Today’s publication shows that if a major UK bank failed today it could do so safely: remaining open and continuing to provide vital banking services to the economy. Shareholders and investors, not taxpayers will be first in line to bear the costs, overcoming the ‘too big to fail’ problem. The Bank of England is publishing its first assessment of the eight major UK banks’ preparations for resolution under the Resolvability Assessment Framework (RAF).
We regulate banks to ensure that they are resilient. Our prudential and financial stability frameworks ensure the UK banking sector is strong, and banks have capacity to absorb losses after a shock. We also work with banks to ensure that if they do experience serious problems, we are able to deal with them safely, minimising disruption to the UK economy – this is called resolution. Contingency planning for resolution does not mean these banks are likely to experience problems.
In 2007-08, the UK did not have a regime to enable resolving banks without the use of public money. This left two choices when some got into trouble: let banks fail and cause huge disruption or bail them out with taxpayers’ money.
We now have a robust resolution regime and following major UK banks’ work in preparing for resolution, there are now more choices if a bank experiences serious problems. The Bank’s assessment of resolvability shows that even if a major UK bank were to require resolution, customers would be able to keep accessing their accounts and business services as normal. Shareholders and investors, not taxpayers, would be first in line to bear banks’ losses and the costs of recapitalisation.
No matter how much preparation is done, resolution is always likely to be complex to execute. Maintaining a credible and effective resolution regime that is fit and ready for use if necessary is a continuous process with the authorities and the banks responding as the financial system and regulatory landscape evolve.
Our assessment does not make pass-or-fail judgments: resolvability is a spectrum. The findings are also specific to individual firms, their business models and resolution strategies, and cannot be compared directly with one another. Today’s assessment reflects a point in time: resolvability isn’t static.
Major UK banks will need to address the outstanding actions identified as part of the Bank’s assessment. They will need to keep their preparations ready and tested over time, and be confident in their use should the need arise. For this reason the Bank, as resolution authority, and the Prudential Regulation Authority (PRA) have made resolvability a continuing obligation for banks and require them to publish their own summaries of their preparations for resolution. The Bank will repeat its assessment of the major UK banks in 2024 and every two years thereafter.
Dave Ramsden, Deputy Governor for Markets and Banking at the Bank of England said:
“The Resolvability Assessment Framework is a core part of the UK’s response to the global financial crisis, and demonstrates how the UK has overcome the problem of ‘too big to fail’. The UK authorities have developed a resolution regime that successfully reduces risks to depositors and the financial system and better protects the UK’s public funds. Safely resolving a large bank will always be a complex challenge so it’s important that both we and the major banks continue to prioritise work on this issue.”
Notes to editors
- The eight major UK banks in scope of RAF reporting, whose disclosures should be read alongside the Bank’s assessment are: Barclays, HSBC, Lloyds Banking Group, Nationwide, NatWest, Santander UK, Standard Chartered and Virgin Money UK. Please refer to the banks’ own websites in order to locate these disclosures.
- Sasha Mills, Executive Director for Resolution has published a video, which introduces the Bank’s assessment and how to read the findings.
- Dave Ramsden, Deputy Governor for Markets and Banking, has written a foreword in the Bank’s assessment. This provides further information on the progress made by the both the Bank, as resolution authority, and the financial system in overcoming the too big to fail problem.
- After the global financial crisis, the UK, like many other countries, took action so there would be better choices if a large bank needed to be resolved in future. The UK established a framework for resolution (known as the ‘resolution regime’) in the Banking Act 2009.
- The Bank of England is the UK’s Resolution Authority. We work with firms when they are healthy to ensure everything is in place should a resolution be needed. If firms can no longer safely operate (ie no longer meet the PRA's robust safety and soundness standards), we are responsible for implementing a resolution.
- We develop a resolution plan for each UK bank, building society, and certain investment firms. Each plan sets out the actions we would take if a firm needed to be resolved and is based on a preferred resolution strategy for how we would use our legal powers to resolve the firm.
- ‘Bail-in’ is our preferred resolution strategy for the largest banks that provide vital services to the UK economy. In a ‘bail-in’ the firm’s equity is written off, and debts written down, to absorb losses. Then it is recapitalised – the debtholders whose debt was written down are issued equity and become the new shareholders. In the medium-term, it would be restructured to address the causes of failure and restore market confidence. The firm remains open and operating throughout the resolution.
- A bail-in is similar to corporate financial transactions like debt for equity swaps. However, given the need for resolution to be implemented quickly and the unknown nature and timing of future shocks, it is important for firms to have flexible capabilities in place so we can carry out a resolution if needed.
- We assess firms’ preparations for resolution based on whether they can achieve three outcomes:
- having adequate financial resources in the context of resolution;
- being able to continue to do business through resolution and restructuring; and
- co-ordinating and communicating effectively internally and with the authorities and markets so that resolution and subsequent restructuring are orderly.
- The three outcomes are underpinned by policies published by the Bank or PRA to remove specific barriers to resolution. Firms need to meet the objectives of these policies at a minimum to achieve the resolvability outcomes. The RAF is an assessment of banks’ preparedness to deal with the realities of failure. The resolution of a major bank will always be a complex undertaking with unforeseen events and circumstances to overcome.
- Further information about the Bank of England’s approach to assessing resolvability.