An updated paper on the Bank of England’s resolution policy
October 13, 2017
This is the fist updated policy document since 2014 and shows the development of the Bank’s priorities.
The Bank of England has just published its 2017 update to the Bank’s approach to the Banking Act 2009 resolution framework. It sets out, with practical examples and in some detail, the processes the Bank will use in decision making and exercise of powers under the still relatively new resolution regime. In the Bank’s own words, its responsibility is to manage the failure of financial institutions: banks, building societies, certain other investment firms and, most recently, central counterparty (“CCP”) institutions (the recognised trade clearing organisations). Click here for a copy of the full report.
This is the first updated policy document since 2014 and shows, I think, the development of the Bank’s priorities as well as laying out very useful detailed guidance in the way the Bank (as the UK’s designated resolution authority) will apply its powers. The substantive changes to powers since the 2014 edition are limited – the Bank Recovery and Resolution Directive had already been published at the time although was awaiting transposition into domestic law – but there are some interesting changes in emphasis and tone.
The first thing to notice is the development of the language used as policy has moved on since the financial crash and the somewhat hurried enactment of the Banking Act and its associated regulations. There is much more emphasis on the need to avoid use of public funds and shift costs to creditors and shareholders while making it clear that the UK regime is not intended to ensure banks do not fail. Among the resolution tools available to the Bank, it is the “bail-in” procedure which gets first billing – the power to impose write-downs on bondholders and other unsecured creditors.
Whether the public anger towards senior bankers has dissipated, it seems the Bank has chosen to tone down its wording since 2014, changing it from removing those “…considered responsible for the failure of the firm” to expecting “…to remove or replace senior management where retention (collectively or individually) is considered unnecessary or detrimental to the continuing operations of the firm”. Or perhaps that suggests the net will be cast more widely?
The guidance on the Bank’s strategies (whether bail-in, partial transfers or special administration) has developed from a general discussion in 2014 of the decision making process, to indicative thresholds on institutional size which will inform the Bank’s decisions. Bail-in is most likely to be considered for large and systemically important entities (with balance sheets of £15bn-£25bn). For smaller and medium sized firms which still meet the public interest test for resolution (usually smaller institutions supplying up to 80,000 active current accounts) the partial transfer powers may be used to protect deposits, other firms will be put through the Act’s insolvency procedures. There is also significant detail on when the Bank will consider providing liquidity to a firm in the resolution regime and how a bail-in process would be implemented.
The ongoing financial dominance of London has often meant the sophistication of regulation and policy has compared well to the EU in general. The added trauma to the financial system in 2008/9 led to a regime that, even without BRRD enhancement, could be considered robust. But the understandably glaring omission in this guidance, as in every aspect of public policy, is the shape of future relations with other EU systems. It gets a nod in one paragraph of the 47 pages and says, effectively, “no idea”.
For further information or to discuss this further, please contact Dan Wheatley.