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Home > Financial Stability > Conducting a resolution
 

Conducting a resolution

Carrying out a transfer of business  |  Carrying out a bail-in

​There are three key phases to carrying out a resolution using the stabilisation powers:

  • stabilisation, in which the provision of critical economic functions is assured, either through transfer to a solvent third party or through bail-in to recapitalise the failed firm;
  • restructuring, during which any necessary changes are made to the structure and business model of the whole firm or its constituent parts to address the causes of failure; and
  • exit from resolution, where the Bank’s involvement as resolution authority in the failed firm and any successor firms comes to a close.

As part of the process of resolution, the Bank will expect to remove the senior management considered responsible for the failure of the firm and appoint new senior management, as necessary.

Stabilisation

The Bank will decide which of the stabilisation tools – a transfer to a purchaser or bridge bank, or a bail-in – should be used in order to secure the appropriate degree of continuity of a failed firm’s critical economic functions. [More information about these approaches can be found by following the links.]  Whichever approach is taken, there will need to be some capacity for the firm’s losses to be absorbed at the point of resolution, so that solvency can be restored.  It is likely that the Bank will need to provide liquidity to the firm in resolution, if external funding sources are not available. The Bank will also aim to ensure that a firm’s existing arrangements for accessing payment systems, clearing and settlement systems and central counterparties remain intact.

At an appropriate point, the Bank will announce:

  • the nature of the resolution strategy being carried out: for example a transfer and the destination of the various parts of the business of the firm; or a bail-in and confirmation of the liabilities that will be affected;
  • that the firm’s core functions will continue without disruption to customers;
  • that depositors and investors protected by the FSCS continue to be protected; and
  • that the firm will open for business as normal, for example on the Monday morning.

Restructuring

Once the firm has been stabilised, either through bail-in or transfer, the next stage will be to consider what restructuring will be required in order to address the causes and consequences of failure, and restore confidence in the firm. Any restructuring plan will need to ensure that critical economic functions are maintained. And market confidence will need to be restored in order to maintain relationships with counterparties and to enable the firm to access funding markets at a sustainable price.

In the case of a bail-in, the Bank will require a resolution administrator or directors of the firm under resolution to submit a business reorganisation plan. This plan would provide, among other things, a description of the measures aimed at restoring the long-term viability of the firm or reasons for winding it down, and a timetable for carrying out those measures.

With a bridge bank, the restructuring effectively takes place over the resolution weekend, when critical functions (such as retail deposits) are transferred to the bridge bank (backed with supporting assets). Shares, debt and other unsecured liabilities remain in a bank administration procedure, along with unwanted or poor-quality assets. For critical functions and other business transferred to a bridge bank, an initial public offering, private share sales or portfolio sales are likely to be the most feasible ways of ensuring that the bridge bank is only temporary. Some additional restructuring may be required to facilitate one or more of these options.

Exit from resolution

Identifying the route for the Bank to bring its involvement with an individual firm to a close is a key part of the resolution. The regime’s tools support the objective that firms will either cease to exist or that they will be restructured and able to operate without official liquidity support when the resolution has been completed. The precise route out of resolution will be shaped by the nature of the intervention that has taken place.

Key Resources

​Resolution through the lens of corporate restructuring
Speech given by Andrew Gracie, Director, Special Resolution Unit at the International Association of Deposit Insurers' conference, Russia on 5 June 2012

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