Roomfuls of people are playing games of “Pass the parcel of debt” for years. Sometimes one room joins up with another roomful and they swap, paying each other as they go, and interchange with other rooms. The music stops in some rooms. What are those parcels worth when they are opened? The Telegraph’s analaysis “The decade of debt is coming to a bloody end” gives an explanation of the financial position, although I think it ought to have included the huge pile of securitised consumer debt.
Desperate times. A new Banking Bill was laid before Parliament on 7 October 2008. Events are happening faster than the legislators and consultees can react. The creation of a Bank Reconstruction Fund reported in the FT (“Treasury readies fund to aid banks“) is not – yet – built into the draft Bill.
The new law will be needed for any unfortunate bank that cannot be rescued by the Government. For over a year, the Government have been mulling plans for legislation to cope with bank insolvency. Last February, the found they needed to rush out the Banking (Special Provisions) Act 2008 to cope with the foundering of Northern Rock. (The Act is not specfic to the Rock and, originally with a short shelf-life, has been extended to February 2009.) Now the Banking Bill has been published which creates a permanent statutory regime for dealing with insolvent banks.
Failing banks
The Bill creates “stabilisation powers” in a “Special Resolution Regime” (SRR) that gives the tri-partite authorities, the FSA, the Bank of England and HM Treasury a method to deal with banks in financial difficulty. The stabilisation powers are the powers to effect the transfer of shares by law. Under the SRR, there is a “power to protect certain interests” – security interests, set-off, close-out or netting arrangements. There are three stabilisation options: transfer to a private sector purchaser, transfer to a bridge bank or transfer to temporary public sector ownership.
Depositor protection
A new Bank Insolvency Procedure (BIP) sets out the way to wind up a failed bank and to make rapid Financial Services Compensation Scheme payments to claimants (or to another bank).
There are new powers for HM Treasury in relation to the use of the Financial Services Compensation Scheme to contribute to the cost of the Special Resolution Regime. The Schemes rules are governed by the FSA and the rules were changed by the FSA on 7 October to increase the protection of consumer deposits to 100% of the first £50,000. Bank directors who have deposited their cash with their own bank are not covered.
Bank administration
There is a new bank administration procedure. A court-appointed administrator would administer the affairs of an insolvent residual bank where the rest of the bank is transferred to a private sector purchaser or a bridge bank under the SRR.
Payment systems to be regulated
The Bill will give the Bank of England a formal regulatory role in bank payment systems. Payment systems are different networks for the transfer of money (or credit) between members of the systems. They are governed by their own rules and at the moment are not subject to formal regulation. The FSA has a statutory responsibility for Recognised Clearing Houses which have payment systems.
Scottish and Northern Irish banknotes
The Bill then turns (Part 6) to the issue of banknotes by Scottish and Northern Irish banks. The banks have been allowed to issue their own notes for over 150 years but the Bank of England does not stand behind them: the notes are a liability of the issuing bank. The Bill permits the banks to continue to issue them but only in accordance with the Bill (issues relating to backing assets) and existing legislation is amended.
No disclosure of funding recipients
There are some provisions relating to the governance of the Bank of England, including a provsion which means the Bank does not have to disclose to whom it provides emergency liquidity.
Building Societies
The Bill allows (s 229) HM Treasury to modify the Building Societies Act 1986 to allow financial assistance to be given to building societies.
Registration of charges
If the Bank of England or another central bank including the European Central Bank are granted a charge, the charge does not have to be registered under Part 25 of the Companies Act 2006 (registration of charges) (s230). Along with non-reporting of emergency funding provision, this presumably is to keep bail-outs shrouded in a discreet veil.
“Funds attached” rule
The Bill abolishes (s 231) the “funds attached” rule of Scottish cheques. The rule is that where a cheque is presented to the drawee for payment, it operates as an assignation (the Scottish term for assignment) of the sum for which it is drawn in favour of the holder of the bill. The Bills of Exchange Act 1882 is amended and section 11 of the Law Reform (Misc Provs) (Scotland) Act 1985 ceases to have effect. This section will come into effect 2 months after Royal Assent is granted to the Bill.
Financial Collateral
Right at the end of the Bill is the section on Financial Collateral Arrangements (s 232) which allows HM Treasury to make regulations about security, not limited to the Financial Collateral Arrangements Directive and to allow HM Treasury to make any provision that it thinks necessary to make financial collateral arrangements “commercially useful and effective”. These can be retrospective. And I see the Government have taken the opportunity to smooth over an issue a small band of us have been raising since the introduction of the Financial Collateral Arrangements (no 2) Regulations 2003: that the regulations were ultra vires because they went beyond the sope of the original Directive. s 232 (5) provides for the regulations to be treated as having effect despite any lack of vires.
Events are moving fast – and move faster every weekend in the breathing space from the markets and their dense red screens. The Government has got used in the space of a week to planning to deal with high-profile banks by shoring them up with cash, not by drafting infinitely complex legislative provisions to deal with the insolvency of putative, but presumably relatively insignificant institutions, in an orderly manner. There is a black humour to be found in para 533 to the notes to the Bill, where “the Government anticipates that the provisions in this Bill will lessen the risk posed to public expenditure by the need to resolve failing banks.”