The Bank of England's approach to resolution

Foreword

It is 10 years since the Bank of England (the Bank) first published its ‘Approach to resolution’, known as the Purple Book.

The absence of a credible resolution regime during the global financial crisis meant that the UK government had to step in, injecting £137 billion of public money to stabilise the financial sector, and that the financial system acted as an amplifier, intensifying the UK economic downturn at great economic and fiscal cost. Many other countries around the world also had to take extraordinary actions.

Resolution aims to ensure banks and other financial institutions can be allowed to fail in an orderly way. Just like when any other business fails, losses arising from bank failure would be borne in resolution by shareholders and unsecured creditors. This protects public funds from loss, protects ordinary depositors, and incentivises banks to operate more prudently.

Parliament passed legislation in 2009 to create a lasting resolution regime for the UK, including objectives for the UK authorities and powers for the Bank of England (the Bank) as resolution authority. The regime continues to be enhanced to give the Bank a flexible set of tools to respond to a crisis. This year, our resolution powers for central counterparties have also been enhanced. HM Treasury has also consulted on a possible resolution regime for insurers.

2023 has been a significant year for the UK’s resolution regime and this is reflected in this updated Purple Book. The regime is built on the principles of credibility, transparency, flexibility and proportionality. Transparency around what is likely to happen if a bank fails is a fundamental part of a credible resolution regime. That is why we place such importance on publications such as this one, explaining the key features of the UK’s resolution regime and how the Bank would be likely to implement a resolution.

A credible and transparent resolution regime is in firms’ interests, further increasing the resilience of the UK banking system by reducing systemic risk and giving the public and investors confidence that should a failure occur any disruption would be minimised. We aim to ensure our resolution requirements are proportionate and appropriate for the UK banking system: proportionate to the impact of failure, and appropriate to the institutions to which they are applied.

To realise the benefits to growth and competition from financial stability, firms of all sizes need to be ‘resolvable’: able to fail in an orderly manner with investors, not the public purse, bearing losses. So in 2019 the Bank introduced its Resolvability Assessment Framework, with outcomes in resolution which larger banks in the UK must demonstrate they would be able to achieve; and the major UK banks must publish summaries of their own preparations for resolution. We publicly communicated the findings from our resolvability assessment for the major UK firms for the first time in 2022. This was a major step forward in ending too big to fail.

Flexibility in times of crisis or when contingency planning, including the ability to run different options in parallel, allows us to respond more effectively to the specific circumstances. This means we can deliver a better outcome for depositors and other customers of the bank in resolution, and for overall UK financial stability.

Further, the UK’s role as a global financial centre means we really value having strong and effective common global regulatory standards and cross-border co-operation. The UK continues to play a proactive role in global fora such as the Financial Stability Board, supporting the development and effective implementation of resolution standards across the world and practical cross-border resolution planning, testing and exercising to maintain operational readiness to execute and co-ordinate cross-border resolutions effectively. Keeping resolution readiness in the spotlight on the international stage continues to be important.

In 2023, we saw the first major test of the post-crisis international resolution framework. In the UK, this included the effective resolution of Silicon Valley Bank UK (SVBUK). It showed the key tools, including writing down shareholders and creditors to protect public funds and transfer powers to maintain operational continuity are both credible and feasible. They work.

No matter how much preparation is done, resolution is always likely to be complex and challenging to execute. Maintaining a transparent, credible and proportionate resolution regime that is fit for purpose and ready for use is a continuous process, with the authorities and firms responding as the financial system and regulatory landscape evolves. Keeping this Purple Book up-to-date is just one of things that we at the Bank do to help achieve this, as part of our broader mission to maintain the stability of the UK financial system for the public good.

Earlier this year, Mel Beaman, the Executive Director for Resolution who led the team through the SVBUK resolution, sadly passed away. Mel worked at the Bank and Financial Services Authority for over 25 years and was an outstanding public servant who touched the lives of so many people. She will be missed greatly, but not forgotten.

Dave Ramsden
Deputy Governor, Markets and Banking
December 2023

Executive summary

The Bank of England (the Bank) is responsible for taking action to manage the failure of certain types of financial institution – a process known as ‘resolution’.

