Resolution is a way to manage the failure of a bank, building society, central counterparty or certain types of investment firm. We use it to minimise the impact on depositors, the financial system and public finances.
Using resolution to manage bank failure in an orderly way, allows us to:
In 2008, banks in many countries were in financial distress. Governments – including the UK’s – felt they had no choice but to bail the banks out. If a large bank had failed then, it would have caused serious problems for many people, businesses and public services. These banks were ‘too big to fail’.
After the financial crisis, the UK, like many other countries, took action so there would be better options if a large bank were to fail in future. The UK established a framework for resolution (known as the ‘resolution regime’) in the Banking Act 2009.
Over time, this regime has been improved and expanded. It is consistent with international standards for resolution regimes.
Under the UK’s regime, we are the UK’s resolution authority. Our job is to work with banks to make sure we can carry out our resolution plans if they fail. Since 2009, we have used the regime for two firm failures.
‘The Bank of England’s approach to resolution’ sets out how the resolution regime works, what we do as the UK resolution authority, and how we would resolve a firm.
We are working to make sure that by 2022, all major UK banks meet the standards we have set them to ensure our resolution plans will be effective.
The final major piece of the UK resolution regime for banks is the Resolvability Assessment Framework (RAF). The RAF will make resolution more transparent and better understood. It will require the banks and the resolution authority to give their own assessment of how effective their resolution plans are. We published the final RAF policy in July 2019.
The UK’s resolution regime applies to banks, building societies, and certain investment firms. On this page we use ‘firms’ to cover all the above.
The resolution regime does not apply to credit unions. When a credit union fails, depositors are paid out by the Financial Services Compensation Scheme (FSCS) up to £85,000 per depositor per credit union.
In 2014, the resolution regime was extended to include (CCPs). The approach to a CCP resolution differs to the approach to a firm resolution, reflecting CCPs’ specific characteristics.
We work closely with the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). The PRA and FCA work to ensure firms are safe and sound, and fair to customers.
The PRA is a part of the Bank of England. We have published a statement to explain how our resolution and supervision responsibilities are divided.
The Financial Services Compensation Scheme (FSCS) protects eligible customers of authorised financial services firms that have failed. We work with the FSCS, particularly when we have concerns that a firm is at risk of failure and when firms fail, to ensure that those eligible depositors are protected (up to £85,000).
We work with HM Treasury (HMT). The way we work with them is documented in HMT’s Memorandum of Understanding.
The UK is a global financial centre, home to both UK and international banks. We work closely with international regulators to ensure we could manage the failure of a UK firm with operations overseas. We also support regulators in other countries should they face the failure of a foreign firm that operates in the UK.
Most UK firms would be put into if they failed, because that wouldn’t disrupt the economy or financial system. Eligible depositors in failed firms would either receive compensation from the FSCS within seven days or have their accounts transferred to another firm.
Our resolution regime operates alongside the depositor protection regime. If a firm’s failure would otherwise result in losses for depositors, the FSCS will protect eligible depositors, up to £85,000. In some specific situations, it can be more eg if a depositor has just sold a house.
But the largest or most complex firms could not go into insolvency. We would need to resolve those to protect the UK’s vital services and financial stability. In these cases, shareholders and certain creditors take the losses.
You can watch our video on what happens when a bank fails and what we do.
We are responsible for planning for and executing a resolution.
We plan for the resolution of every bank, building society and some investment firms in the UK, and review these plans annually.
A resolution plan contains two main elements. First, a ‘preferred resolution strategy’, which identifies the tools we would use to resolve the firm. Second, a 'resolvability assessment' which identifies what may impede us from doing that.
Many firms share some of the factors that make a resolution difficult. We highlight these and require firms to take action to address them. Our approach is designed to be proportional. So large or complex firms have more extensive requirements. This is because they’re harder to resolve and would be more disruptive to the economy if they failed in a disorderly way.
The PRA or the FCA determine if a firm is failing, or likely to fail, after consulting us. We then consult the PRA, the FCA and HMT before we judge that a firm needs to enter resolution.
If a firm fails, we are responsible for executing the resolution.
The Banking Act 2009 sets objectives we must have regard to when we prepare for and carry out resolutions.
These are to:
HMT provide guidance on how and when the authorities (the Bank of England, the PRA, the FCA, the FSCS and HMT) will use the regime in their Special resolution regime code of practice.
There are no consultations open at this time.
On 7 May 2020 the Bank and PRA published a statement on resolution measures and Covid-19.
These measures are aimed at alleviating operational burdens on PRA-regulated firms in response to the Covid-19 outbreak.
In light of these decisions, the Bank remains committed to the strategic importance of the resolution agenda and delivering resolvability.
We will continue to work with firms to ensure progress on resolvability continues to be made, whilst recognising the impact on firms of the current disruption caused by the Covid-19 outbreak.
The UK has now entered into a transition period, due to end on 31 December 2020, during which EU law will continue to apply.
We ran consultations between October 2018 and January 2019 on our proposals to ensure there would be an operable legal framework after the UK leaves the EU.
