The UK’s resolution regime and how we handle resolutions are explained in the following document:
The UK’s resolution regime was introduced in the Banking Act 2009 and has since been extended by several pieces of legislation. The Banking Act provides a set of objectives the Bank must have regard to when preparing and carrying out resolutions. These are broadly consistent with the principles in the Financial Stability Board’s international ‘Key attributes of effective resolution regimes’ (KAs), which G20 leaders agreed in 2011. The Banking Act also provides us with a suite of statutory powers – or resolution ‘tools’ – to allow us to carry out resolutions.
A HM Treasury Code of Practice provides guidance on how and when the authorities will use the special resolution regime.
Our statutory objectives when we use our resolution tools are to:
We contribute to developing resolution policy domestically and internationally.
Readers are encouraged to refer first to the joint Bank and PRA Introduction for an overview of the Resolvability Assessment Framework, before reading the consultations.
Four main components are needed to make resolution possible:
In other words, the legal powers and tools to resolve banks.
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 indicative external interim and final MRELs for each of the UK’s global and domestic systemically important banks. These amounts are not definitive because a firm’s MREL in any given year will depend on a number of factors, including its capital requirements and its resolution strategy.
We have also published an average indicative MREL for all other UK firms which have a resolution plan involving the use of our bail-in or partial transfer tools, rather than use of modified insolvency.
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,
The Prudential Regulation Authority has published rules in relation to these barriers to resolvability.
The Bank has also published a policy on the valuation capabilities that certain firms should have in place to support timely and robust resolution valuations.
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.
We are required to develop a resolution plan for each UK bank and building society, and large investment firms that hold client assets. Each plan sets out the actions that would be taken if a firm failed. We have resolution plans for around 400 firms, and they are reviewed and updated as necessary every year.
We identify a preferred resolution strategy for each firm. This strategy depends on, among other things, the firm’s systemic relevance and its structure. These strategies fall into one of three categories:
This is our preferred resolution strategy for the largest and most complex firms.
A bail-in involves writing off the firm’s equity and writing down its debt to absorb losses, then converting that debt into equity to recapitalise the firm.
This is to ensure the critical functions provided by the firm are maintained. Following a bail-in, the firm would then be restructured in the medium term to restore market confidence and ensure that critical functions are maintained.
This is our preferred resolution strategy for medium-sized firms where it is credible that another firm would be willing and able in short order to purchase either the whole firm or part of it.
This purchase would take place either immediately or after a short period during which the firm’s critical functions would be transferred to a temporary ‘bridge bank’ controlled by the Bank of England.
This is our preferred resolution strategy for firms which we consider would pose little risk to our resolution objectives if they failed. Following entry into insolvency by such a firm, the Financial Services Compensation Scheme would pay out to depositors that are covered by its guarantee, or fund a transfer of their accounts to a healthy bank.
We complete resolvability assessments for each firm, which identify any barriers to implementing that firm’s preferred resolution strategy and achieving its statutory objectives. If necessary, we can require firms to take action that remove these barriers to make them ‘more resolvable’.
The Banking Act 2009 sets the conditions under which the Bank may place a financial firm into resolution.
In summary, we may place a firm into resolution only if the following two conditions are met:
|The firm is failing or likely to fail||Prudential Regulation Authority||
Bank of England
|It is not reasonably likely that action will be taken – outside of resolution – that will result in the firm no longer failing or being likely to fail||Bank of England||
Prudential Regulation Authority
Financial Conduct Authority
The Bank of England must then choose which resolution tools best meet the resolution objectives set by the Banking Act 2009. The choice is between the ‘stabilisation tools’ – broadly either bail-in or transfer – or the modified insolvency procedures.
