MPs back Bill to prevent taxpayers being ‘on the hook for small bank failures’
The Government has said the mechanism would provide more flexibility.
A Bill that will prevent taxpayers being “on the hook for small bank failures” has moved closer to becoming law.
Treasury minister Emma Reynolds said the Bank Resolution (Recapitalisation) Bill “strengthens protections for public funds”, but the opposition MPs raised concerns about the measure in the Bill being used for larger banks.
Proposed legislation would enable the Bank of England to direct the Financial Services Compensation Scheme (FSCS) to make a payment to a struggling bank to recapitalise it, with the costs covered by increases to a levy paid by the industry.
The Government has said the mechanism would provide more flexibility in responding to the failure of banks and protect taxpayers from shouldering the financial burden.
During the Bill’s second reading Ms Reynolds told MPs: “The Bank Resolution (Recapitalisation) Bill will enhance the UK’s resolution regime by giving the Bank of England a more flexible toolkit to respond to bank failures.
“The Bill creates a recapitalisation mechanism which will ensure that certain costs of managing the failure of banking institutions do not fall to the taxpayer.
“It strengthens protections for public funds and financial stability while supporting the competitiveness and growth of the UK financial sector by avoiding placing new upfront costs on the banking sector.
“It is therefore an important Bill that underpins, underpins this Government’s commitment to promote growth and economic stability.”
The Bill was conceived after the failure of Silicon Valley Bank (SVB), which Ms Reynolds said presented “a case for a targeted enhancement to give the Bank of England greater flexibility to manage the failure of smaller banks”.
The Treasury minister added: “Essentially, if a small bank is in trouble, and it is better for that bank not to go into insolvency, and it is better for it to go through resolution to protect its depositors, which, in the case of SVB, only 14% of deposits were covered by the Financial Services compensation scheme, because the scheme only covers deposits up until that £85,000 threshold.
“If public funds had been required to facilitate the sale of SVB to another purchaser, in this case, HSBC, but it could have been another institution then that would have had recourse to public funds.
“And what we are seeking to avoid is that the taxpayers in all of our constituencies are not on the hook for small bank failures.”
Conservative shadow treasury minister Mark Garnier said the transfer of SVB was “done very much in an orderly manner” and “demonstrated why the UK is such a financial centre of excellence”.
He said: “We recognise that in the financial sector, some banks may fail for issues outside their control, and should have pathways to continue as a going concern if transferred to another entity.
“And it’s right that the Bank of England has more tools in its arsenal to support the financial system, and therefore on this side of the House, we are absolutely happy to support the Bill.”
Mr Garnier did raise an amendment proposed in the House of Lords that would prevent FSCS funds being used to support large financial institutions, already covered by a separate safety net designed to absorb losses and support recapitalisation, known as the minimum requirement for own funds and eligible liabilities (MREL).
He said: “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 would be extremely costly for banks potentially and their customers.”
Deputy leader of the Liberal Democrats Daisy Cooper said her party also supported the change to prevent the Bank of England “from using it for bigger banks that are signed up to a different scheme”.
She said: “The minister has said that an updated code of practice has been produced, but it is disappointing to hear that ministers intend to table an amendment at the next stage to try and delete this amendment and withdraw it from the Bill.”
Ms Reynolds said the Government would be tabling an amendment at committee stage to “remove the constraint” of the Lords amendment.
She said: “After careful reflection, the Government continues to believe that there should remain some flexibility on this point in the legislation, in order to avoid constraining the Bank of England’s ability to act and use the mechanism in a highly uncertain crisis scenario.”
She added: “The Government considers it important to avoid constraining that optionality, given the alternative may be to use public funds.
“So ultimately, we want to protect the taxpayer.”
