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British Banking Sector

Volume 828: debated on Tuesday 21 March 2023


Asked by

To ask His Majesty’s Government what assessment they have made of the health of the British banking sector, following the challenges faced by overseas banks.

The UK Government welcome the steps taken to support financial stability on Sunday by the Swiss authorities relating to Credit Suisse. This follows the sale on 13 March of Silicon Valley Bank UK to HSBC after the resolution of its US parent. No other UK banks have been materially affected by these actions. The Governor of the Bank of England has confirmed that, in his view:

“The wider UK banking system remains safe, sound, and well capitalised.”

I thank the Minister for her reply. Many people watching the events unfold at the moment are concerned that they may lose their jobs or that there will be another financial hit to people at a time of high inflation. It is 10 years since we had the publication of the Parliamentary Commission on Banking Standards report. One of its conclusions was that the implicit taxpayer guarantee gives banks

“access to cheaper credit than would otherwise be available and creates incentives for them to take excessive risks.”

Do His Majesty’s Government have any steps to remove the implicit taxpayer guarantee? If not, what other incentives will His Majesty’s Government give to ensure that bankers act prudently?

My Lords, I emphasise to people at home the words of the Governor of the Bank of England that the UK banking system

“remains safe, sound, and well capitalised.”

The situation is different from 2008. Over the last 15 years, the Government and the Bank of England have taken robust action to strengthen the regulatory system and the resilience of the UK banking system. Specifically to the right reverend Prelate’s question, we have put in place a resolution regime to ensure that the failure of a bank can be managed in a way that minimises the impact on depositors, the financial system and public finances. I note that the resolution solution found for Silicon Valley Bank last week involved no UK taxpayer money whatever.

My Lords, is the implication of the right reverend Prelate’s question not a policy that would make banks far riskier than they already are? It is an extraordinary policy for him to advocate. I understand from the press that the Government were involved in the actions taken to save Credit Suisse and merge it with UBS, but a certain amount of disquiet has been caused by the preferential treatment that appears to have been given to shareholders rather than bondholders. Can she explain why this situation has arisen? Is the implication of that not rather disturbing for bondholders in other banks?

My Lords, the Swiss authorities were in the lead in the solution for Credit Suisse but my noble friend is right that, given the significant presence of Credit Suisse in the UK, the Treasury has remained in close contact with the Bank of England and the Swiss authorities in recent days. We welcome the comprehensive set of actions set out by the Swiss authorities to support financial stability. The UK authorities are going to take a number of actions to support that action, including PRA plans to approve a change in control application for the Credit Suisse subsidiaries in the UK. The resolution of the Credit Suisse situation was for the Swiss authorities, but the UK remains in close contact.

My Lords, we welcome the Bank of England’s swift action on SVB UK and its recent statements about the safe nature of the UK’s banking system. Nevertheless, events elsewhere, including those relating to Credit Suisse, are creating uncertainty in the global financial system. With this in mind, will the Treasury and the Bank of England commit to undertake a systemic review of the impact of interest rate rises and wider events in the system on our own financial sector and banking system?

My Lords, as with any major event, the Treasury will reflect on the lessons to be learned and how improvements can be made. I assure noble Lords that, each year, the Bank of England carries out a stress test of the major UK banks that incorporates a severe but plausible adverse economic scenario. The 2022 stress test scenario includes a rapid rise in interest rates, with the UK bank rate assumed to rise to 6% in early 2023. The results of that test are taken forward by the PRA in its supervision of the banks. The results will also be published this summer.

My Lords, an FT piece yesterday, headlined “How ‘competitive’ would you like your bank regulation now?”, says:

“The UK regulatory pendulum has been halted in mid-swing.”

Is that true? Credit Suisse had G-SIFI levels of capital and liquidity but was undone through bad culture. Are not the twin bastions of culture in the UK banks ring-fencing and the senior managers regime? Is it not also of massive cultural significance that it came from the Parliamentary Commission on Banking Standards? If the Government mess with those, where is the break on culture-based runs? What do they say when these practices come under lobbying pressures?

My Lords, I think the noble Baroness was asking about the Government’s proposed Edinburgh reforms package, which represents a move towards proportionate, simple regulation that works for the UK and will help to drive growth in the broader economy, supporting families and businesses across the country. In that approach, we recognise that the UK’s success as a financial services hub is built on agility, consistently high regulatory standards and openness. We will continue to take those principles forward in our reforms.

My Lords, I found the noble Baroness’s position on the current status of the banking system to exhibit extreme complacency. Is she aware that Credit Suisse was very highly capitalised and had in place all the financial anchors on which she relied in her Answer? Yet Credit Suisse has collapsed. Do the so-called Edinburgh reforms not actually come up to this: we are going to make the banking system more competitive, which equals taking greater risks?

My Lords, in the Financial Services and Markets Bill we are introducing a new objective for the regulators to look at competitiveness, but we are clear that that objective comes second in the hierarchy to the systems objectives around financial stability. We think that strikes the right balance. We are absolutely not complacent about the global banking system and the wider financial services sector, but it is important to recognise that we are in a different position from 2008 and that we are making further changes to ensure the resilience of our sector. For example, the Bank of England announced in December that, for the first time, it will run an exploratory stress-test exercise focused on non-bank financial institutions, recognising the increased risk posed there. We will continue to do what we need to do to ensure financial stability in this country.

Are we entitled to assume that the London branch of Credit Suisse is being properly regulated by the FCA and the Bank of England?

The noble Lord is right that the Credit Suisse subsidiary in the UK was regulated by the Prudential Regulation Authority and met its obligations under those regulations.

My Lords, we have had two questions addressing the dangers of the competitiveness agenda of the Edinburgh reforms, which the Green Party has consistently opposed. The other element is that the Government talk about boosting growth. The Minister suggested that was for the general economy, but it has been presented as a desire to grow the financial sector. Is there not, as demonstrated by recent events, a great risk of too much finance and too large a financial sector when what we need is a real-sized financial sector to serve the real economy?

I disagree with the noble Baroness. The UK’s financial services sector is one of our great strengths in and of itself and as an engine to power growth across the rest of our economy; that will remain the case under this Government.

My Lords, is my noble friend the Minister confident that the risk controls at the UK fintechs are adequate, given the current challenging conditions in the global financial markets?

My Lords, one thing that UK regulators have sought to do is ensure that the fintech sector is well regulated while continuing to innovate. We have been able to use things such as regulatory sandboxes to allow safe spaces for that innovation to be tested out, and we will continue to take that approach.