Lord Livermore (Lab)

My Lords, I am grateful to all noble Lords, and to my noble friend Lord Eatwell for the points that he made. The scope of firms in relation to which the mechanism can be applied has been a key issue in all our deliberations to date. I am very grateful to noble Lords for their engagement on this topic since Grand Committee. As I stated then, the Government’s policy intention is for the mechanism provided by the Bill to be used primarily to support the resolution of smaller banks. We have reaffirmed that intention by including it in the updates to the special resolution regime code of practice, drafts of which have now been published and shared with noble Lords. The Bank of England must have regard to the code of practice when exercising its resolution powers, and this is set out in statute. The Treasury is involved in the exercise of any resolution powers, either by being required to provide a response to consultation or by consent. Nevertheless, the Government maintain that it is right for the Bill to contain some flexibility for the Bank of England to be able to use the mechanism more broadly in some circumstances. That is because firm failures can be unpredictable and there could be circumstances in which it would be appropriate to use the mechanism on other firms. To repeat the example I gave in Grand Committee, this may be especially relevant in situations where a small bank has grown but is still in the process of reaching its end-state MREL requirements. Firms in this position would have at least some MREL resources to support recapitalisation, but the new mechanism could be used to meet any remaining shortfall if judged necessary. Without the proposed mechanism, there will be a potential gap in this scenario, creating risks to public funds and financial stability. There is, of course, a counterargument here that the scope could instead be constrained, such that firms on the glide path to their full MREL requirement remain in scope of the mechanism but firms that have met their end-state MREL are excluded. The Government note that this is the desired intent of the noble Baroness’s amendment and it is an argument that we have considered carefully. Ultimately, noting what has been set out in the code of practice and the strong expectation that the mechanism will be used on small banks, the Government’s view is that it is still right for the tool to have additional flexibility for unpredictable circumstances. To narrow the scope would constrain the Bank of England’s optionality, particularly where it might be necessary to supplement the resources bailed in with additional capital resources. I note that these are considered unlikely outcomes, rather than a central case. However, given the uncertainty and unpredictability of a crisis scenario, the Government consider it important to avoid constraining that optionality. None of the Bank of England’s other stabilisation powers are constrained for use on a specific type of in-scope firm and that the choice of stabilisation option used remains a decision for the Bank of England to take, having considered the resolution conditions and objectives. The Government believe that it is right for a similar approach to be taken in relation to the new mechanism. To be clear, the Government’s clear view remains that this mechanism should be intended for smaller banks and that the Bank of England should not assume the use of this mechanism for larger firms. In that regard, I agree with the noble Baroness on the crux of the issue she is raising. The Government simply do not wish to hard-wire that principle into the Bill. Since we last debated this issue in Grand Committee, the Bank of England has published a consultation on proposed changes to the MREL regime. These proposals include the removal of the additional MREL requirement associated with the transactional accounts threshold for being set to the transfer strategy, given the availability of FSCS funds under the mechanism in the Bill as an alternative. There are currently only a limited number of firms with a transfer strategy, and firms with such a strategy would typically be expected to have a relatively small balance sheet. As such, the proposed change to the MREL regime is modest, consistent with the policy intention for the Bill mechanism to be intended primarily for smaller banks and it has the additional benefit of seeking to ensure that the MREL regime is proportionate for growing firms. I reiterate the message delivered in the Written Ministerial Statement I made on the day the Bank of England’s consultation was published. As I have already said, the Government and the Bank of England agree that the Bank should not assume use of the new mechanism when setting a preferred resolution strategy of bail-in and corresponding MREL requirements for larger banks. Recognising the level of interest rightly expressed in Peers being able to scrutinise the changes to the code of practice before the Bill begins its passage in the other place, the Government published updates of that document on 15 October. Notably, on the issue of scope, these updates to the code of practice explicitly state that the Bank of England will not assume use of the new mechanism when setting a preferred resolution strategy of bail-in and the corresponding MREL requirements for a large bank. Those updates to the code also made it clear that the Bank of England is still expected to abide by the so-called 5% and 8% rules in the case of larger banks. I hope the explanations I have given have been helpful. Throughout the commitments I have given today and in Committee, in publishing draft updates to the code of practice, in the Written Ministerial Statement and in the engagement I have had with noble Lords, I have sought to reassure noble Lords on the question of scope, the primary intention for the mechanism in the Bill and the importance of maintaining flexibility for the Bank of England to act in the public interest. I recognise that I may not have been successful and that strong views remain, but I hope that the noble Baroness may feel able to withdraw her amendment as a result.