Being ready for cross-border resolution: lessons from Credit Suisse and Silicon Valley Bank

1: Introduction

Former Bank of England governor, Mervyn King, famously observed that ‘most large complex financial institutions are global – at least in life if not in death’. This neatly captured the challenge faced by public authorities when dealing with the failure of banks in 2007–08: authorities mostly did not have either the national powers or bedrock of common understanding and relationships to be able to respond to the failures of banks in an orderly and co-ordinated way.

So, in most cases, governments were compelled to bail out failing banks.^{footnote [2]} This avoided the worst of the disruption and spillover risks to global financial stability that would have resulted if these firms had entered insolvency (as Lehman Brothers did, causing significant disruption to global financial markets), as any other large private company would do if it failed. However, the actions came at significant fiscal and moral hazard cost: in the UK, the Government directly extended £137 billion of public money to bailout the banks, with guarantees of £1,029 billion, and the UK suffered from recession with consequential impacts on society and public finances.^{footnote [3]}

A key achievement in the response to the financial crisis has been the introduction of ‘resolution regimes’ so authorities have the powers and frameworks to co-operate to handle future failures (Box A). The Financial Stability Board’s (FSB) Key Attributes of Effective Resolution Regimes for Financial Institutions (FSB Key Attributes) provide the common foundation for national resolution frameworks and international co-operation on resolution. These are supported by guidelines identifying the financial and operational arrangements banks need to assist the authorities to undertake a resolution.

Since the financial crisis, many authorities have worked together to build closer relationships with their counterparts in other jurisdictions; these relationships are a function of ongoing engagement to build understanding and shared incentives. The nature of the UK financial system makes being ready to handle bank failures particularly important, as noted by the International Monetary Fund (IMF): ‘Globally, the UK is the biggest ‘host country’ to foreign financial firms; it is home to three G-SIBs (global systemically important banks) and virtually all foreign G-SIBs have UK subsidiaries or branches’.

This article proceeds as follows: we explain how the Bank works with other resolution authorities to ensure readiness for the failure of a bank should one occur, before describing the Bank’s approach to managing the cross-border failure of an internationally active bank.

2: The Bank’s responsibilities as a host authority and how the Bank engages with other authorities

We use the failure of Credit Suisse – a Swiss-headquartered bank identified as globally systemic by the FSB – to illustrate how the Bank prepares to use its resolution powers to support cross-border resolution as a host authority. SVB was a large regional US bank with operations overseas, including in the UK. The Bank’s resolution of the UK subsidiary of SVB, SVBUK, is used to illustrate co-operation and co-ordination between authorities when banks fail.

Explainer: Internationally active banking groups are generally supervised by prudential regulation authorities (like the PRA in the UK) on a day-to-day basis, with a split of responsibilities between the ‘home’ authority in the jurisdiction where the group is headquartered and the ‘host’ authorities with responsibility for the subsidiaries and/or branches of the group in their jurisdiction.^{footnote [4]} The role of the host authority is greater in the case of subsidiaries which are legal entities in their own right established in the host jurisdiction, compared to branches which are economically and legally part of their parent entity.^{footnote [5]} The split of responsibilities between home and host authorities is similar for resolution arrangements, with the ‘home’ resolution authority generally responsible for the co-ordination of the group resolution strategy working with the host resolution authorities.

SVB deposit run and planning for resolution

The failure of SVB in 2023 made it the largest US bank to fail since 2008. Its failure was a reminder of how the risks of contagion from a non-UK parent to a subsidiary in the UK can pose risks to financial stability, and of the need for close co-operation between authorities. SVB failed due to losses on sales of substantially all its available-for-sale securities portfolio and subsequently the rapid withdrawal of its customer deposits. This was not a feature of SVBUK’s business. Nonetheless, the deposit run spread quickly from the parent to the UK subsidiary, SVBUK, with 30% (£2.9 billion) of deposits being withdrawn in one day showing how digital banking and social media can increase the speed of bank failures.^{footnote [6]}

On the afternoon of Friday 10 March 2023, the US authorities informed the Bank that SVB would be put into receivership to stabilise the bank and market the franchise. The FDIC subsequently transferred all deposits and most loans to First-Citizens Bank and Trust Company.

