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Banks’ resilience means taxpayers won’t foot bill in case of future failures

Paloma Kubiak
Written By:
Paloma Kubiak

Major UK banks have reformed their processes in the aftermath of the financial crisis which means if one were to fail, taxpayers wouldn’t foot the bailout bill.

If a bank were to fail, customers would still be able to access their accounts and business services as normal.

Further, shareholders and investors rather than taxpayers would be the first to bear the bank’s losses and costs of recapitalisation.

That’s according to the Bank of England’s (BoE) ‘resolvability assessment’ of eight of the UKs major banks, including Barclays, HSBC, Lloyds Banking Group, Nationwide, NatWest, Santander UK, Standard Chartered and Virgin Money UK.

The BoE looked at how banks, building societies and other financial entities would manage a potential failure to minimise the impact on customers, the financial system, as well as public finances.

During the financial crisis the UK did not have a regime to resolve banks without the use of public money, which meant the options were to let banks fail or bail them out with taxpayers’ money.

The BoE assessment – the first of its kind – found that a “robust resolution regime” was in place following extensive work by UK banks. It also stated there were more choices if banks encountered “serious problems”.

Actions taken across the sector include holding more loss-absorbing capacity, improving ability to monitor liquidity needs and use liquid resources throughout resolution; ‘resolution-proofing’ contracts and critical service arrangements; changes to group structure; better ability to plan at speed for “further restructuring changes to return the firm to long term viability”; and improved communication planning with the public.

However, it said that resolution was a “spectrum” and that it would always “likely to be complex to execute” so maintaining a “credible and effective resolution regime” was a “continuous process”.

Dave Ramsden, deputy governor for markets and banking at the BoE, said: “The resolvability assessment framework is a core part of the UK’s response to the global financial crisis, and demonstrates how the UK has overcome the problem of ‘too big to fail’.

“The UK authorities have developed a resolution regime that successfully reduces risks to depositors and the financial system and better protects the UK’s public funds. Safely resolving a large bank will always be a complex challenge so it’s important that both we and the major banks continue to prioritise work on this issue.”

How UK banks were evaluated

In its assessment the BoE evaluated banks on three themes: adequate financial resources, continuity and restructuring, and coordination and communication.

Shortcomings were identified in three firms, which the BoE said, “may complicate unnecessarily the Bank’s ability to undertake a resolution”. The firms were HSBC, Lloyds Banking Group and Standard Chartered.

HSBC’s shortcomings were around the production of resolution specific liquidity analysis and its plans to execute the restructuring actions in scenarios with a multiple point of entry bail-in.

Lloyds Banking Group and Standard Chartered also had shortcomings around production of resolution specific liquidity analysis, while for Standard Chartered the BoE identified issues around “identification and evaluation of all available restructuring options in a wide range of resolution scenarios”.

This relates to a bank’s availability of liquidity to support itself through a resolution.

The BoE has also identified “areas for further enhancement” for six firms, which are specific areas where continued work is needed to “enhance or embed capabilities in order to further reduce execution risks associated with resolution”.

The six firms were Barclays, HSBC, Nationwide Building Society, NatWest, Standard Chartered and Virgin Money UK.

The BoE said it would repeat its assessment in 2024 and then every two years after that.