Professor Philip Lane:

Let me state two important exceptions. One is that there is a basic difference between a voluntary and a statutory code because of the terms of compulsion and the consequences for not following the code. I will defer to Ms Rowland in a moment regarding the history of this code. My second point, which is very important, is that the voluntary code makes exceptions for conditions of financial distress. I recognise there is a financial distress exception in the Bill being put forward, but I made the point in my opening remarks regarding that being too narrowly defined. It is defined in terms of "failing or likely to fail". That is an end game type of issue.

Our point is that it is important to anticipate and pre-empt financial distress and that occurs throughout our whole approach to this issue. Where it makes sense is where that includes loan sales which reduce the national risk facing us in the next downturn. There is a basic similarity for the reason Deputy Doherty gave. The issue of compulsion versus voluntary, and the scope of financial distress, however, means we think the Bill would have those adverse consequences. I will also make the point that the role of transferable loans in the financial system has become much more important compared to 30 years ago.

The likelihood of a bank at that time needing to raise liquidity from a central bank on a collateralised basis was much less than we would appreciate now. The importance of securitisation as a technique is much more prevalent now. I also refer to the role of collateral in the interbank market. The world has changed. Even in respect of the code itself, there is a difference between voluntary and statutory. There is also the issue regarding the conditions of financial distress. It is interesting to consider the history of this issue as well. I will hand over to Ms Rowland to speak on that issue.