The Banking Act 2009 created a Special Resolution Regime (SRR) which gives the UK authorities a permanent framework providing tools for dealing with failing UK banks, building societies, investment firms and central counterparties. It gave the Bank of England a key role in implementing a resolution using the statutory resolution tools. The SRR powers are carried out by the Resolution Directorate which leads in the work required to select and implement a resolution tool.
The SRR powers came into force on 21 February 2009 following the expiry of the emergency legislation in the Banking (Special Provisions) Act. The SRR powers allow the authorities to:
- transfer all or part of a bank’s business (its shares or property, ie assets and liabilities) to a private sector purchaser;
- transfer all or part of a bank’s property to a bridge bank - a subsidiary of the Bank of England – pending a future sale;
- recapitalise a failed institution by allocating losses to its shareholders and unsecured creditors by writing down and/or converting their claims to equity in a manner that respects the hierarchy of claims in insolvency, using the bail-in tool;
- place a bank into temporary public ownership (a Treasury resolution tool);
- apply to put a bank into the Bank Insolvency Procedure (BIP), which is designed to allow for rapid payments to Financial Services Compensation Scheme (FSCS) insured depositors (or transfer of their accounts to a healthy bank);
- apply for the use of the Bank Administration Procedure (BAP) to deal with a part of a bank that is not transferred and is instead put into administration.
The Banking Act creates clearly-defined roles for operation of the SRR. The Prudential Regulation Authority (PRA), in consultation with the Bank and the Treasury, makes the decision to put a bank into the SRR. HM Treasury would decide whether to put a bank into temporary public ownership, and otherwise, the Bank of England, in consultation with the other authorities, decides which of the tools to use and implements the resolution. The FSCS has a role paying out depositors covered by its depositor compensation scheme and its funds may be used also to support a non-payout resolution provided that is no more costly to the FSCS, net of recoveries, than a payout.
The Act sets out seven key objectives which must be considered in choosing which resolution tools to use:
- to protect and enhance the stability of the financial systems of the UK;
- to protect and enhance public confidence in the stability of the banking systems of the UK;
- to protect depositors;
- to protect public funds;
- to avoid interfering with property rights in contravention with the Human Rights Act 1998;
- to protect client assets, where this is relevant; and
- to minimise adverse effects on institutions that support the operation of financial markets.