Answer ... By virtue of the Banking Act 2009, the Bank of England has responsibility for the resolution of a failing bank, and their group companies. The SRR applies to banks, building societies, systemically important investment firms, recognised central counterparties and banking group companies. The SRR prescribes a number of stabilisation powers that are exercisable in relation to a bank. The aim of the SRR is to provide a mechanism for resolving failing banks that will only be used in situations where failure is imminent and other powers of the relevant UK authorities are inadequate. The measures available include the transfer of all or part of the bank in question to a ‘bridge bank’ owned by the Bank of England or the temporary public ownership of the bank in question or its holding company.
On 29 April 2019 the FSB published its thematic Review on Bank Resolution Planning (www.fsb.org/wp-content/uploads/P290419.pdf). On 31 August 2018 the PRA published Supervisory Statement 19/13, “Resolution Planning”, which sets out the resolution planning information that banks are expected to provide to the PRA.
In October 2017 the European Banking Authority consulted on changes to the Implementing Technical Standards (ITS) on information for resolution planning, with the aim of further harmonising data collections and facilitating data exchange within resolution colleges. The ITS was submitted to the European Commission for approval on 17 April 2018. Banks are expected to start reporting using the new templates by the end of May 2019.
Bank nationalisation in the United Kingdom is rare. Northern Rock was nationalised on 22 February 2008; Bradford & Bingley was nationalised on 28 September 2008, although the deposits and branch network were sold to the Santander Group. The interests of depositors were fully protected. In the event of a bank’s insolvency, deposits protected by the FSCS are ‘super-preferred’ in the creditor hierarchy. Employees may be protected under employment law where a business unit is transferred or where redundancies are made. Certain employee claims rank as preferred debts if a bank is wound up.
Under the Banking Act 2009, if the Treasury decides to take a bank or a bank holding company into public ownership, it must pay compensation if shareholders suffer a loss compared to the position they would have been in had the failed bank been subject to insolvency proceedings (referred to as the ‘no creditor worse off’ safeguard). No account is taken of any financial assistance provided by the Bank of England or the Treasury in valuing the shares of the bank.
The SRR consists of the following pre-insolvency stabilisation options for banks:
- the transfer of all or part of a bank to a private sector purchaser (PSP);
- the transfer of all or part of a bank to a bridge bank owned by the Bank of England;
- the transfer of a bank or a bank’s holding company into temporary public ownership (TPO);
- the asset separation tool, which allows assets and liabilities of the failed bank to be transferred to a separate asset management vehicle, with a view to maximising their value through an eventual sale or orderly wind-down; and
- a bail-in to absorb the losses of the failed firm, and recapitalise that firm (or its successor) using the firm’s own resources.
A stabilisation power may be exercised only if the PRA is satisfied that:
- the bank is failing, or is likely to fail, to satisfy the threshold conditions for authorisation under the Financial Services and Markets Act 2000; and
- having regard to timing and other relevant circumstances, it is not reasonably likely that action will be taken to satisfy those conditions.
In exercising any of the stabilisation powers or the insolvency procedures, the relevant authorities must have regard to a number of specified objectives. These are:
- ensuring the continuity of banking services and critical functions in the United Kingdom;
- protecting and enhancing the stability of the UK financial system;
- ensuring the stability of the UK banking system;
- protecting depositors;
- protecting public funds and client assets; and
- avoiding unjustified interference with property rights.
The Bank of England may exercise the PSP or bridge bank powers if it is satisfied (after consultation with the Treasury and the PRA) that it is necessary having regard to:
- the public interest in the stability of the UK financial systems;
- the maintenance of public confidence in the stability of the UK banking system; or
- the protection of depositors.
The Treasury may exercise the TPO power only if it is satisfied (after consultation with the Bank of England and the PRA) that either:
- exercise of the power is necessary to resolve or reduce a serious threat to the stability of the UK financial system; or
- it is necessary to protect the public interest where the Treasury has previously provided financial assistance to a bank.
The stabilisation powers are supplemented by a broad range of powers to transfer shares or property (including foreign property) and overriding contractual rights that could interfere with the transfer.
A bank insolvency procedure provides for the orderly winding up of a failed bank. It facilitates the FSCS in satisfying depositor claims or the transfer of their accounts to another institution. The Bank of England, the PRA or the secretary of state may apply to the court to make a bank insolvency order. An order may be made if:
- the bank is unable, or is likely to be unable, to pay its debts;
- winding up the affairs of the bank would be in the public interest; or
- winding up the bank would be ‘fair’ (‘just and equitable’ in the Insolvency Act 1986).
In order to participate in the bank insolvency procedure, the bank must have depositors eligible to be compensated under the FSCS. Once a bank insolvency order is made, the liquidator has two objectives:
- to work with the FSCS to ensure, as soon as is reasonably practicable, that accounts are transferred to another bank, or that eligible depositors receive compensation under the FSCS; and
- to wind up the affairs of the bank.
The general law of insolvency applies, with some modifications, to bank insolvency. The liquidator has similar powers to access the bank’s assets and, once the eligible deposits have been transferred or compensation paid, creditors will receive a distribution in accordance with their rights. A resolution for voluntary winding-up has no effect without prior approval of the court.
The SRR includes a bank administration regime, which puts the part of a failed bank that is not transferred to the bridge or private sector purchaser (known as the residual bank) into administration. The purpose of bank administration (which should not be confused with administration under the Insolvency Act 1986) is principally to ensure that the non-sold or transferred part of the bank continues to provide services to enable the purchaser or bridge bank to operate effectively. Once the Bank of England notifies the bank administrator that the residual bank is no longer required, the bank will proceed to a normal administration, where the objective is either to rescue the residual bank as a going concern or, if this is not possible, to achieve a better result for the bank’s creditors as a whole than in a winding-up.
Insolvency procedures for banks carrying on an investment banking business are set out in Statutory Instrument (SI) 2011/245 (as amended by the Investment Bank (Amendment of Definition) and Special Administration (Amendment) Regulations 2017 (SI 2017/443)). On 4 December 2018 the Deposit Guarantee Scheme and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 (SI 2018/1285) were published by the Treasury.