The Bank of England’s approach to resolution

The Bank of England (BoE) has recently updated its approach to resolution, outlining the framework available to resolve failing banks, building societies, and certain investment firms. The resolution framework aims to ensure that financial institutions can fail in an orderly manner, with losses borne by shareholders and unsecured creditors rather than the public and society as a whole. This approach helps maintain a stable financial system and protect the public interest. In its „approach to resolution“, the BoE describes the key components of this resolution framework such as the „Resolvability Assessment Framework“ used to assess the resovability of institutions, individual resolvability tools available to the Bank, its assessment of whether or not a firm should be resolved, and various other issues in relation to the resolution of banks, building societies, and investment firms. It shall be noted beforehand, that the framework is primarily based on the Banking Act 2009 and enhancements made for central counterparties via the Financial Services and Markets Act 2023.
##### The Bank’s resolution framework
A key feature of the BoE’s resolution regime is the Resolvability Assessment Framework, which assesses the ability of larger banks to achieve resolution outcomes. Within this framework, key factors for resolvability are identified, key barriers to resolvability are determined, and institutions are required to develop a plan to manage all such factors and mitigate the risk of non-resolvability. The assessment must be reported to the Bank on a regular basis to ensure that banks are „well“ prepared for potential failure scenarios.
The resolution regime further provides the Bank with a set of legal powers and five stabilization tools to resolve a failing bank, including 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. In addition, there are modified insolvency procedures available to resolve failing firms, such as the bank or building society insolvency procedure and the bank administration procedure.
To use its resolution powers, the BoE must follow a two-step process. First: the firm must be failing or likely to fail, as assessed by the PRA following consultation with the Bank. Second, it must not be reasonably likely that action will be taken that will result in the firm recovering, as assessed by the Bank, having consulted the PRA, Financial Conduct Authority, and the HM Treasury. Resolution powers can only be used if it is in the public interest, and 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 regime also affects the contractual rights of counterparties, creditors, and shareholders in the failed firm, and provides statutory safeguards for creditors and shareholders. The Bank cannot use resolution powers without conducting an independent valuation of the firm’s assets and liabilities prior to the use of resolution powers, respecting netting, set-off or collateral arrangements, and ensuring that no shareholder or creditor is left worse off than it would have been in a hypothetical counterfactual insolvency. The resolution regime also prevents a firm’s counterparties from terminating contracts simply because the firm enters resolution. 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.
International coordination also plays a crucial role in the Bank’s resolution approach. The resolution regime addresses third-country recognition, ensuring that the resolution of a foreign bank with a significant presence in the UK is compatible with the bank’s home-country resolution framework. This approach promotes a consistent and coordinated response to cross-border resolution cases.
To conclude, the Bank notes that it has developed a strategy for managing the failure of every bank, building society, and designated investment firm within its remit. Managing the failure of an institution of any size is unlikely to be a straightforward process, but the noted strategies are well designed to help support this procedure.