It is unlikely any banking subsidiary can withstand the failure of its parent without being sold. SVBUK would not have been a viable standalone entity as it was reliant on its US parent for technology and operational continuity. So, throughout the Friday, the Bank had prepared for the failure of SVBUK, in co-ordination with the US authorities.

When the US authorities announced SVB had been closed, the Bank announced that absent any meaningful further information, it intended to apply to the UK Courts to place SVBUK in a Bank Insolvency Procedure. This would have enabled the Financial Services Compensation Scheme (FSCS) to pay compensation to SVBUK’s insured depositors (within seven days and up to £85,000 per depositor; £306 million of SVBUK’s £6.7 billion deposits would have been compensated). The firm would have subsequently been wound up to achieve the best results for other creditors, including depositors with balances greater than the FSCS limit.

The ‘resolution weekend’

Following the Bank’s announcement, there were expressions of interest over the weekend in buying SVBUK. On Saturday evening, it became clear selling SVBUK to a purchaser using the Bank’s resolution powers to write off SVBUK’s regulatory capital instruments and sell the shares to a purchaser was a viable option. The Bank and PRA co-ordinated closely with the US authorities at all levels to ensure operational continuity for SVBUK so a sale to HSBC for £1 could be concluded by 7am on Monday 13 March 2023 before financial markets opened – ending the ‘resolution weekend’.

The sale ensured SVBUK’s clients could continue to access their banking services, avoiding a situation where just 4.6% of SVBUK’s deposits would have received compensation from the FSCS, pending any receipts from the insolvency of SVBUK. Even if the losses from the insolvency had eventually only been small, the delay in payment may have threatened the viability of many of SVBUK’s technology sector clients as they would not have had the funds to run their businesses.^{footnote [9]} This was the first use of the Bank’s resolution powers since June 2011, although the Bank’s proactive approach to planning means contingency planning for the possible resolution of individual firms several times each year. In parallel to the US and UK actions, the German authorities used their resolution powers to support the resolution of SVB’s German branch, further supporting the effective and co-ordinated response to the firm’s failure.

How authorities co-operate

The successful resolution of SVB was supported by the strong and co-operative relationships built between the authorities as envisaged by the FSB Key Attributes, which note ‘The statutory mandate of a resolution authority should empower and strongly encourage the authority wherever possible to act to achieve a co-operative solution with foreign resolution authorities’.^{footnote [10]} SVB was a reminder that co-operation between authorities also matters for firms that are not G-SIBs.

The FSB Key Attributes expect home and host authorities to co-ordinate both their preparations and, in the event of a crisis, actions for the resolution of a G-SIB through a ‘Crisis Management Group’ (CMG). The UK hosts CMGs for the three UK G-SIBs (Barclays, HSBC and Standard Chartered) and participates in 18 as a host authority.

The CMGs act as the key forum for authorities to co-ordinate and agree their preparations for potential failure. This ensures shared understanding and trust to enable timely and effective co-ordination if failure does occur. The importance of institutional relationships developed over time via CMGs and bilateral engagement should not be underestimated. Increasingly CMGs have also provided venues for co-ordinating and reviewing testing and assurance work conducted by firms to demonstrate their readiness for resolution if it occurs.^{footnote [11]} This builds on the progress made in enhancing the resolvability of firms and increasing operational preparedness between authorities.

Some UK operations of G-SIBs (like Credit Suisse) provide very significant critical functions to the UK economy. This could be in the form of deposit-taking and other services for businesses and households or wholesale or investment banking critical to the functioning of the UK economy. Where this is the case, the Bank engages actively with the home authority via the CMG to ensure the resolution of the group would achieve the objectives under the UK resolution regime for the UK subsidiary.^{footnote [12]}

