Bank of England lays out framework for orderly collapse of UK banks

The Bank of England has published a proposed framework under which the UK’s biggest banks will need to publicly demonstrate they have plans in place to allow them to wind down without a government bailout.

The Bank of England is reforming the banking system to allow banks to fail without the need for the taxpayer to step in, as it was forced to do in the immediate aftermath of the 2008 financial crisis.

Publishing a consultation paper on the Resolvability Assessment Framework, the Bank said: “Disorderly bank failures can imperil financial stability including by interrupting the most important services banks provide to their customers. The Bank of England has been working to build an effective resolution regime which will ensure that banks are able to fail in an orderly manner with losses borne by their investors.”

The framework, the Bank said, was “the final major piece in the UK’s resolution regime for banks”. It places the responsibility on the banks to demonstrate both publicly and to the Bank that they have a workable resolution in place – often dubbed a ‘living-will’ – and that they are aware of any potential risks to successful resolution.

The two key areas of focus will be whether banks have adequate financial resources to absorb losses and recapitalise, and if they have contingency plans to allow them to carry on doing ordering business during the resolution. A senior executive will also be put in charge, and would face sanctions if the wind down did not go smoothly or if the bank was ill-prepared.

Under the proposals, banks would be expected to publish the self-assessments of their plans with the Bank then able to comment on their resolvability.

The proposals apply to the UK’s seven largest banks with more than £50bn in retail deposits. They are expected to have workable resolution schemes in place by 2022.