We contribute to developing resolution policy domestically and internationally.
The Bank of England’s power to direct institutions to address impediments to resolvability
Statement of Policy - December 2015
The Bank of England’s approach to setting a minimum requirement for own funds and eligible liabilities (MREL)
Consultation - December 2015
Statement of Policy - November 2016
The Bank of England’s policy on valuation capabilities to support resolvability
Consultation - August 2017
Four main components are needed to make resolution possible:
1. A statutory resolution regime
In other words, the legal powers and tools to resolve banks.
2. Sufficient loss-absorbing capacity
Our resolution tools can only be effective if firms have enough equity or debt resources to absorb losses and, where necessary, recapitalise the institution that exits resolution. This ensures that the firm’s shareholders and creditors – rather than taxpayers – are first in line to meet any losses. The Financial Stability Board’s standard on total loss-absorbing capacity sets a minimum loss-absorbing capacity requirement for the largest and most complex global firms (known as global systemically important banks, or G-SIBs).
We have implemented and extended this policy in the UK via MREL (minimum requirement for own funds and eligible liabilities). Our MREL Statement of Policy sets out our approach to setting loss-absorbing capacity requirements for all financial firms. UK firms will be subject to interim MREL requirements from 1 January 2020, with final requirements coming into force in 2022.
We have published the estimated amounts of MREL that we have set for each of the UK’s seven global and domestic systemically important banks. These amounts are only indicative because a firm’s MREL will depend on its going concern requirements in a particular year.
For the eight other UK banks and building societies that have a resolution plan involving the use of our resolution tools (rather than the insolvency regime), we have so far just published averages of the indicative amounts of MREL they most hold.
3. Identifying and eliminating barriers to resolvability
Firms should be organised in such a way that it is feasible for us to use our powers to resolve them if necessary. We perform firm-specific assessments of how ‘resolvable’ a firm is, based on the firm’s structure and how we would intend to resolve it. In that assessment, we apply standards for resolvability developed internationally by the Financial Stability Board. Besides total loss-absorbing capacity (TLAC), this includes standards to ensure, where relevant, continuity of a firm’s critical functions in resolution. For example,
- Operational continuity: a firm which we expect to continue operating after resolution should be able to maintain any critical services it provides during resolution.
- Stays on termination rights: third parties should not refuse to honour obligations to a failing firm just because it has entered resolution.
The Prudential Regulation Authority has published rules in relation to these barriers to resolvability.
4. Cross-border cooperation
For cross-border banks, we work closely with authorities in other jurisdictions to make sure there is a minimum standard of bank supervision and regulation. This includes co-ordinating on developing policies relating to resolution. We expect firms entering the UK from abroad to be bound by rules of a similar standard to those in the UK. Cross-border cooperation is essential to ensure that the UK is able to resolve not just domestic banks, but also to ensure that those banks that operate internationally are also capable of being resolved.