31 October 2014
The Bank of England (BoE) has outlined its approach to resolve failed institutions.
Failed institutions include banks, building societies and investment firms – the central bank has set out the process by which the authorities can intervene to manage the failure of a firm.
The BoE has put together a document, which sets out its toolkit and provides detail about how it would be applied. It explains the purpose and objectives of the UK’s resolution regime, its key features, the approach that the BoE would take to resolve a failed firm and the arrangements for safeguarding the rights of depositors, clients, counterparties and creditors.
The approach document sets out three key stages of resolution, which firms would go through. These are:
Stabilisation phase: Once a firm has entered resolution, the Bank must decide on the most appropriate method to stabilise the firm. This may be through transferring some of its business to a third party or through bail-in to recapitalise the failed firm;
Restructuring phase: Once the firm has been stabilised, it will need to restructure to address the causes of failure and restore confidence; and
Exit from resolution: This is the end of the Bank’s involvement with a firm in resolution – either the firm will cease to exist or they will be restructured and no longer require liquidity support.
The BoE states that in order for it to protect and enhance the resilience of the UK financial system, firms must be able to fail in an orderly way without causing systemic consequences or critical disruption to economic activity – hence it has outlined its approach in the event of a fail.
Commenting on the publication, Executive Director of Resolution at BoE, Andrew Gracie said: ‘This is a significant milestone in our resolution regime. It sets out exactly how we would go about resolving a bank, building society or investment firm in practice. The failure of these firms should have the same impact as that of the failure of any other institution i.e. the rest of the system is not impacted and taxpayers do not bear the cost. This is what resolution achieves.’