This document is the third edition of the Bank’s approach to resolution and updates the 2017 version. It focuses on banks, building societies and designated investment firms regulated by the Prudential Regulation Authority (PRA); for simplicity we refer to these institutions as ‘firms’ or ‘banks’. The special resolution regime and the powers of the Bank also apply to group companies within the same group as a bank, subject to certain modifications. Part 1 explains the key features of the resolution regime. Part 2 looks at how the Bank is likely to implement resolution. Part 3 explains the Resolvability Assessment Framework (RAF) which the Bank has put in place for firms while Part 4 describes the Bank’s approach to resolution planning, third-country recognition and international co-ordination. Annexes 1–3 provide detail on how the Bank addresses some specific barriers to resolvability.

The Banking Act 2009 (the Banking Act) special resolution regime also applies to central counterparties (CCPs). The Financial Services and Markets Act 2023 (the FSM Act) expands the UK’s regime for the resolution of CCPs. Following the secondary legislation for the CCP resolution regime being put in place, the Bank will separately publish a description of the CCP resolution regime.

Resolution reduces the risks to depositors, the financial system and public finances that could arise due to the failure of a bank. By ensuring losses fall on a failed bank’s investors, resolution can both reduce the risk of bank failures and limit their impact when they do occur.

The need for a financial system to have an effective resolution framework was a key lesson from the global financial crisis of 2007–09. During the crisis, governments had to resort to ‘bailouts’ as some banks had become too big, complex, and interconnected to be put into insolvency like other types of firms. Without a resolution regime, letting them fail would have meant that people or businesses would have been unable to access their money or make payments. The potential risks to the financial system and the economy meant they had become ‘too big to fail’.

Resolution changes this by providing powers to impose losses on investors in failed banks while ensuring the critical functions of the bank continue. Shareholders and creditors profit when a bank is healthy and should therefore bear losses when a bank gets into trouble. The Bank’s resolution regime also aims to make firms’ responsibilities for their resolvability more transparent to the public and firms’ investors. The PRA’s Fundamental Rule 8 requires firms to prepare for resolution so that if the need arises, they can be resolved in an orderly manner with a minimum disruption of critical services. This relationship between risk and reward strengthens incentives for banks to demonstrate to their investors that they are not taking excessive risks. It also reduces the unfair competitive advantage of large banks that investors consider too big to fail and helps to create the conditions for a banking sector in which both entry and exit is easier.

To be effective, a resolution authority needs powers that can be applied credibly and feasibly and without risk to financial stability and to the broader economy.

As the UK resolution authority, the Bank is responsible for developing a strategy for how it would manage the failure of every bank, building society and designated investment firm within its remit. Managing the failure of a bank of any size is unlikely to be a straightforward process, but these strategies set out how the bank could be allowed to fail without risks to financial stability. The Bank has established a RAF under which the largest banks are expected to assess and report on their preparations for resolution. Resolution is ‘feasible’ when the authorities have the necessary legal powers and the capacity to implement these resolution strategies, and where any substantive impediments to resolvability have been addressed. For resolution to be ‘credible’, the authorities must be able to use their powers without threatening the stability of the financial system and wider economy.

The Bank operates within a statutory framework that gives it legal powers to resolve banks in order to meet certain objectives.

The Banking Act sets out the objectives that the Bank must pursue when it carries out the resolution of a bank. It provides the Bank with a set of legal powers to ensure resolution is an orderly process. These powers are used to enable a failing bank’s critical functions to continue while the remaining parts of the bank’s business are restructured to restore viability or are wound down.

Resolution takes place if a bank is ‘failing or likely to fail’ and it is not reasonably likely that action will be taken that will result in a change to this. But resolution powers can only be used if it is in the public interest.

Two conditions must be met before a firm is resolved:

1. First, the firm is failing or likely to fail. This is assessed by the PRA, following consultation with the Bank as resolution authority.
2. Second, it is not reasonably likely that action will be taken that will result in the firm recovering. This assessment is made by the Bank, having consulted the PRA, Financial Conduct Authority (FCA) and HM Treasury (HMT).^{footnote [1]}

Resolution powers are, however, only applied if the Bank judges it is in the public interest (having consulted the PRA, FCA and HMT). If the public interest test is not met, firms may be put into a bank or building society insolvency process. Designated investment firms may be placed instead into a special insolvency regime if they hold deposits or client assets, and normal insolvency if they do not. The Bank must have regard to the objectives for resolution set out in the Banking Act in considering whether to use the resolution powers or the bank or building society insolvency or administration procedure. The resolution objectives are set out in Figure 2.

