The Bank of England has ordered big lenders in the UK to find £116bn of funding as part of a series of measures to ensure that taxpayers will never again have to bail out the banking sector.
Threadneedle Street also intends to publish details of how each of the big lenders would cope in the event they find themselves in a situation similar to Royal Bank of Scotland and Lloyds Banking Group, which needed £65bn of taxpayer bailouts almost a decade ago.
Sir Jon Cunliffe, the deputy governor at the Bank responsible for financial stability, said regulators needed to let banks fail in a similar way that traditional companies collapse. This has not been possible in the past because of the risk that savers lose their funds and because a system did not exist to allow banks to be put into insolvency.
The Bank has devised a system to instead “resolve” banks instead of putting them into insolvency and has such a plan – sometimes known as “living wills” – for each lender. The details of how big lenders would cope with a crisis will be published from 2019 and are intended to demonstrate to the public that they will no longer be on the hook when banks collapse.
“Just like when other business fails, losses arising from bank failure would be imposed on shareholders and investors. This protects the public from loss and incentivises banks to operate more prudently,” said Cunliffe.
As part of the plans, the industry needs £116bn of special funding – bonds that can be turned into equity during times of crisis. Some £112bn can be found by rejigging their existing borrowings, while an extra £4bn will need to be issued by institutions. Banks have been issuing these types of bonds in recent years; HSBC, for example, has issued £80bnin the past 18 months.
These bonds are known as MREL – minimum requirement for own funds and eligible liabilities – and are regarded as a crucial part of the toolkit that the Bank will be able to deploy if there is a re-run of the 2008 crisis.
The Bank has set out how banks can be “resolved” – rather than liquidated like a company – in what it is describing as its “purple book” for troubled institutions.
“Resolution policy has come a long way since 2007,” said Cunliffe, who added that banks needed to devise resolution plans now, before they run into trouble. “Resolution cannot be an afterthought. In order to have the option of resolution, when and if a bank fails, we need to ensure in advance that there are resources that can be bailed in and that other barriers to effective resolution have been removed.”
The threat of resolution was hung over bondholders in the Co-operative Bank. Eventually, they agreed to take losses on their bonds in return for a greater shareholding in the Manchester-based bank.
This article was written by Jill Treanor, for theguardian.com on Monday 2nd October 2017 15.03 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010