The question of who pays when a bank fails has challenged policymakers since banks were first established. Resolution provides an answer to that question. Resolution changes the answer from the taxpayer to the shareholders and unsecured creditors of the firm. A credible resolution regime promotes market discipline and acts to remove any implicit subsidy.
During the financial crisis, governments felt compelled to bail out failing banks rather than risk the negative consequences that a disorderly failure would have had on the wider economy and financial system if the bank had been placed into insolvency. At that time there were no effective arrangements for resolution in place.
Following the crisis, there have been a number of legislative changes to build comprehensive resolution frameworks to deal with bank failure and remove the public subsidy for banks that were once considered ‘too big to fail’.
The Bank has published its approach to resolution in the following document:
The document describes the framework available to the Bank to resolve failing banks, building societies and some types of investment firm. The first part outlines the aims of resolution and describes the key features of the United Kingdom’s resolution regime. The second part sets out how the Bank expects to carry out the resolution of a failing firm in practice, using the powers available to it as the UK resolution authority. It will be updated periodically, as approaches to resolution, the legal regime and firm structures evolve.