Draft clauses from the proposed new banking bill are due to be published in the next few weeks in an attempt by the government to ensure the legislation contains no hidden surprises when it is introduced.
The clauses will be scrutinised by bankers and lawyers for signs that in its efforts to overhaul banking regulation, the government is not undermining the rights of creditors in an insolvency.
Although the 164-page consultation document sets out a comprehensive framework for banking regulation, the Treasury, Financial Services Authority and Bank of England have yet to clarify important details about how the scheme would work. Among these are the basis on which the FSA would decide whether a bank were in sufficiently bad shape to trigger the new special resolution regime for dealing with failing lenders.
The document says the FSA could do so if a bank were failing its Threshold Conditions. These include factors such as having sufficient financial resources, proper systems, and being managed by people the regulator deems fit and proper.
Bankers are concerned this would give the FSA sweeping powers. In practice, however, the regulator would be likely to focus on whether a bank met minimum capital ratios – enshrined in international regulations – and liquidity requirements, which are being drawn up.
There are questions on how the regime, and the proposed system for protecting depositors, would affect banks’ creditors. “It is quite striking how, in a number of areas, the government is prepared to make changes to the normal state of affairs with respect to creditors of banks,” said Richard Stones, a consultant at Lovells, the law firm.
The consultation document makes clear that the Financial Services Compensation Scheme would rank equally with other creditors. What is less clear is what would happen to creditors if the FSA and Bank of England transferred part of a failing bank to another institution, leaving some assets and liabilities behind. These issues will be hotly debated, but it is far from clear the powers would be needed; the authorities would have powers to prevent a bank from failing or tackling it before it gets to that stage.
Tim Plews, a partner at Clifford Chance, the law firm, said: “There is a view which says: this is very interesting, but the authorities will never put a bank into that regime. They will nationalise it or get somebody to buy it.”
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