The Bank of England (Bank) and Prudential Regulation Authority (PRA) have today published proposals to further protect the economy and taxpayers from bank failure by putting in place the final major piece in the UK's resolution regime for banks.
The regime is the process by which authorities intervene to manage the failure of a bank in an orderly way, reducing risks to depositors, the financial system, and public finances. The financial crisis, in which governments used taxpayer money to bail out banks, demonstrated the importance of an effective resolution regime as disorderly bank failure is disruptive and costly.
The Resolvability Assessment Framework (RAF) package, published today, is designed to ensure banks are accountable for their own resolvability. It does this by demonstrating how they have prepared for resolution as well as requiring certain banks to publicly disclose their own assessment of their resolvability.
The two consultation papers which make up the package are an important step in the Bank’s commitment to Parliament that major UK banks will be fully resolvable by 2022. They will make resolution more transparent, better understood and more successful. They will also build on key post-crisis work imposing losses on the investors of failed banks, not taxpayers.
The RAF and the resolution regime will allow bank services to continue after resolution so that authorities or new management can restructure the bank, or allow it to fail in an orderly way, reducing risks to depositors, the financial system and taxpayers.
Today’s package is comprised of three main components:
- A Bank consultation paper which proposes how the Bank, as resolution authority, intends to assess individual banks' resolvability and the three outcomes it deems necessary to support a successful resolution. These three outcomes are: i) having adequate financial resources; ii) being able to continue to do business through resolution and restructuring; and iii) being able to coordinate and communicate within the Bank, with authorities and markets so that resolution and restructuring are orderly. The Bank's Consultation Paper would apply to UK firms whose resolution strategy is a Bank-led bail-in or partial transfer, and material UK subsidiaries of international firms.
- A PRA consultation paper which contains proposed requirements for banks to assess their preparations for resolution, identifying any risks to implementation and their plans to address these. Banks will be required to submit their assessments of their preparation for resolution to the PRA by September 2020, and to publicly disclose a summary of that assessment by June 2021. This would apply to the largest UK banks with at least £50 billion in retail deposits on an individual or consolidate basis.
- That the Bank will publish a statement regarding its assessment of resolvability of each firm, highlighting any shortcomings where it believes there is more work to do. Firms’ summaries and Bank statements are planned to be published at the same time.
Deputy Governor for Financial Stability, Jon Cunliffe, said:
“Disorderly bank failures can imperil financial stability, including by interrupting the most important services banks provide to their customers. The Bank of England has been working to build an effective resolution regime which will ensure that banks are able to fail in an orderly manner with losses borne by their investors.
“The Resolvability Assessment Framework proposed in these consultation papers is the final major piece in the UK’s resolution regime for banks. The Framework places the responsibility on banks to demonstrate to the Bank and publically their preparedness for resolution and that they have identified the risks to successful resolution.”
Deputy Governor for Prudential Regulation and Chief Executive Officer of the Prudential Regulation Authority, Sam Woods, said:
“This represents a major step forward in implementing credible resolution and builds on the significant progress the UK has made since the financial crisis.”
Notes to editors
- The consultations will be open until 5 April 2019.
- See the joint Bank/PRA ‘Introduction to the Resolvability Assessment Framework’.
- See the ‘Bank of England approach to the Resolvability Assessment Framework’.
- See the PRA consultation, ‘Resolution Assessment and Public Disclosure by Firms’.
- The RAF builds on significant work on resolution undertaken by the UK since the financial crisis. The UK’s regime was first set out in the Banking Act 2009. The Bank and the PRA have supplemented this regime with policies to improve firms’ resolvability, including on Minimum Requirement for own funds and Eligible Liabilities (MREL), Valuations, Operational Continuity in Resolution, and Stays in resolution.
- The assessment and disclosure framework proposed in this package of publications would operate on a two-year cycle beginning in 2020. Firms’ assessments, reports and the public disclosure would occur in each cycle. The timing of the first cycle in 2020 is intended to allow the first reports to reflect any changes to firms’ structures that are required for EU withdrawal and ring-fencing.
- The first round of reports in 2020 would provide each firm’s roadmap on their course to being resolvable by 2022. From 2022 onwards, firms would assess their steady-state resolvability and the steps they have taken to achieve it, as well as reflecting changes to their business model as it evolves over time.