The Bank sets, in co-ordination with the CMG, the level of financial resources needed by the subsidiary to facilitate the implementation of the group resolution strategy. Having minimum levels of financial resources ‘pre-positioned’ at subsidiaries means that losses can be absorbed and the host authority can be confident the subsidiary can be recapitalised as part of resolution. This reinforces the mutual interest between authorities to support an orderly group resolution and curbs the temptation to trap resources locally in a stress. CMGs also work together to ensure arrangements to provide operational continuity across the group in the event of resolution and prepare for orderly restructuring. Noting the UK subsidiary is likely to be highly integrated with its parent, the Bank seeks to ensure the subsidiary and its parent are ready to take actions to support the implementation of the resolution strategy should this be needed.^{footnote [13]}

Testing and exercising

In the UK-led CMGs, the Bank is working with other participants to develop and maintain shared playbooks describing the steps and actions to be taken via the CMGs in response to a stress, for example on funding arrangements and communications. And, outside CMGs, the UK engages closely with other key jurisdictions to maintain readiness through exercises and simulations, multilaterally and bilaterally.

Like CMGs, it is important for exercises to be held regularly so understanding keeps pace with market, regulatory and statutory developments as well as changes in personnel in the various authorities. This familiarity reduces unknowns, supports predictability, increases co-operation and strengthens relationships. Together this underpins trust and helps mitigate the fragmentary instincts that can take hold in crisis, including the risk of trapping liquid resources in different entities across the group, weakening the group as a whole.

3: The Bank’s approach to recognition decisions

Planning for resolution via CMGs is necessary but not sufficient for orderly cross-border resolution. This section uses the case study of Credit Suisse to explain how the FSB Key Attributes enable national resolution authorities to co-ordinate the implementation of resolutions with other jurisdictions.

‘Recognition’ powers

The disorderly failure of Lehman Brothers and its co-ordination challenges, frictions and systemic risks was one of the principal drivers behind the development of the FSB Key Attributes, and especially Key Attribute 7. This notes ‘jurisdictions should provide for a transparent and expedited process to give effect to foreign resolution measures’. Giving legal and operational effect to a home-led resolution in a host jurisdiction, providing legal certainty, is known as ‘recognition’.

Consistent with the FSB Key Attributes, the UK’s recognition powers (Box B) enable the Bank to give legal force in the UK, as if it were a UK resolution, to:

• a group resolution where the home resolution action affects a UK branch of the group being resolved;
• a decision by the home authority to write down liabilities (like bonds) governed by UK law;
• a decision to transfer the ownership of property located in the UK from one legal entity to another, like a temporary bridge bank established by the home authorities or a private sector purchaser of the assets; and
• ensure that a ‘stay’ on the close-out of financial contracts governed by UK law is enforceable, providing operational continuity and avoiding the risk of the disorderly close-out of financial contracts.

Credit Suisse

In March 2023, Credit Suisse was one of the largest global banks. Headquartered in Switzerland, the bank had extensive international operations with major operations in the UK and US. An international investment bank, private bank and Swiss retail bank, Credit Suisse had CHF531 billion (around £506 billion) of assets at end 2022 and was designated a G-SIB by the FSB.^{footnote [14]} To provide context, Northern Rock was much smaller with £114 billion of assets when it failed after a bank run early in the global financial crisis in 2007.^{footnote [15]}

Credit Suisse had been troubled for years and in 2022 undertook restructuring and raised new capital. In March 2023, Credit Suisse announced ‘material weaknesses’ had been found in its financial reporting controls. The next day, the firm’s shares fell sharply following a statement by a major shareholder that it could not provide further assistance (by increasing its stake). The firm experienced very large deposit outflows – eventually totalling CHF67 billion in 2023 Q1 (around £64 billion) and sought emergency assistance from the Swiss National Bank. CHF168 billion (around £160 billion) of emergency liquidity assistance and other liquidity assistance was provided.^{footnote [16]} This was the largest amount of liquidity support ever provided to a single bank anywhere in the world – a reminder of the potentially significant use of central bank and public liquidity backstops and the need for authorities to co-ordinate on these to ensure the orderly provision of liquidity to a group.^{footnote [17]} For context, during the global financial crisis, the Bank provided emergency liquidity assistance of £61.5 billion to HBOS and RBS.^{footnote [18]}

As members of the Credit Suisse CMG, the UK authorities had participated actively in planning for a potential failure when outflows began in October 2022. Credit Suisse had a significant presence in the UK, undertaking foreign exchange, lending and acting as a global funding hub for the wider Credit Suisse group.

