The Bank of England (BoE) has published an updated document setting out its approach to resolving a failing bank, building society or investment firm. It also explains arrangements for central counterparties.
Part 1 of the document explains the objectives of the UK resolution regime, its key features, the main strategies the BoE has developed to deal with failing banks and the arrangements for safeguarding the rights of depositors, clients, counterparties and creditors. Part 2 looks at how the BoE would be likely to implement a resolution. Part 3 describes the BoE’s business as usual responsibilities as the UK’s resolution authority.
In the document’s foreword Jon Cunliffe, Deputy Governor of the BoE states:
“International co-operation remains a critical component of ensuring banks with cross-border activities can be resolved. The BOE continues to work with counterparts in other countries to develop policies to overcome the remaining barriers to resolvability. At the same time, work is underway to replicate the increased resolvability of banks in other types of financial institution. Progress has been made with respect to central counterparties and consideration will need to be given to whether, and if so, how, the resolution regime should be extended to insurance companies.”
When discussing in Part 2 how it is likely to use its resolution powers, the BoE reminds readers that it retains discretion when deciding how best to resolve a firm in pursuit of the resolution objectives, based on the circumstances at the time. In addition, the BoE states, among other things, that the resolution tools (bail in or transfer) are similar in effect to corporate restructuring transactions and follow some similar principles. However, unlike corporate restructuring transactions the resolution authority is empowered to act without the consent of shareholders, creditors or the senior management of the firm. This feature of the regime recognises that the firm has failed and is designed to ensure that action can be taken quickly and effectively to protect financial stability. As part of the process, the BoE will expect to remove or replace senior management where retention (collectively or individually) is considered unnecessary or detrimental to the continuing operations of the firm.
In Part 3 the BoE discusses resolution planning. The BoE has a statutory duty to draw up resolution plans and assess the resolvability of UK firms. This part explains how the BoE approaches resolution planning in co-operation with the PRA and FCA and international counterparts as well as the legal obligations underpinning this approach.
In relation to the BoE’s work with international counterparts and crisis management groups (CMGs) for global systemically important banks (G-SIBs) a number of points are made including:
- where the UK is a host of a non-UK G-SIB, the BoE expects to co-ordinate closely with the home resolution authority in developing and implementing a resolution plan. The BoE (with the consent of HM Treasury), where certain conditions are met, has formal powers to recognise legally and give effect to the resolution actions of a resolution authority outside the EEA; and
- the BoE (with the consent of HM Treasury) also has the right to refuse such support and take independent action in relation to UK branches of non-EEA firms. This includes where the home country’s proposed action (or inaction) is deemed not likely to maintain financial stability in the UK or would treat UK depositors or creditors differently compared with home country depositors or creditors. But the BoE’s aim is where possible to maintain a co-operative approach with host authorities, in line with the approach to cross-border resolution set out in the Financial Stability Board’s key attributes for effective resolution regimes.
The annexes to the document provide detail on how the BoE is addressing some specific barriers to resolvability:
- Annex 1 – loss absorbing capacity – total loss absorbing capacity and minimum requirement for own funds and eligible liabilities;
- Annex 2 – valuation and bail-in mechanic; and
- Annex 3 – ensuring contracts are resolution-proof;
View BoE updates approach to resolution, 2 October 2017