The statutory regime provides the Bank with powers which may be used to resolve banks.

The Banking Act establishes five stabilisation tools to resolve a failing bank:

• bail-in;
• transfer of a failed firm or all or part of its business to a private sector purchaser;
• transfer of a failed firm or all or part of its business to a bridge entity controlled by the Bank;
• transfer of all or part of the business of a failed firm or of a bridge entity to an asset management vehicle controlled by the Bank; and
• temporary public ownership, which would be decided on and implemented by HMT and can only be used as a last resort.

In addition, there are modified insolvency procedures which are available to resolve failing firms: the bank or building society insolvency procedure and, where there has been a partial transfer of the business from a failing firm, the bank administration procedure.

To achieve the public objectives of resolution, the Bank has powers that affect the contractual rights of counterparties, creditors and shareholders in the failed firm, so the regime provides statutory safeguards for creditors and shareholders.

As resolution powers enable the Bank to interfere with the property rights of firms’ shareholders and creditors, there are important statutory safeguards regarding their use. First, an independent valuation of the firm’s assets and liabilities must be carried out prior to the use of resolution powers. Second, netting, set-off or collateral arrangements should be respected. Third, where the bail-in or partial property transfer tool is used, it is a requirement that the compensation arrangements to be put in place by HMT ensure that no shareholder or creditor is left worse off than they would have been in a hypothetical counterfactual insolvency.

The effectiveness of resolution will be reduced if on entry into resolution a firm’s counterparties can cancel their contracts with it. The resolution regime prevents a firm’s counterparties from terminating contracts simply because the firm enters resolution. Further, the Bank can suspend payment and delivery obligations, suspend the right of a secured creditor to enforce security and impose a stay on termination rights, for up to two business days.

Shareholders and creditors must absorb losses before public funds can be used.

The resolution regime aims to ensure public funds are not put at risk by requiring that shareholders and creditors meet the costs of bank failure. Shareholders and creditors must bear losses first.

The implementation of the resolution regime follows one of three broad strategies.

Part 2 of the document explains how the Bank is likely to conduct a resolution. This follows one of three broad resolution strategies, bail-in, transfer and modified insolvency.

Bail-in is likely to be the resolution strategy the Bank would apply to the largest, most complex firms with balance sheets greater than £15 billion–£25 billion. Bail-in restores the solvency of a failed firm, enabling it to continue providing, without interruption, functions that are critical for the UK economy and then undertake an orderly restructuring of the business to address the underlying causes of failure. The bail-in tool enables the Bank to impose losses on shareholders and to write down or convert into equity the value of the claims of certain unsecured creditors. The exposure of shareholders and creditors to losses in resolution should respect the order in which they would have received distributions in an insolvency of the firm and leave them no worse off than they would have been if the firm had been placed into an insolvency process. This is a key protection for investors in firms and known as the ‘no creditor worse off’ safeguard. The bail-in tool ensures investors bear losses before taxpayer funds can be used.

Transfer of the shares in a failed firm or transfer of the business or part of the business of the firm to a private sector purchaser also aims to ensure continuity of critical functions. This resolution strategy is likely to be appropriate for smaller and medium-sized firms whose operations can be sold in short order to another firm, but which nevertheless, in the event of their failure, meet the public interest test for use of resolution powers. Generally, these are firms that provide at least 40,000–80,000 transaction-based retail accounts (eg current accounts that are regularly used), but do not exceed the £15 billion–£25 billion balance sheet threshold. However, in some cases of smaller bank failure the public interest and resolution objectives, particularly in respect of continuity of banking services, may also be better served by the use of the transfer powers.

The Bank can also transfer the shares in a failing firm or transfer the business or part of the business of the firm temporarily to a bridge entity, pending a sale to a private sector purchaser. Assets and liabilities of the firm not transferred to a temporary bridge entity, or a private sector purchaser, can be transferred to an asset management vehicle to be run off.

Alternatively, where there has been a partial transfer from a failing firm, the firm could be placed into administration using the bank administration procedure if this is needed to ensure that essential services continue to be provided to the transferred part of the firm.

As with bail-in, the Bank would expect to impose losses on shareholders and to write down the claims of certain unsecured creditors.

While larger firms would be placed into resolution, depending on the circumstances modified insolvency may be the appropriate resolution strategy for smaller firms. Protected depositors would be paid by the Financial Services Compensation Scheme (FSCS) or have their accounts transferred to another institution using FSCS funds (up to £85,000 at December 2023 per eligible depositor) as a priority. After that the firm would be wound up in a normal insolvency process.

