HANSARD
Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) Order 2023
- Considered in Grand Committee
- 5:42 pm
- Moved by
- That the Grand Committee do consider the Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) Order 2023.Relevant document: 35th Report from the Secondary Legislation Scrutiny Committee
- Noble Lords will be aware that Silicon Valley Bank UK Limited, or SVB UK, was sold on Monday 13 March to HSBC. Customers of SVB UK are now able to access their deposits and banking services as normal. This transaction was facilitated by the Bank of England, in consultation with the Treasury, using powers granted by the Banking Act 2009. In doing so, we limited risks to our tech and life sciences sector and safeguarded some of the UK’s most promising companies, protecting customers, financial stability and the taxpayer. We were able to achieve this outcome—the best possible outcome—in short order, without any taxpayer money or government guarantees. There has been no bailout, with SVB UK instead sold to a private sector purchaser. This solution is a win for taxpayers, customers and the banking system.SVB UK has become a subsidiary of HSBC’s ring-fenced bank. Ring-fencing requires banking groups that hold over £25 billion of retail deposits to separate their retail banking from their investment banking activities. The regime provides a four-year transition period for an entity acquired as part of a resolution process before it becomes subject to the ring-fencing requirements. As a result of this existing provision in legislation, SVB UK is not currently subject to ring-fencing requirements. However, HSBC UK, SVB UK’s parent company, remains subject to the ring-fencing regime.To facilitate this transaction, the Economic Secretary to the Treasury laid in both Houses of Parliament on Monday 13 March a statutory instrument using the powers under the Banking Act 2009 to broaden an existing exemption in ring-fencing legislation with regard to HSBC’s purchase of SVB UK. This is the first time that the Treasury was required to use these powers since the resolution of Dunfermline Building Society in 2009. I note that the Secondary Legislation Scrutiny Committee has raised this statutory instrument as an instrument of interest in its 35th report, published on 30 March.This exemption allows HSBC’s ring-fenced bank to provide below-market-rate intragroup funding to SVB UK. This was crucial for the success of HSBC’s takeover of SVB UK, because it ensured that HSBC was able to provide the necessary funds to its new subsidiary. HSBC has since stated publicly that it has so far provided approximately £2 billion of liquidity to SVB UK, money that it needed to continue to meet the needs of its customers. The Bank of England and the Prudential Regulation Authority fully support this modification to the ring-fencing regime as a necessary step to facilitate the sale.In view of the urgency, and given that this statutory instrument was crucial in enabling the sale, the Treasury determined that it was necessary to lay this instrument using the “made affirmative” procedure under the powers in the Banking Act 2009. Parliament provided the Treasury with these powers for exactly these situations: recognising that exceptional circumstances can arise where the Government must take emergency action in the interests of financial stability, depositors and taxpayers.
- My Lords, I declare my interest as a shareholder in UK banks which are subject to the ring-fencing regime. My husband and I hold shares in HSBC, which will benefit from this order, and in both NatWest and Lloyds, which are subject to the ring-fencing rules but do not derive a benefit from this order. I think my registered interests in this case probably cancel each other out.I should say that I have never been a big fan of ring-fencing. The triple whammy of an electrified ring-fence, elaborate resolution planning and higher capital and liquidity requirements have imposed a very high set of costs on UK banks which can in the long run result only in disbenefits for UK bank customers —that is, all of us. I do, however, believe passionately in fair competition and level playing fields, and my concern about this order—and, more so, the one that we are promised that will come later—is that it distorts competition and creates an unlevel playing field by creating unfair advantage for one particular bank in relation to the ring-fencing rules.I completely understand that the Bank of England had to operate under pressure to achieve a sale of Silicon Valley Bank over a weekend and that avoided having to place it into an insolvency procedure, and we owe the Bank a debt of gratitude for what it achieved over that weekend. But there are some aspects of the transaction—and therefore this order—which I find mysterious. I am also, as I said, concerned that HSBC has obtained an unfair competitive advantage compared with other UK banks, so I have some questions to put to my noble friend.First, SVB UK is not a ring-fenced bank under UK legislation and it remains outside that legislation. Why did the Bank not agree to sell the bank to HSBC itself rather than to HSBC’s UK ring-fenced subsidiary? Had it done that, I do not believe that any special legislation would have been necessary. HSBC operates a narrow definition of ring-fencing—unlike other UK ring-fenced banks—such that the majority of its commercial customers are serviced within the non-ring-fenced part of HSBC. Why was it decided to place Silicon Valley Bank UK into the ownership of the ring-fenced bank? Would it not have been more appropriate to have put it somewhere else within the HSBC Group along with other commercial customers?
