On 23 January 2025, the Bank Recapitalisation Bill was voted through its second reading.

As mentioned by City Minister Emma Reynolds MP in the debate:

“The Bill does four main things. First, it expands the statutory functions of the Financial Services Compensation Scheme, giving the Bank of England the power to require the FSCS to provide it with funds to be used to support the resolution of a failing bank. Secondly, it allows the FSCS to recover the funds provided to the Bank [of England] by charging levies on the banking sector. This mirrors the arrangements for funding payouts to covered depositors in insolvency, with the exception of the treatment of credit unions, to which I will return. Thirdly, the Bill gives the Bank of England an express ability to require a bank in resolution to issue new shares, facilitating the use of industry funds to meet a failing bank’s recapitalisation costs. Finally, following constructive debate in the other place, the Bill sets out a number of accountability measures that apply when the Bank of England uses the recapitalisation mechanism.”

During the debate it was noted that the Bill “retains surprisingly strong cross-party support” but there appears to be disagreement between the two main political parties regarding the scope of the Bill and the amendment that was introduced in the House of Lords which would mean that the industry-funded levy brought by the Bill could not be used for the largest banks that have built up a loss-absorbing debt.

Emma Reynolds MP said:

“There remains one area of the Bill that will require the attention of this House, namely the question of the scope of the mechanism—that is, which firms the Bank of England can use the mechanism on to support their failure. This was heavily debated in the other place, and reflects concerns about the risk of the mechanism being used on a wide range of firms, with the potential for large levies as a consequence. Those concerns led to an amendment to the Bill, intended to exclude from the scope of the mechanism those banks that already hold the full set of equity and debt resources—the so-called MREL, or minimum requirement for own funds and eligible liabilities—necessary to manage their own failure. The intent was to limit the scope to banks that are not required to hold additional capital resources, or banks that have not yet raised the full amount of additional resources to fully support their own failure. As I have alluded to, the Government note and appreciate the concerns being raised on this point, but as the Financial Secretary to the Treasury made clear during the Bill’s passage in the other place, the Government are clear that this Bill is primarily intended for smaller banks. My predecessor made a written statement to the House on 15 October to reiterate this policy position.

However, after careful reflection, the Government continue to believe that some flexibility should remain in the legislation on this point, in order to avoid constraining the Bank of England’s ability to use the mechanism in a highly uncertain crisis scenario. Narrowing the scope would constrain the Bank of England’s optionality, particularly where it might be necessary to supplement the bail-in of a firm’s own resources with additional capital resources. I note that this is considered an unlikely outcome, rather than a central case. Nevertheless, the Government consider it important to avoid constraining that optionality, given that the alternative may be to use public funds. Ultimately, we want to protect the taxpayer. The Government will therefore table an amendment in Committee to remove the constraint on the scope of the application of the new mechanism.

In the same debate shadow City Minister Mark Garnier MP stated:

“The Opposition took reassurance from a policy statement that the mechanism would be used for the largest banks only in exceptional circumstances. However, this still left the key question as to why the legislation allowed large-scale banks to trigger the mechanism. In her opening speech, the Minister referred exactly to this. Baroness Vere’s amendment makes it clear that this mechanism cannot be used on the largest banks—those that have achieved end-state MREL. That amendment was opposed by the Government in the other place. I was hoping that the Minister would update the House today on the Government position and she has done that, but we may want to talk about this at greater length.

Next steps

The Bill is now committed to a Public Committee

Proceedings in the Public Bill Committee shall (so far as not previously concluded) be brought to a conclusion on Thursday 13 February 2025.