October 02, 2017

BoE published an update to its 2014 approach to the resolution framework for failing banks, building societies, and certain investment firms. It also covers arrangements for central counterparties or CCPs. This new publication explains the key features of the UK resolution regime—including BoE’s statutory responsibilities and powers, along with how BoE would be likely to implement a resolution.

Part 1 of the approach to resolution explains the key features of the resolution regime. Part 2 looks at how BoE would be likely to implement a resolution, while Part 3 explains BoE's business as usual responsibilities as the UK's resolution authority. The approach highlights that the resolution reduces the bank failure risks to depositors, the financial system, and public finances. By ensuring losses will fall on a failed bank’s investors, resolution can reduce the risk of bank failures and limit their impact, when they do occur. To be effective, a resolution authority needs powers that can be applied without risk to financial stability and to the broader economy. BoE, as resolution authority, operates within a statutory framework that gives it legal powers to resolve banks to meet certain objectives.

The report further notes that the statutory regime provides BoE with powers that may be used to resolve banks. To achieve the public objectives of resolution, BoE has powers that affect the contractual rights of counterparties and investors in the failed firm; therefore, the regime provides statutory safeguards for creditors and counterparties. Shareholders and creditors must absorb losses before public funds can be used. BoE prepares for resolution by planning for the failure of every firm and coordinating with international counterparts. To make sure a firm is resolvable, BoE undertakes an assessment to identify barriers to resolution. If BoE finds barriers to "resolvability," it has powers to direct a firm to remove these through changes to their operations or structure. The resolution regime covers firms incorporated in the UK, including subsidiaries of foreign firms. The EU Bank Recovery and Resolution Directive, or BRRD, extends this scope to branches of firms from outside the European economic area.

 

Related Link: Approach to Resolution (PDF)

Keywords: Europe, UK, Banking, Approach to Resolution, Resolution Framework, Resolution Planning, BoE

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