Written by:
Simon Hills, Director, Prudential Policy, UK Finance

Earlier this week the Bank of England and Prudential Regulation Authority (PRA) released a suite of consultations containing their proposals for a Resolution Assessment Framework (RAF).

Ten years on from the apogee of the global financial crisis and a plethora of regulatory initiatives later, the RAF represents the final brick in the wall designed to protect the economy and taxpayer from a failing bank.

Sweeping revisions to the prudential regulation of banks means that they now hold ten times more of the highest quality capital than before the global recession and twice as many liquid assets that can be used to raise cash if their depositors lose confidence in them. These, along with other requirements such as countercyclical buffers, more stringent credit modelling requirements and the central clearing of derivatives mean that banks are much better able to survive a severe financial crisis than a decade ago. But we can never say ‘never again will a major bank fail’ – indeed the UK authorities do not believe in a zero-failure regime.

However unlikely that a failure is, the authorities are planning for just such an eventuality and the RAF appears to be a sensible course of action, and one which UK Finance supports to ensure that banks, if they do fail, fail in an orderly manner. Losses will be borne by investors, not the tax payer, and the bank in resolution will continue to provide essential services to its customers for sufficiently long enough for the authorities or a new owner to restructure it.

The RAF is applicable to all banks that have been notified by the Bank of England that in resolution they would be subject to a bail-in or partial transfer strategy – those banks that have either £50 billion of UK retail assets, or between 40,000 and 80,000 transaction accounts. But helpfully the requirement for a bank to carry out a formal assessment of resolvability, submit it to the PRA for review and publicly disclose it in summary form, with the Bank of England subsequently making a public statement about resolvability only applies, initially at least, to banks with more than £50 billion of UK retail assets, not to those above the transaction account threshold. This is a helpfully proportionate approach that UK Finance supports.

Nonetheless, banks that are not subject to public disclosure requirements will want to take into account the Bank of England’s approach to resolvability. Indeed, those with a preferred resolution strategy of bail-in or partial transfer will be required to undertake an assessment.

The Bank of England consultation identifies eight barriers to resolvability. These include having sufficient Minimum Requirement for own funds, Eligible Liabilities (MREL) being able to value assets and liabilities accurately, ensuring continuity of access to financial market infrastructure, and having an appropriate crisis communication plan in place. The timelines for implementation, however, seem quite prolonged. In-scope banks must submit their biennial self-assessments to the PRA starting in September 2020 and make public disclosure by the following May, with the timing of the Bank of England’s public statement on a bank’s resolvability being in line with those of the in-scope banks.

But there will doubtless be a lot of coordination to be done between banks and the authorities to ensure that the objective of the RAF can be operationalised cost effectively, that messages are harmonised, and that a failing bank can be smoothly and swiftly resolved to support public and market confidence in the UK’s banking system.

UK Finance looks forward to working with its members and the authorities so that the Bank of England can meet its commitment to Parliament that all major UK banks will be fully resolvable by 2022.

Death, transformation and rebirth: from failing bank to phoenix – a Framework for Resolution