The Bank prepares for resolution by planning for the failure of every firm and co-ordinating with domestic and international counterparts.

Part 3 of this document describes how the Bank assesses the resolvability of firms and Part 4 summarises how the Bank prepares for resolution. The Bank, in close co-operation with the PRA and FCA, has a statutory responsibility to identify a preferred resolution strategy and develop a resolution plan for every firm or group in the UK. The Bank must provide HMT with an assessment of potential risks to public funds where the resolution plan involves the use of resolution powers.

As many groups have international activities, the Bank works with authorities in other countries bilaterally and for global systemically important banks (G-SIBs), through crisis management groups (CMGs). This embeds co-operation and co-ordination between home authorities and host authorities and makes cross-border resolution feasible.

To make sure a firm is resolvable the Bank undertakes a resolvability assessment to identify barriers to resolution.

For resolution strategies and plans to be fully effective, any significant barriers to their implementation, which could affect the ‘resolvability’ of the firm, must be identified and removed. The Bank has identified eight generic barriers to resolution (Figure 5). The Bank also expects firms to be able to achieve three outcomes if they are to be considered resolvable. These are:

• adequate financial resources: in the context of resolution: that a firm has the resolution-ready financial resources available to absorb losses and recapitalise without exposing public funds to loss;
• continuity and restructuring: that a firm can continue to do business through resolution and restructuring; and
• co-ordination and communication: that a firm is able to co-ordinate and communicate effectively within the firm and with the Bank, PRA and the FCA and markets so that resolution and subsequent restructuring are orderly.

The Bank works with international bodies, such as the Financial Stability Board (FSB), to develop policies to remove barriers to resolvability. Resolvability of individual firms is then assessed regularly to monitor implementation and identify substantive barriers to the execution of the resolution plan.

If the Bank finds that firms have not developed sufficient capabilities to remove the barriers to their resolution, it has powers to direct a firm to remove these through changes to their operations or structure.

The Bank shares the outcome of the resolvability assessment with the firm and asks it to make proposals to remove any barriers identified. If the Bank subsequently concludes that the firm’s proposals are inadequate, the Bank has the power to require it to take steps to remove any substantive impediments.

In the interests of transparency, major UK firms are expected to perform a regular assessment of their preparations for resolution and publish a summary. In parallel, the Bank publishes its own assessment of those firms’ resolvability capabilities.

The Bank believes greater transparency over the progress being made towards removing barriers to resolvability will incentivise firms to prioritise those actions. The Bank published its first assessment of major UK firms’ ability to achieve the three resolvability outcomes in June 2022, and will update this assessment every two years.

Part 1: Framework for resolution

I: Aims of resolution

Resolution reduces the risks to depositors, the financial system and to public finances that could arise due to the failure of a bank.

The Bank’s mission is to promote the good of the people of the UK by maintaining monetary and financial stability. As part of that mission, the Bank has statutory responsibility for taking action to manage the failure of banks, building societies and designated investment firms regulated by the PRA.^{footnote [2]} This process is known as ‘resolution’. It is distinct from insolvency. The Bank carries out a resolution if it determines that action is needed to protect financial stability. It is designed to avoid the use of public funds to support failed banks.

This document also refers to recent developments in enhancing the approach to resolving CCPs, which fall within the scope of the UK resolution regime; and insurance companies, which currently do not.

This document describes the statutory responsibilities and powers of the Bank as UK resolution authority. The framework takes into account the changes made in consequence of the withdrawal of the UK from the European Union (EU) on 31 January 2020 and the ending of the transitional period on 31 December 2020. In general, any reference in this document to legislation derived from the body of EU law (retained EU legislation, or ‘REUL’) is to that legislation as retained in accordance with the EU (Withdrawal) Act 2018 (the ‘EU Withdrawal Act’) and as amended, in particular as amended in accordance with the EU Withdrawal Act.^{footnote [3]} However, the references do not take into account changes made after publication.^{footnote [4]}

This publication contains outlines or summaries of various of the Bank’s statements of policies related to particular aspects of the resolution regime aimed at providing an introduction or general overview of certain aspects of such policies. For detailed information the relevant policy document itself should be referred to. References to the policy documents referred to in this publication are provided in Annex 5.