- My Lords, first, let me say that obviously we will support this order—although I cannot see any way in which one could not. In retrospect, it confirms the regulatory adjustments that were necessary or enabled the efficient rescue of Silicon Valley Bank UK and the transfer of ownership to HSBC, effectively protecting customers from the implications of the collapse of the US parent. We need to congratulate the Government, or the Treasury, the Bank of England and indeed the industry—Coadec, Tech London Advocates and BVCA—for acting together, co-operating and moving swiftly to make sure that a problem did not turn into a crisis or catastrophe.That said, I have a whole series of questions. I am incredibly grateful to the noble Baroness, Lady Noakes, who in far more detail and far more effectively than me raised the relevant questions on ring-fencing. Where she and I slightly disagree is on her request that, if there is going to be a long-term exemption that gives a competitive advantage to HSBC, let us let everybody have it, whereas I am concerned about the undermining of ring-fencing in a fundamental way. I can understand that sometimes one has to act to undermine ring-fencing on a short-term basis, but this has pinned into it that second exemption, which effectively makes this a life-long exemption.I will not repeat the points that the noble Baroness made. I have a lot of them down on the piece of paper in front of me, but she made those points so well that I think the Minister needs only to hear them once—they were so detailed and rightly crafted. We have to understand whether to some extent the Government are pre-running the changes that they anticipate making under the Edinburgh proposals. We saw that with previous financial services Bills, when powers were given to the regulator ahead of the consultation processes that would all be relevant to it, so the consultation process then led to a phase 2 or part 2 Bill that came in later. I am very anxious to understand whether this is reflective of the Government’s approach to ring-fencing from now on—in other words, that they no longer intend to separate retail banking from investment banking.
- 6:00 pm
- There is a substantial set of issues, and this might be the Minister’s opportunity to provide a fuller response than she was able to do at the time of the Statement. I have never understood why SVB UK was not ring-fenced in any way from its US parent when it was playing such a critical role in the financing of the tech sector. Will the Government look at that issue, in particular cross-border ownership and potential cross-contamination as a consequence?
- The Minister suggested that that was an issue for the Bank of England to deal with through stress tests, but it strikes me that it is a lot more than that. In the failures of not just Silicon Valley Bank but the two other banks that became troubled in the United States, we have really seen that systemic risk is extremely complex, crosses national boundaries and can be triggered by seemingly small events. I would like to hear whether the Minister anticipates an investigation of what happened on both sides of the Atlantic and a lessons-learned follow-up to all that. In this case, we saw such a rapid collapse. In the modern digital age, the collapse of banking institutions happens at a pace that we have never seen before, and I would love to know whether that is leading the Government to have a rethink.
- The whole Silicon Valley experience, combined with that of Credit Suisse, which happened at virtually the same time, means that we have to look at and think again about resolution regimes as a mechanism for dealing with failing banks. I fully accept that Silicon Valley Bank in the US did not have an adequate resolution plan, largely thanks to a watering down of banking regulations in the US. Interestingly, a leading figure in lobbying to achieve that was Greg Becker—SVB’s CEO. Those same dulcet tones have been very active at lobbying here in the UK for the watering down of banking regulation, and I wonder whether the Minister can tell us whether there is now a little more cynicism in the Treasury as it listens to those sweet notes.
- It is also important that in the United States, Silicon Valley Bank did not have an adequate resolution plan and the Orderly Liquidation Authority in the US could have imposed a resolution but decided not to because it felt that that would be harmful to the broader interests of the financial sector and business in the United States. Resolution was deemed the wrong answer to manage a bank failure in that case. It is troubling that in the UK, we rely so heavily on resolution as the best—indeed, almost the only—answer for dealing with bank failures.
- I referred to Credit Suisse—obviously a collapse—where a resolution plan was in place but the regulator, FINMA, chose not to impose it. Marlene Amstad, president of FINMA, declared that resolution of Credit Suisse would have triggered a widespread financial crisis. Sometimes I hear regulators in the UK brush that aside and say, “We understand how to do resolution in the UK”, but Marlene Amstad is a senior, highly respected regulator and I am concerned that neither the Government nor the regulators here have taken her views seriously. They are the views, from the coalface, of someone who had to deal with a crisis in a real-life timeframe.
- I raise the issue again, because, in presenting their Edinburgh reforms, the Government seem to regard resolution as so powerful and inviolable that it justifies removing other key protections, the most notable of which is the ring-fencing of retail banking from investment banking. I am concerned to hear from the Government something that indicates to me that they are not being naive, that they understand that resolution is not a universal answer to bank failures and that it may be a mechanism that can be applied only in fairly narrow circumstances. From what we have seen in the last month, one might begin to think that using resolution is really only possible both when the failing bank is insignificant in the role it plays and in the context of very stable, broader financial markets.