The Credit Suisse CMG met frequently to monitor the firm’s condition and co-ordinate preparations for a possible resolution. The Bank also used the relationships established over many years with the Swiss Financial Market Supervisory Authority (FINMA), to discuss preparations for a potential resolution bilaterally from a UK perspective. The focus of the Bank’s UK preparations was minimising the risks to UK financial stability of the type that occurred when Lehman Brothers failed in 2008, by ensuring there was clarity on how any resolution led by FINMA would apply in the UK, using the UK’s ‘recognition’ powers.

The Bank’s powers to recognise a foreign resolution action had been used just once – PrivatBank in 2021 (Box C). The PrivatBank case provided valuable lessons to the Bank about the importance of close engagement with the National Bank of Ukraine to ensure the complex recognition decision could be made. In particular, the Bank needed to ensure a comprehensive understanding of the resolution action and the home regime before deciding if the recognition request satisfied the UK statutory requirements.

Preparing to use the Bank’s recognition powers

The Bank drew on the PrivatBank lessons in engaging with FINMA as the Credit Suisse stress deepened and the possibility that the UK might be asked to recognise a Credit Suisse resolution increased. In addition to having a UK footprint via its subsidiaries and branch, Credit Suisse had three English law bail-in debt instruments, as well as large portfolios of English law governed financial instruments. This reflects the use of English law as the governing law for a substantial amount of bail-in debt issuance by banks, as well as for standard financial market documentation for products like derivatives and interbank lending.

Credit Suisse’s UK footprint illustrates one of the key choices the UK authorities face when deciding whether to recognise a foreign resolution action: should the recognition occur after the home authority has put the firm into resolution or should the decision be co-ordinated, so recognition is announced at the same time as the firm enters resolution? In the PrivatBank case, there was no time pressure as the recognition request to the UK was not made until sometime after the resolution action had been taken. That is very different to the potential failure and resolution of a G-SIB, where speed in decision-making and co-ordination of announcements are essential to minimise market uncertainty and risks to financial stability.

If Credit Suisse had entered resolution, rather than been acquired by UBS, the UK had resolution plans ready to be implemented. As part of this, the Bank was getting ready to make a recognition decision so an announcement could be made alongside an announcement that resolution action had been taken by FINMA. Such a decision would have been consistent with the expectation in the FSB Key Attributes for expedited recognition and provided maximum market and legal certainty. Getting to this point in the Credit Suisse case provides useful learnings for resolution authorities responding to future cross-border failures – ensuring co-operative relationships, understanding of information needs, and having tested processes to execute those decisions when required at speed.

The nature of the assessment for recognising a resolution action is obviously more complicated the wider the scope and more complex the recognition decision. The Bank needs adequate information to determine if the planned resolution action is broadly comparable to a UK resolution and assess that none of the grounds for refusing the resolution action are met (summarised in Box B). In a more complex or rapid case, a close dialogue with the home authority is very important to support an expedited recognition decision – especially as the UK resolution regime requires a decision by the Bank and approval of that decision by HM Treasury.

Being ready for future recognition decisions

Consistent with the themes discussed in Section 2, to maximise readiness before a crisis arises, the Bank engages with CMGs to ensure there is a baseline level of information ready to support a possible future recognition request. This helps build shared readiness and deepen co-operation. Each recognition request must be judged on its own merits and the detail of the resolution actions will be case specific, but it is possible to document key information about the home regime so as to minimise the assessment to be undertaken in a live case – where often time may be very short (as with SVBUK, even though that case did not necessitate a recognition decision).^{footnote [19]}

The Bank benefited from this close engagement with the CMG, FINMA and HM Treasury in the Credit Suisse case. The annex summarises information the Bank published after the PrivatBank decision to guide home authorities on the UK’s approach to the recognition of resolution actions and the type of information the Bank may request from home authorities when assessing a recognition request. The Bank is ready to provide equivalent information about the UK regime to host authorities where it is likely the UK would request recognition of UK resolution actions in the event of the failure of a UK headquartered group.

