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Major UK banks can fail safely due to ‘robust resolution regime’ – BoE

  • 10/06/2022
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Major UK banks can fail safely due to ‘robust resolution regime’ – BoE
Major banks have overcome the problem of “too big to fail” and if one was to fail then the taxpayer would not be the one to foot the cost.

According to an assessment by the Bank of England (BoE), which is the first undertaken, if a bank were to require resolution customers would still be able to access their accounts and business services as normal.

Additionally, shareholders and investors rather than taxpayers would be the first to bear the bank’s losses and costs of recapitalisation.

The banks involved in the assessment were Barclays, HSBC, Lloyds Banking Group, Nationwide, Natwest, Santander UK, Standard Chartered and Virgin Money UK.

Resolution is a way to manage the failure of a bank, building society or other financial entity to minimise the impact on customers, the financial system, and public finances. The BoE is the UK’s resolution authority.

During the financial crisis the UK did not have a regime to resolve banks without the use of public money, which meant the options were to let banks fail or bail them out with taxpayers’ money.

The BoE said that a “robust resolution regime” was in place following extensive work by UK banks and there were more choices if banks encountered “serious problems”.

Actions taken across the sector include holding more loss absorbing capacity, improving ability to monitor liquidity needs and use liquid resources throughout resolution; ‘resolution-proofing’ contracts and critical service arrangements; changes to group structure; better ability to plan at speed for “further restructuring changes to return the firm to long term viability”; and improved communication planning with the public.

However, it said that resolution was a “spectrum” and that it would always “likely to be complex to execute” so maintaining an “credible and effect resolution regime” was a “continuous process”.

Dave Ramsden, deputy governor for markets and banking at the BoE, 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.”

In its assessment the BoE evaluated banks on three themes: adequate financial resources, continuity and restructuring, and coordination and communication.

Shortcomings were identified in three firms, which the BoE said, “may complicate unnecessarily the Bank’s ability to undertake a resolution”. The firms were HSBC, Lloyds Banking Group and Standard Chartered.

HSBC’s shortcomings were around the production of resolution specific liquidity analysis and its plans to execute the restructuring actions in scenarios with a multiple point of entry bail-in.

Lloyds Banking Group and Standard Chartered also had shortcomings around production of resolution specific liquidity analysis, whilst for Standard Chartered the BoE identified issues around “identification and evaluation of all available restructuring options in a wide range of resolution scenarios”.

This relates to a bank’s availability of liquidity to support itself through a resolution.

The BoE has also identified “areas for further enhancement” for six firms, which are specific areas where continued work is needed to “enhance or embed capabilities in order to further reduce execution risks associated with resolution”.

The six firms were Barclays, HSBC, Nationwide Building Society, Natwest, Standard Chartered and Virgin Money UK.

The BoE said that it would repeat its assessment in 2024 and then every two years after that.

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