The FSAP did not conduct a formal and systematic assessment of the KAs, which represent the nonbinding international standard for the design of resolution regimes.
The authorities believe that the BoE has implicit power to depart from pari-passu treatment when using other stabilization powers subject to the No Creditor Worse Off (NCWO) rule.
Prepared by Oana Croitoru Nedelescu (MCM) and Elsie Addo Awadzi (LEG) as part of the 2016 FSAP Update of the U.K. The mission would like to thank the U.K. authorities, in particular the management and staff of the BoE’s Resolution Directorate, and market participants for their excellent cooperation and open dialogue.
Bank of America, Citibank, Goldman Sachs, JP Morgan, Morgan Stanley, State Street, Bank of New York Mellon, Deutsche Bank, Mitsubishi UFJ FG, Mizuho FG, Sumitomo Mitsui FG, Santander, Credit Suisse, and UBS.
Temporary emergency legislation was passed during the crisis through the Banking (Special Provisions) Act (2008) to carry out resolutions. Four institutions were resolved under these arrangements, namely, Northern Rock, Bradford & Bingley, and two U.K. subsidiaries of Icelandic banks (Landsbanki and Kaupthing).
Among the new additions to the SRR are the inclusion of mixed financial holding companies/groups to the scope of entities covered, the minimum requirement for own funds and eligible liabilities (MREL), further safeguards on the use of public support or resolution funds, the recognition of third-country resolution actions, and a general prohibition against automatic termination of financial contracts as a result only of the entry into resolution.
The FSAP team did not have access to RRPs, playbooks, COAGs, CMG meetings and records, etc., so the ability to draw conclusions on the actual resolvability of firms was limited.
The Bill has since been enacted as the Bank of England and Financial Services Act of 2016.
In addition to the general conditions for resolution, special conditions must be met for the use of the TPO. Before determining whether the special conditions have been met, HMT must consult the PRA, FCA, and the BoE.
Under Section 13 of the Banking Act (BA), HMT may place a bank under TPO and for that purpose make one or more share transfer orders in which the transferee is a nominee of HMT or a company wholly owned by HMT. The Code of Practice further provides for arm’s length management of institutions in TPO in line with the BA provisions.
Financial Services Act, 2012 Section 61 on “Treasury Power of directions” and paragraph of the HMT/BoE crisis management MoU. HMT is required to lay such directions before Parliament unless it would be against the public interest, in which case HMT must subsequently review the direction from time to time and lay it before Parliament once that publication is no longer against the public interest.
The BRRD requires EU member states to ensure the operational independence of prudential regulation and resolution functions. In this regard, the BoE Bill requires the BoE to make arrangements to comply with these requirements.
The Authorities’ Response Framework (ARF) aims at ensuring coordination among BOE, HMT, and FCA with the objective of keeping retail and wholesale markets open and functioning in the face of shocks with a high probability of having an impact on the financial sector. The framework has a high degree of operationalization setting clear triggers, decision-making processes, and individual responsibilities.
See the Investment Bank Special Administration Regulations (2011).
Prior to the BIP-SAR proceedings, the FCA reviews the client assets to ensure that they are protected and available for prompt return to clients during insolvency proceedings.
See Bloxham Report 2014 which makes recommendations intended to facilitate a more rapid and efficient return or transfer of client assets, and (where applicable) swifter payment of compensation in any future investment firm failures. https://www.gov.uk/government/publications/review-of-the-special-administration-regime-sar-forinvestment-banks-final-report.
In addition to Condition 1 and Condition 2, a further two conditions must be met to enable the use of the stabilization options. The BoE must determine (in consultation with the PRA, FCA, and HMT) that (i) the exercise of the stabilization powers is necessary having regard to the public interest in the advancement of one or more of the special resolution objectives and (ii) one or more of the special resolution objectives would not be met to the same extent by the winding up of the bank.
The rule of 8 percent of loss absorbency in resolution (before resolution funds may be used) applies to the use of any resolution tool.
Other stabilization tools have been used in practice, for example the use of transfer powers in the resolution of Dunfermline Building Society in 2009.
With the exception of specified unsecured claims including insured deposits.
See “Bank failure and bail-in: an introduction” by L. Chennells and V. Wingfield, BoE. Notably, the BoE could apply both an “open bank bail-in” and a “closed bank bail-in” which involves the establishment of a new operating entity (bridge). The U.S. approach is to carry out a “closed bank bail-in” which involves the transfer of the assets of the holding company to a bridge bank holding company controlled by the FDIC while the liabilities are left in the failed bank (consistent with powers available under the Title II of the Dodd-Frank Act).
The listing of these liabilities is suspended by the FCA.
Part 6 of the Financial Services (Banking Reform) Act 2013.
Under the BRRD, insured deposits are preferred to deposits of households and SME above the insurance limit, which in turn are preferred to other uninsured deposits (which rank equally with senior unsecured claims).
The U.K. authorities emphasized that the BoE has the implicit power to depart from pari passu in resolution when any resolution tool is used, not just bail-in, and that while it can only do so in certain defined exceptional circumstances if the bail-in tool is used, this restriction does not apply to other stabilization tools, so arguably the BoE has more scope to do this if these other tools are used.