By ensuring losses will fall on a failed bank’s investors, resolution can both reduce the risk of bank failures and limit their impact when they do occur.

The regulatory system in the UK is not designed to ensure that banks will never fail. A core feature of a stable and competitive financial system is that where banks fail, they can do so in an orderly fashion – that is without excessive disruption to the financial system or to the banking services provided to households and businesses, and without exposing taxpayers in general to loss. This principle underpins the FSB’s international standard for resolution (the Key Attributes of Effective Resolution Regimes for Financial Institutions), agreed by G20 leaders in 2011 and enhanced in 2014. The arrangements for the resolution of failing banks in the UK are designed to comply with the Key Attributes.

The need for a financial system to have an effective resolution framework for banks became clear during the global financial crisis of 2007–09. At that time the UK, like many other economies, had no resolution regime for its banking system. Without arrangements that could avoid the serious risks to financial stability that would have arisen had some failed banks entered insolvency proceedings, the authorities had to resort to ‘bailouts’. This meant providing public funds to recapitalise them. The need to avoid the consequences of bankruptcy meant the costs of financial support for failing banks were imposed on the public finances rather than on the owners and creditors who had benefited from banks’ profits prior to the crisis.

Resolution arrangements have changed this by enabling losses arising from bank failure to be borne by the shareholders and creditors of failed banks, while ensuring continuity of banking services and the firm’s critical functions. The Bank has used its resolution powers to resolve failing banks on a number of occasions since the 2007–09 financial crisis (Box 4), and many other countries around the world have also used similar powers.

The market’s perception that the biggest banks would be rescued by the government as they were ‘too big to fail’ created an implicit guarantee that acted as a hidden subsidy to these firms. Credible resolution regimes should remove this perception. Doing so should improve market discipline in the pricing of risks being taken by these firms. This should, in turn, strengthen incentives for them to demonstrate to their customers, clients and investors that they are not taking excessive risks. It also encourages a more dynamic banking sector in which both entry and exit is easier.

Figure 1: Scope of the resolution regime ^{(a) (b) (c)}

Footnotes

• (a) The Bank has powers to resolve UK branches of overseas-based banking firms, which are available under certain circumstances set out in the Banking Act.
• (b) In the case of banking group companies (defined in the Banking Act and the Banking Act 2009 (Banking Group Companies) Order 2014 (SI/2014/1831)) which include non-UK institutions, where a non-UK resolution authority decides to take stabilisation action in respect of a non-UK banking group company, the Bank will need to consider whether the exercise of a stabilisation power in respect of any UK firm in the banking group is necessary having regard to the public interest in the advancement of one or more of the special resolution objectives and to consult the PRA and HMT if it is likely to use such powers.
• (c) Investment firms within the scope of the resolution regime are PRA-designated investment firms.

To be effective, a resolution authority needs powers that can be applied effectively and without risk to financial stability and the broader economy.

To achieve orderly resolution, the resolution authority needs to develop feasible and credible resolution strategies for all firms.

A ‘feasible’ strategy is one where the authorities have the necessary legal powers and the capacity to use them. The UK’s resolution regime was initially put in place in 2009 and has been modified subsequently. The 2022 FSB review of resolution regimes identified no gaps in the UK’s policy toolkit for bank resolution, while the 2022 International Monetary Fund (IMF) UK Financial Sector Assessment Program report and Technical Note noted that the UK benefitted from a robust financial stability framework and recognised the effectiveness of the Bank’s work in enhancing the bank resolution regime.

A ‘credible’ strategy is one where the use of resolution powers does not have unacceptable consequences for the financial system and wider economy. For example, a strategy would not be credible if it were likely to result in significant disruption of one or more of the critical functions^{footnote [5]} provided by the failing firm. Examples of critical functions that would have knock-on effects on the economy and financial stability if disrupted include: payments services on behalf of customers; taking deposits from, and extending loans to, households and small businesses; clearing and settling financial transactions; and providing custody services. A credible resolution strategy is one which also gives assurance that the firm can be resolved without risk to public funds. This incentivises investors and other market participants to solve problems before the conditions for resolution are met. Part 2 of this document describes how a bank resolution is likely to be conducted to implement a credible and feasible resolution strategy.

II: Key features of the UK bank resolution regime

The Bank, as resolution authority, operates within a statutory framework that gives it legal powers to resolve banks in order to meet certain objectives.