You can read the feedback we got on our resolution proposals on page 41 of our Amendments to financial services legislation under the European Union (Withdrawal) Act 2018 (PS5/19).
We encourage you to read our instrument, direction and guidance on transitioning to post exit rules and standards.
To be ‘resolvable’ a firm needs to have arrangements and plans in place so we can carry out a resolution if it fails. We think about resolvability in terms of whether a firm:
We have published policies and rules in relation to barriers to resolvability.
Each year we assess the barriers to implementing the strategy and meeting our statutory objectives for each firm. If necessary, we can make a firm remove these barriers to make them more resolvable.
For cross-border banks, we work closely with authorities in other jurisdictions to ensure a co-ordinated and co-operative approach. This includes co-ordinating on developing policies relating to resolution.
When the firm is a UK firm, we are the ‘home’ resolution authority and responsible for ensuring the failure of the whole banking group can be achieved in an orderly way.
For a foreign firm that operates in the UK, we are a ‘host’ resolution authority, and our role is to support the firm’s home resolution authority in preparing for, and where necessary 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 failed. We have resolution plans for around 400 firms. For the large majority of these firms, the plan is to permit it to enter insolvency and rely on FSCS protection.
We review these plans every year and update them if necessary.
We identify the preferred resolution strategy for each firm. That depends on things like how much harm its failure would cause to the wider economy and what kind of structure it has.
The three main strategies are:
This is our preferred strategy for the largest firms that provide vital services to the UK economy.
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.
Preferred for a medium-sized firm that could credibly have a buyer for all or part of it.
The firm is sold immediately or after a short period. If it takes a short period, then its critical functions are transferred to a temporary ‘bridge bank’ controlled by the Bank of England, before being sold on.
Preferred for a firm we think could be put into insolvency without risking our statutory objectives to protect financial stability and depositors.
The firm would enter into a form of insolvency. The FSCS would compensate eligible depositors up to £85,000, or fund a transfer of their accounts to a healthy firm.
We have a number of tools to implement these strategies. Find more details in The Bank of England’s approach to resolution.
Firms with a resolution strategy that involves bail-in or partial transfer must maintain sufficient equity and debt resources that can absorb losses and provide for recapitalisation in resolution.
MREL (minimum requirement for own funds and eligible liabilities) is the minimum amount of equity and subordinated debt a firm must maintain to support an effective resolution. This is a separate to the capital requirements set by the PRA.
For debt or equity to count to MREL, it must meet specific conditions. These conditions ensure we could depend on that equity and debt to support a resolution.
MREL ensures that investors and shareholders – and not the taxpayer – absorb losses when a firm fails. We set MREL to reflect how we would expect to resolve a firm if they failed. The biggest and/or most complex firms have the highest MRELs – reflecting that they would be more disruptive if they failed in a disorderly way.
We have published our policy on setting MREL and we disclose what MRELs we have set for the largest firms.
In a resolution, we need to be able to quantify the losses the firm faces and the resources it has to pay for these losses (including MREL). Our policy on valuations makes this possible, and so complements the MREL policy.
The Banking Act 2009 says a firm has entered resolution when:
If we wanted to use one of the other powers (bail-in or transfer), we must also determine that it would be necessary in the public interest – which includes that we could not meet our resolution objectives to the same extent by placing the firm into a modified insolvency instead. We will consult the PRA, FCA and HMT before deciding that these conditions are met.
If a firm fails to meet the public interest test, we place it into modified insolvency.
As a last resort, HMT can transfer a failing firm into public ownership or make a public equity injection.
It is slightly different process for a CCP. In the Bank of England’s role as the CCP’s supervisor, we would decide if the CCP was failing or likely to fail. Then, in the Bank of England’s role as the resolution authority, we would decide if it were reasonably likely that action could be taken that would result in the CCP no longer failing or being likely to fail, after consulting HMT.
The Resolvability Assessment Framework (RAF) is a policy framework that gives responsibility to firms to demonstrate how prepared they are for resolution. Firms will need to show that they have identified the risks to successful resolution. The framework is designed to increase awareness of resolution. We also expect this to help market participants make more informed investment decisions.
The Bank of England and PRA published the final RAF policy in July 2019, following consultation.
By 2022, the largest UK banks will need to show they have identified the risks to successful resolution and have taken action to ensure they can be resolved.
They will be required to publish key aspects of this self-assessment. We will also make a public statement on their resolvability.
We resolved Dunfermline Building Society over the weekend of 28 to 29 March 2009. We used our resolution powers under the Banking Act.
We conducted a sales process, in which the retail and wholesale deposits, branches and residential mortgages (other than social housing loans and related deposits) were transferred to Nationwide Building Society.
Some other assets – a portfolio of social housing loans – were placed into a temporary bridge bank, before eventually being sold to Nationwide.
The rest of the bank, including commercial real estate and corporate loans, was placed into a building society administration procedure.
Southsea Mortgage and Investment Company Limited was placed into modified insolvency on 16 June 2011.
7 May 2020 – We published a statement on resolution measures and Covid-19.
10 June 2019 - We published a notice on revisions to EU legislation (CRR II).