It is important for CMGs to keep recognition discussions on their agendas and to use the discussions to identify potential risks to effective cross-border recognition. Following the failures of 2023, the FSB identified cross-border recognition as an important focus in the context of operationalising bail-in execution. As part of this, the FSB hosted a technical roundtable for authorities and legal experts to consider a stylised bail-in case. Recognition mechanisms in five key jurisdictions were considered as part of this.^{footnote [20]}

4: Conclusion

The events of 2023 show that bank failures do happen, and the authorities – and firms – need to be prepared to respond when required. Not least as SVB showed that deposit runs are getting faster, highlighting the importance of planning and building trust between authorities well in advance. The development of resolution regimes and cross-border structures supporting and incentivising co-operation to deal with failures puts us in a much better place than we were in 2008. But we must not be complacent. Trust and co-operation need to be maintained over time so that we are always ready – without trust and co-ordination local jurisdictions must insure against the risk of failure locally, fragmenting and complicating regulation.

Cross-border recognition of resolution actions is an important dimension to maintaining readiness, and authorities need to ensure they are prepared and ready to use it if needed. Authorities need to build familiarity with host authorities’ approaches to making recognition decisions in business as usual and engage with one another as early as possible during contingency planning so they can be ready to act in a co-ordinated way to use recognition powers if required to deliver an orderly resolution.

Annex

The Bank of England website provides further information on the Bank’s approach to recognition decisions. This annex provides a summary of key points.

How does the Bank of England decide whether to recognise a foreign resolution action?

To make a recognition decision, the Bank must decide whether the resolution action is broadly comparable in terms of objectives and anticipated results to a resolution carried out under the UK resolution regime (meaning the exercise of a stabilisation option in relation to a corresponding entity in the UK). Where the home action is not of this nature, other options for cross-border assistance may be available through the UK courts. 

The Bank may only make a recognition decision with the approval of HM Treasury.

If the resolution action meets these tests, recognition of the action (or part of it) may be refused only if the Bank and HM Treasury are satisfied that one or more of the following five conditions are satisfied:

1. Recognition would have an adverse effect on financial stability in the UK.
2. The taking of action in relation to a UK branch of a foreign institution is necessary to achieve one or more of the special resolution objectives.
3. Under the foreign resolution action, UK creditors (particularly depositors) would not receive the same treatment as home creditors with similar legal rights, by reason of being located or payable in the UK.
4. Recognition of the foreign resolution action would have material fiscal implications for the UK.
5. Recognition would be unlawful under section 6 of the Human Rights Act 1998 (public authority not to act contrary to Human Rights Convention).

What information does the Bank of England need to make its decision?

Effective prior engagement between the home resolution authority and the Bank will help support the transparent and expedited process envisaged in the FSB Key Attributes. Therefore, the Bank encourages home resolution authorities to engage the Bank ahead of taking any resolution action that may require action from the Bank, including recognition. This gives the Bank time and flexibility to work with the home resolution authority when assessing the recognition request and supporting materials, and aids swift decision-making.

Home resolution authorities could also consider recognition as part of business-as-usual resolution planning and engagement. This would allow home resolution authorities, host and any other relevant authorities to consider the information and decision-making that may be required in advance. In the event that the home resolution authority is unable to engage ahead of taking a resolution action, the Bank encourages the home authority to engage as soon as possible after taking the measures.

The information provided to the Bank may be shared with HM Treasury given its role in deciding whether to approve the Bank’s recognition decision.

The Bank is likely to seek information on the national legislation and policy framework under which the home country is intending to take the proposed resolution action. To inform the assessment of the anticipated results of the planned resolution, the Bank is likely to request information including details of the home creditor hierarchy and the treatment of UK creditors, the sequence of proposed allocation of losses and safeguards and ‘No Creditor Worse Off’ protections for creditors. As part of wider contingency planning, the Bank will also seek information regarding the home authority’s approach to providing any liquidity support and arrangements for ensuring operational continuity during the resolution and any subsequent restructuring.

Further information or enquiries should be directed to RD-Recognition@bankofengland.co.uk.