Bank Resolution (Recapitalisation) Bill [HL]

Lord Livermore Excerpts

Consideration of Commons amendments and / or reasons
Monday 12th May 2025 Lords Chamber

Moved by

[Lord Livermore]

That this House do agree with the Commons in their Amendment 1.

1: Clause 1, page 1, line 21, leave out subsection (3)

[The Financial Secretary to the Treasury (Lord Livermore) (Lab)]

My Lords, with the leave of the House, I will also speak to Amendment 2. I would like to thank noble Lords for their continued interest and engagement in this important legislation. I know that some noble Lords will be disappointed to see the other place overturn the amendment inserted by your Lordships’ House, relating to the scope of the new mechanism, but I hope that I can offer some reassurance today on this matter.

As noble Lords will know, this Bill is intended to enhance the toolkit that the Bank of England has to manage the failure of a banking institution. In particular, it seeks to provide a new source of funding to cover certain costs associated with resolution and, in doing so, to strengthen the protections for the taxpayer, given the importance of protecting public funds in the event that a bank fails.

That said, I do understand the concerns that noble Lords have about any potential costs that would be placed on the banking sector if the Bill’s mechanism were used to support the resolution of some of the largest banks. Here, I would reiterate that it is the Government’s strong expectation that this mechanism would not be used to support the failure of the largest firms.

Noble Lords will recall that the Government published draft updates to its code of practice in October last year, which contained important language clarifying this expectation. I also met with many noble Lords in person during the Bill’s passage to listen carefully to concerns and to seek to explain the Government’s views on this matter.

Ultimately, the other place has taken the view that the scope of the mechanism should not be limited. The Government continue to believe that it is important to retain some flexibility for the Bank of England. I would like to make three further points to help explain that position.

First, as I have mentioned, the Government published draft updates to the code of practice to clarify our expectation that the Bank of England would bail in all readily available MREL that a bank holds, on top of the regulatory capital that must be bailed in, before using this mechanism. The Government therefore envisage that the mechanism would only be used on larger banks as a backstop, and any funds required would be only a top up to these other sources of recapitalisation.

Secondly, allowing the Bank of England the option of using the recapitalisation mechanism on larger banks means that it will be more able to respond to unexpected factors when resolving a bank. While of course the Bank of England works hard to ensure that it is fully prepared for a failure scenario, the manner in which banks fail is always highly uncertain. It is therefore important to ensure that the Bill is not overly restrictive in curtailing the Bank’s ability to use the mechanism flexibly.

As we have discussed in previous debates, there are some circumstances where retaining that flexibility could help to protect public funds. Although unlikely, there are circumstances in which larger banks may not be sufficiently capitalised to self-insure against their own failure, even if the bank in question has been directed to maintain end-state MREL requirements. An example of that might be if the firm was subject to a large redress claim, resulting in larger recapitalisation requirements than envisaged. Similarly, changes in the market value of the firm’s assets over time could result in higher losses than expected at the point of failure, again resulting in higher recapitalisation requirements to manage the failure of the firm in question.

While unlikely, those examples demonstrate a clear benefit in having the flexibility to source additional resources from the mechanism, having already written down the firm’s available MREL. Restricting the scope of the Bill would prevent the mechanism from being available in such scenarios, leaving public funds and therefore the taxpayer exposed instead. The Government therefore consider the theoretical possibility of using the recapitalisation mechanism on a larger bank a prudent step, providing comprehensive protection for public funds.

Thirdly, any levying by the Financial Services Compensation Scheme to recover funds provided to the Bank of England will be subject to an affordability cap set by the Prudential Regulation Authority, which is currently £1.5 billion per year. In line with its safety and soundness objective, the PRA carefully considers the affordability of the FSCS levy for firms, providing an important safeguard against the sector being hit by unaffordable levies to prop up the largest firms.

I hope those points will go some way to reassuring noble Lords, and that they will be able to support the Bill as it now stands. Noble Lords will note that Amendment 2 is a straightforward amendment to remove the financial privilege amendment that was inserted by this House at Third Reading. I beg to move.

[Lord Vaux of Harrowden (CB)]

My Lords, I want to ask the Minister a question that arises from this change. First, though, it is over six months since we debated these amendments. That does seem like an awfully long time for the Bill to disappear into limbo and come back, particularly when other Bills are being rushed through this House.

I wanted to ask the Minister to explain more about whether the resolution process could be used for larger banks, but I think he has actually answered that question. I am not sure his answer gives me an awful lot more confidence or comfort, but I am not going to oppose the Commons amendments. However, in the last six months, various comments have come from the PRA or the Bank of England about the fact that this Act, as it will be, may allow them to take some banks out of the MREL process. I wondered if the Minister might wish to comment on that and whether there are any consequences the other way round.

--- Later in debate ---

[Lord Livermore (Lab)]

My Lords, I again thank all noble Lords for their efforts on the Bill since July last year, and all noble Lords who have spoken in this brief debate today. I am also grateful to all three noble Lords for indicating that they will not oppose the Bill further. I will briefly attempt to respond to the questions and points made in this brief debate.

First, I reiterate what the noble Baronesses, Lady Kramer and Lady Neville-Rolfe, said about the expertise in this House; I was on the receiving end of much of that expertise and it certainly tested me. However, to a large extent, the Bill was improved by the debates we had in this House, and I am grateful to all noble Lords for that.

The noble Lord, Lord Vaux, talked about the gap between Third Reading and us returning today for this ping-pong session. It is somewhat out of my hands, although I do agree that it feels like rather a long time since we last debated these issues. He asked about the circumstances in which this power will be used, and I hope, as he said, that I covered that in my opening speech. He also raised some other questions.

On MRELs, the Bank of England sets MREL requirements independently of government, as he knows, but within a framework as set out in legislation. The Bank of England has consulted on proposals which seek to ensure that the MREL regime remains proportionate and evolves over time. The Government are engaging closely with the Bank of England as it considers its responses to that consultation, and its engagement includes consideration of the impacts on economic growth.

The noble Baroness, Lady Kramer, talked about MREL being used as the first resort. The Government believe there are sufficient safeguards in place to ensure that shareholders and creditors are exposed to losses before the new mechanism is used. These include the principle in legislation requiring the Bank of England to ensure that shareholders and creditors bear losses when a banking institution fails. As set out in the draft updates to the code of practice, the Bank of England would first look to write down or otherwise expose to loss all readily available MREL resources before requiring a recapitalisation payment from the FSCS. Noting these points, the Government believe that specifying the extent of losses that must be imposed before the new mechanism is used would be an unnecessary restriction on the Bank of England’s flexibility.

The noble Baroness, Lady Neville-Rolfe, asked about the FCSC budget and minimising operating costs. It is in fact a legal duty on it to minimise those costs, and I would expect it to adhere to that legal duty. The noble Baroness also spoke about the importance of financial services to the growth of the UK economy, on which I very much agree with her.

The Bill plays a vital role in upgrading the UK’s toolkit to manage bank failures, strengthening protections for taxpayers and financial stability which are, in turn, key to the Government’s number one priority of economic growth. I look forward to the Bill’s enactment and I hope noble Lords will join me in supporting the amendments made in the other place. I beg to move.

Motion on Amendment 1 agreed.

Moved by

[Lord Livermore]

That this House do agree with the Commons in their Amendment 2.

2: Clause 8, page 6, line 1, leave out subsection (5)