- Finally, ahead of the return of the Financial Services and Markets Bill, I ask whether this whole experience is leading the Government to look again at the international competitiveness clauses. When I speak with bankers, there is a general acceptance that these clauses would have put the UK regulators under great pressure and, in essence, into a position where they would have felt unable to resist the demands of the industry to match the relaxation of rules enjoyed by Silicon Valley Bank in the USA. That would have been the case even when regarding the competitiveness objective as a secondary objective. Had we not had the experience of seeing what happened with Silicon Valley Bank, we would have found ourselves in precisely the same position, with key regulations stripped away. It really is only by luck and chance that we have not had the equivalent of Silicon Valley Bank here; if the timing had been different, we might well had faced that.
- I hope that the Minister can give me some of those reassurances. However, if all she does is answer the detailed questions of the noble Baroness, Lady Noakes, she will help me very considerably.
- My Lords, I am grateful to the Minister for introducing this order. I begin by reiterating the Labour Party’s thanks to the officials at the Treasury, the Bank of England and the regulators to secure a rescue deal for the UK arm of Silicon Valley Bank. While there will be important lessons to learn from SVB’s collapse, it was vital that swift action was taken to preserve financing for the life sciences and tech companies that will play such an important role in our future economic growth.I also thank the noble Baronesses, Lady Kramer and Lady Noakes, for bringing out areas of concern, which I certainly have not seen raised in the same sharp relief. I hope that the Minister will be able to give us some feel as to the extent to which this reach of the ring-fence will be of significance or not, and, if it is significant, why it is intended to be made perpetual by a subsequent order. Equally, when we are discussing lessons learned, the noble Baroness, Lady Kramer, shone a light on the issue of the speed of collapse. The physical queues outside Northern Rock created time; today, very little time need be created between an area of significant concern turning into total collapse. I hope that the regulators, when doing a proper lessons-learned exercise on this will ponder on that point, to see what, if anything, we need to do to be better able to manage the rate of collapse that is potentially available.The collapse of SVB was the catalyst for several other major events in the global financial system, including the very serious difficulties faced by Credit Suisse. In many senses, the UK regulatory system has functioned as hoped, which we welcome. It certainly makes the many hours spent on previous legislation worthwhile. Financial institutions and regulators in other countries have taken their own steps in recent weeks to deal with issues with entities in their own jurisdictions. The collective action seems to have calmed the markets, which is important for us all. However, I hope that the Minister can assure us that the Treasury, the Bank and the regulators continue to monitor the situation very closely, and that they stand ready to act, should that be required. With inflation still in double digits, and with the implications that is likely to have on interest rates in the short to medium term, will the Treasury finally commission a review of the risks that this could present to the financial system?
- My Lords, I thank all noble Lords for their detailed questions on this statutory instrument. While everyone agreed that we reached a good resolution in this instance, it is absolutely right that we look at how it was delivered in detail and how we should reflect from this instance on the resolution regime in our wider regime. The noble Baroness, Lady Kramer, asked explicitly—but I think all noble Lords wanted to know—what the Government will do to ensure that we can learn lessons from the events around SVB UK. The Treasury and the Bank of England are working together to ensure that we properly reflect on these events and will consider how best to draw on the lessons learned and share them as needed in future.The noble Lord, Lord Tunnicliffe, remarked on wider financial stability events, including Credit Suisse. I reassure him that the UK financial sector is fundamentally strong. The resolution of SVB UK on 13 March highlights how the resolution regime can be effectively used to protect UK financial stability. However, we continue to monitor the situation closely and remain in close contact with the Bank of England, the Prudential Regulation Authority, the Financial Conduct Authority and relevant foreign and international authorities. We are absolutely committed to protecting the stability of the UK banking sector, which is key for supporting economic growth and for the UK’s world-leading financial sector.The noble Lord, Lord Tunnicliffe, also asked whether we would commission a review of the risks that higher interest rates pose to the financial system. I reassure noble Lords that the Bank of England already has in place processes to monitor and assess risks to our financial sector and banking system. In particular, each year, the Bank of England carries out a stress test of the major UK banks, which 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, as well as higher global interest rates.
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- The results of the test are expected to be published in summer 2023 and, based on the results of the stress test, the PRA will set firm, specific requirements for UK banks to cover unexpected losses arising from various risks, including the interest rate risk. I have also mentioned previously that, this year, the Bank will for the first time run an exploratory scenario exercise focused on non-bank financial institution risks to inform understanding of these risks and future policy approaches.