The stabilisation tools are available in resolution if two further conditions are met:
|The use of stabilisation tools is in the public interest (e.g. it supports financial stability)||Bank of England||
Prudential Regulation Authority
Financial Conduct Authority
|The resolution objectives could not be met to the same extent if, instead of using stabilisation tools, the Bank placed the firm into a modified insolvency procedure||Bank of England||
Prudential Regulation Authority
Financial Conduct Authority
The Bank of England’s stabilisation tools If the four conditions summarised above are met, we can use one or more of our ‘stabilisation tools’:
|Bail-in tool||This allows us to write down a firm’s equity and debt to absorb losses, and convert debt into equity to recapitalise the firm.||
Banking Act 2009, Part I, Section 12A
|Private sector purchaser||A tool to sell all or part of the business of the bank to a commercial purchaser.||Banking Act 2009, Part I, Section 11||Transfer|
|Bridge bank||A short-term operation to transfer part of or all of a failing firm to a temporary subsidiary of the Bank of England, where an immediate sale is not possible but an eventual sale is.||Banking Act 2009, Part I, Section 12||Transfer|
|Bank administration procedure||Although this is not itself a stabilisation power, the BAP is available where there has been a partial transfer of business from a failing institution. The remainder of the business that is not transferred is placed into a modified administration procedure.||Banking Act 2009, Part 3||Transfer (when only a partial transfer is implemented)|
|Asset management vehicle||Used to remove and wind down certain parts of the firm where doing so would make it easier for the firm to be sold, or to continue to operate in resolution. Can only be used in conjunction with one or more of the other stabilisation tools.||Banking Act 2009, Part I, Section 12ZA||Transfer (private sector purchaser or bridge bank) and bail-in|
As a last resort, HM Treasury retains powers to transfer a failing firm into public ownership or make a public equity injection.
The Banking Act provides us with the ability to initiate special insolvency procedures, depending on whether the failing firm is a bank or building society or an investment firm holding client assets.
These insolvency procedures allow any protected deposits or assets to be paid out or transferred quickly.
|Bank (or Building Society) Insolvency Procedure – (payout or transfer)||The Bank (or Building Society) Insolvency Procedure differs from an ordinary corporate insolvency procedure because it prioritises either quick payout of deposits protected by the Financial Services Compensation Scheme (FSCS) or a transfer of protected deposits to another firm using FSCS funds.||Banking Act 2009, Part 2: Bank Insolvency||Modified Insolvency Procedures|
|Special Administration Regime (SAR)||
Investment firms that hold client money or custody assets can be placed into the Special Administration Regime rather than into resolution. The SAR differs from ordinary corporate insolvency procedures because it prioritises return of client assets to customers.If a bank holds both deposits and client assets, then it can be subject to both the Bank Insolvency Procedure (to protect the covered deposits) and the Special Administration Regime (to return the assets to customers or transfer them to a healthy firm).
|The Investment Bank Special Administration Regulations 2011||
Investment firms that do not take deposits – use of the SARFirms that take deposits and hold client assets – Bank (or Building Society) Insolvency Procedure
Given the broad nature of the tools and powers set out in the resolution regime, and that the use of our stabilisation powers affects individual property rights, the Banking Act also provides safeguards for creditors. These are designed to give creditors more certainty about how they would be treated in resolution while maintaining flexibility for us to implement a resolution quickly if necessary.
To date, we have carried out the following resolutions under the Banking Act 2009:
The resolution of Dunfermline Building Society over the weekend of 28 to 29 March 2009 was the first time that we used our resolution powers under the Banking Act.
Over that weekend – through a sales process conducted by the Bank of England – the retail and wholesale deposits, branches and residential mortgages (other than social housing loans and related deposits) were transferred to Nationwide Building Society. Some other assets – a portfolio of social housing loans – were placed into a temporary bridge bank, before eventually being sold to Nationwide. The rest of the bank, including commercial real estate and corporate loans, was placed into a building society administration procedure.
The resolution of Southsea Mortgage and Investment Company Limited on 16 June 2011 was the second time we used our resolution powers under the Banking Act 2009 and the first time that the Bank Insolvency Procedure has been used.