Under the Banking Act the UK resolution regime applies to banks, building societies and designated investment firms regulated by the PRA, and their financial holding companies^{footnote [6]} that are incorporated in the UK (Figure 1). It therefore includes the UK subsidiaries of foreign firms. The UK branches of overseas-based banking firms are also within scope of the regime. Certain investment firms regulated solely by the FCA were removed from the scope of the regime in 2022, following a government consultation in 2021, and are instead subject to the investment bank special administration regime.

The Banking Act sets out the objectives that the Bank must pursue when it carries out a resolution, as well as the responsibilities of the other UK authorities – the PRA, FCA and HMT – in relation to certain aspects of the bank resolution regime.

The regime provides the Bank with a flexible set of resolution tools^{footnote [7]} to manage the failure of a firm. The regime also includes a set of separate modified insolvency procedures^{footnote [8]} for banks, building societies and designated investment firms, which can be used alongside the resolution tools or relied upon exclusively where the Bank decides that resolution powers are not needed to meet the objectives of the regime. The Bank has used these tools on a number of occasions, including for the resolution of Silicon Valley Bank UK (SVBUK) in March 2023.

The resolution powers are designed to allow the authorities to take action – if necessary, before a bank is insolvent – to minimise any wider consequences of its failure for financial stability and ensure confidence in the financial system. The resolution regime recognises the overriding importance of these public policy objectives, unlike normal corporate insolvency arrangements, which are designed to act in the interests of the firm, its creditors and employees. Given the extent of the discretion conferred on the resolution authority, the regime includes safeguards for the owners and creditors of firms affected, by the use of resolution powers.

Separately from the stabilisation powers, the Banking Act imposes on the Bank a legal duty to effect a mandatory cancellation, transfer or dilution of a firm’s Common Equity Tier 1 (CET1) instruments and, to the extent necessary to achieve the special resolution objectives, the write-down or conversion of the firm’s Additional Tier 1 (AT1) instruments and potentially Tier 2 instruments, in circumstances where the firm has reached the point of non-viability. The Bank is required to make a mandatory reduction instrument where one of the five cases set out in the Banking Act applies. This power may be exercised in conjunction with a stabilisation power, other than, in certain circumstances, the bail-in stabilisation power. A mandatory reduction of capital instruments was made as part of the resolution of SVBUK in March 2023, meaning losses were borne by the firm’s AT1 and Tier 2 capital instruments, with the CET1 instrument (ie shares) being transferred to HSBC.

Objectives

The Banking Act specifies a set of objectives, to which the Bank must have regard when resolving a firm. These are shown in Figure 2.

The Bank must consider each of these objectives in selecting and using its resolution powers, but they are not ranked in any particular order. The Bank decides how to balance these objectives, including which of them should be prioritised if they conflict, in the circumstances of the case.

Figure 2: The statutory resolution objectives

Co-ordination between the financial authorities in financial crisis management and in bank resolution

The Bank and HMT have a general duty to co-ordinate in crisis management.

A crisis management Memorandum of Understanding (MoU) between the Bank and HMT sets out the respective responsibilities of each authority in a crisis and the co-ordination needed for resolution planning, policy and execution. HMT has sole responsibility for any decisions involving public funds. In order to give HMT sufficient notice of plans that could have implications for public funds, the Bank is required to provide HMT with information before determining a resolution plan for a firm that involves the use of resolution tools. This includes an assessment of the systemic risks and potential risks to public funds from the firm’s failure.

While the Bank is designated as the resolution authority in the UK, the authorities and the FSCS all have formal roles under the resolution regime. In summary:

• the PRA, as prudential supervisor,^{footnote [9]} determines if the firm is failing or likely to fail, having consulted the Bank;
• the Bank, as resolution authority, makes the decision to put a failing bank into resolution, having consulted the other authorities,^{footnote [10]} selects which tools to use and conducts the resolution (other than temporary public ownership);
• HMT is consulted on the decision to trigger resolution and the choice of tools. It can veto the use of powers in certain circumstances and can decide whether to put a bank into temporary public ownership – in such circumstances, HMT conducts the resolution alongside the Bank;^{footnote [11]} and
• in modified insolvency, the FSCS pays out deposits protected up to the applicable limit (currently £85,000 per eligible depositor)^{footnote [12]} or else funds the transfer of these deposits. In resolution the FSCS can be requested to contribute up to the amount it would have paid out in insolvency.

