depositors. First, this test may force the authorities to wait until it is too late to intervene in a way that preserves franchise value in the bank. That may be the case where the authorities have to wait until the bank is on the very edge of the precipice of failure, at which point it would be likely to be next to worthless. That may not protect public funds and may ultimately be deleterious to bank creditors. For example, in resolution through a bridge bank, the net proceeds of resolution flow back to the bank through the bank resolution fund. Where the authorities have waited too long before intervening, those net proceeds will be much less than if the intervention had taken place while franchise value remained in the bank. Secondly, distressed banks do not necessarily decline gradually towards failure in a predictable way. As resolution experience shows, bank failures can involve ““fast burn”” scenarios. For example, a depositor run can potentially imperil any bank at very short notice, as it is in the nature of banking that banks do not hold sufficient liquidity to repay all their depositors within a short period of time. Thirdly, it may simply not be possible to say that turnaround is highly unlikely in circumstances where there is nevertheless the most compelling and powerful public interest in intervention. Perhaps I may illustrate this with an example. Let us say that a bank is failing its threshold conditions, but a private sector purchaser is potentially interested in acquiring ownership of the bank. In this example, the failure of the bank would have catastrophic implications for financial stability and for depositors. Because a private sector purchaser is potentially interested in acquiring ownership of the bank, it may be difficult to say that it is highly unlikely that action cannot be taken by or in respect of the bank to enable it to satisfy its threshold conditions. Indeed, the possibility that the bank could be acquired through a share sale means there is at least a possibility that the bank could be enabled to meet its threshold conditions without resort to the special resolution regime. However, the private sector purchaser may be too risk averse to seek to acquire the bank through ordinary commercial means, which may involve delay and an unacceptable level of execution risk. In such circumstances, even though it is not highly unlikely that the bank will be turned around, the Government believe that there is a clear case for intervention under the special resolution regime, ideally to effect a transfer under Clause 11 to the private sector purchaser concerned. Otherwise, the authorities would have to run the risk of a failure occurring, with all the adverse implications this may have for financial stability and the protection of depositors, not to say public funds. On this basis I would strongly urge the noble Baroness to withdraw her amendment, and if she is unable to do so, I urge the House not to support it.