The Bank also has a number of formal responsibilities and powers as resolution authority which apply outside of an actual bank failure situation and relate to general resolution planning. They include assessments of banks to identify whether there are barriers to resolving them, the exercise of powers to require the removal of substantive impediments to resolvability and the setting of a minimum requirement for own funds and eligible liabilities (MREL) to ensure that banks maintain appropriate levels of loss-absorbing capacity. These responsibilities and the Bank’s expectations of firms in addressing any impediments to resolvability are set out in detail in The Bank of England’s approach to assessing resolvability and are described in Part 3. The purpose and approach to setting MREL is explained in detail in the Bank’s Statement of Policy on MREL and is described in Annex 1.

The Bank engages with authorities in other jurisdictions when planning for, and carrying out, a resolution of a cross-border bank. This is particularly important for the UK, which is the home jurisdiction of three G-SIBs and hosts a number of large international firms – some of which are also G-SIBs – whose headquarters are outside the UK. The arrangements established in recent years to facilitate this co-operation are wide-ranging and are covered in more detail in Part 4.

Triggering the resolution regime

Resolution takes place if a firm is ‘failing or likely to fail’ and it is not reasonably likely that action taken will change this.

Certain conditions must be met before a bank may be placed into resolution. First, the bank must be deemed ‘failing or likely to fail’. This includes where a firm is failing or likely to fail to meet its ‘threshold conditions’ in a manner that would justify the withdrawal or variation of authorisation.^{footnote [13]} This assessment is made by the PRA following consultation with the Bank as resolution authority.

Second, it must not be reasonably likely that – ignoring the resolution powers – action will be taken that will result in the bank no longer failing or being likely to fail. This assessment is made by the Bank as resolution authority, having consulted the PRA, FCA and HMT. The Bank also has an obligation to notify the Financial Policy Committee. When making this determination, the Bank takes into account whether any remaining regulatory capital instruments of the failing bank must be written down and/or converted to common equity once the firm is no longer viable.^{footnote [14]}

Measures that may be taken to prevent the bank from failing or being likely to fail could involve supervisory action to help restore the bank’s financial resources, such as stopping the payment of dividends to shareholders or bonuses to senior management. Or it could involve further action by the bank or its shareholders and creditors, for example a financial restructuring (such as a debt-for-equity swap negotiated with the bank’s bondholders) or a sale of the whole or parts of the business. These and other options may be a feature of the bank’s recovery plan.

As the regime permits resolution to be triggered when there is evidence a bank is failing or likely to fail, this can happen before it is ‘insolvent’; that is, before it can no longer pay its debts as they fall due or the value of its assets falls below the value of its liabilities. The conditions for entry into the regime are designed to strike a balance between, on the one hand, avoiding placing a bank into resolution before all realistic options for a private sector solution have been exhausted and, on the other, reducing the chances of an orderly resolution by waiting until the firm is technically insolvent.

In considering these two conditions, the Bank must disregard financial assistance provided by HMT or the Bank other than ordinary market assistance offered by the Bank on its usual terms such as the Sterling Monetary Framework and other operations in the Bank’s published framework for market operations.

The public interest test

But resolution is only used if it would be in the public interest.

The determination that a bank satisfies the conditions for resolution discussed above does not, on its own, allow the use of all the resolution powers. Resolution powers allow the authorities to take actions which directly affect people’s property rights and should therefore not be exercised unless justified in the public interest. Accordingly, before deciding to use a resolution power, the Bank must also determine that action is necessary to advance the statutory resolution objectives, summarised in Figure 2. This assessment includes considering the size and nature of the critical functions of the failed firm and conditions in the wider financial system at the time of failure.

The Bank must also consider whether the resolution objectives would be met to the same extent by placing the firm into the relevant statutory insolvency process, such as the bank insolvency procedure.^{footnote [15]} If this assessment indicates that use of the bank insolvency procedure would not meet the resolution objectives to the same extent as use of the resolution tools, then the resolution tools may be used. If the public interest test is not met, then the resolution tools are unavailable, but the relevant insolvency procedure may be used if the firm is unable, or likely to become unable, to pay its debts or is otherwise insolvent.

The decisions that need to be taken by the authorities in the run-up to, and during, a resolution may take place in quick succession. Figure 3 presents a stylised decision tree, setting out the decisions that the PRA as supervisor and the Bank as resolution authority need to take, in the course of the entry into resolution of a failing bank.