Bank liquidators (under the BIP) and bank or special administrators (under the BAP or SAR), enjoy protections from court under ordinary insolvency law, and in any event are deemed to be agents of the institution in insolvency, with indemnity from the institution for any liabilities arising in the course of their work.
FSMA 2000 with further amendments. Also see BCP Assessment.
HMT published in December 2015, a consultation on a draft statutory instrument (Bank Recovery and Resolution Order 2016) to clarify and strengthen the U.K.’s transposition of the BRRD.
This has been a recommendation of the 2011 FSAP Update. The PIF gives effect to the common European Supervisory Review and Evaluation Process framework by directly mapping PIF scores to SREP scores (i.e., PIF stage ‘1’ = Overall SREP Assessment ‘1’, and so on).
Risks cover: external context, business risk, management and governance, risk management and controls, capital and liquidity.
The triggers are: an overall PIF score and pre-defined combinations of the overall PIF score and scores for individual PIF elements; material changes or anomalies identified in the monitoring of key financial and non-financial indicators under PIF revealing that the conditions for early intervention are met; and significant events indicating that the conditions for early intervention are met.
The PRA has transposed the EBA Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) EBA/GL/2014/13.
These are further detailed in EBA/GL/2015/07: http://www.eba.europa.eu/documents/10180/1156219/EBA-GL-2015-07_EN_GL+on+failing+or+likely+to+fail.pdf/9c8ac238-4882-4a08-a940-7bc6d76397b6.
Including idiosyncratic quantitative and qualitative factors (i.e.,, capital, liquidity, or any other requirement for continuing authorization, or failed implementation of recovery plan) and significant adverse developments in the macro-economic environment or in the market perception that would threaten the firm’s viability.
The BoE’s approach to resolution, October 2014.
BoE’s approach to setting a MREL, Consultation on a Proposed Policy Statement, December 2015.
See BA 2009, further amended. The BoE’s resolution objectives are to ensure the continuity of banking services and critical functions, protect and enhance the stability of the financial system, protect public funds, protect depositors, protect—where relevant—client assets, and avoid interfering in property rights in a manner inconsistent with the ECHR.
There is an explicit requirement against a presumption that the institution will receive any extraordinary public support, ELA, or any nonstandard liquidity assistance (Order No2. Art.60 (2.c)).
A “qualifying parent undertaking” is a parent holding company which has a subsidiary which is PRA/FCA authorized. Such entities are not regulated, but are required to make arrangements to facilitate the preparation of a group recovery plan and the exercise of resolution powers in relation to their subsidiaries and to themselves.
Branches of third-country (non-EEA) firms might be required to prepare recovery plans only when there are concerns related to the group plan (a wide set of information is received by the PRA regularly through the “Branch Returns”). Resolution plans could also be considered for foreign G-SIBs established in the United Kingdom if the BoE would not be satisfied with the home country’s plan.
The Bank Recovery and Resolution (No. 2) Order 2014 transposed the BRRD into national legislation with effect from January 2015, superseding the existing requirements for recovery plans.
Requirements are set in the Recovery Planning Part of the PRA Rule Book and SS18/13.
Draft EBA/RTS/2014/11 and EBA/RTS/2014/12 are to be adopted by the European Commission (http://www.eba.europa.eu/documents/10180/760167/Draft+RTS+on+content+of+recovery+plans.pdf and http://www.eba.europa.eu/documents/10180/760181/EBA-RTS-2014-12+Draft+RTS+on+assessment+of+recovery+plans.pdf).
EBA/RTS/2014/11; EBA/GL/2014/6; EBA/GL/2015/02.
See PRA SS18/13.
The PRA is required under the FSMA 2000, as amended by the Financial Services Act 2013, to make policy to implement the ring-fencing of core U.K. financial services and activities. The PRA will issue final rules in 2016. See PRA Consultation Paper CP37/15 on the Implementation of ring-fencing: prudential requirements, intra-group arrangements and the use of financial market infrastructures, October 2015.
Among these, the RFB should not depend on resources which are provided by a member of its group and which would cease to be available to the RFB in the event of the insolvency of the other member and should be able to continue to carry on core activities in the event of insolvency of other members of the group.
PRA Discussion Paper DP1/14 on “Ensuring Operational Continuity in Resolution,” October 2014.
The structure and content of the resolvability assessments follow the mandatory EBA’s RTS on Contents of Resolution Plans and Resolvability Assessments.
Section 3B of the BA requires that, before it can exercise the powers under section 3A of the BA to remove impediments to the exercise of stabilization powers, the BOE must publish a Statement of Policy setting out how it intends to use the powers. The Statement can be found at: http://www.bankofengland.co.uk/financialstability/Documents/resolution/barriersresolvabilitydec15.pdf.
This supports the PRA’s general objective to promote the safety and soundness of authorized institutions.
See BoE Consultation on a proposed Statement of Policy, “The BOE’s approach to setting an MREL,” December 2015. BoE may also set MREL for certain other group entities, including holding companies.
See FSB “Principles on Loss-absorbing and Recapitalization of G-SIBs in Resolution; Final TLAC Term Sheet,” November 2015.
The BoE estimates that the macroeconomic benefits of MREL (0.3-0.9 percent of GDP) will exceed the costs (0.04 percent of GDP) by a considerable margin, a finding which is in line with the FSB’s TLAC impact study.
The BoE has a degree of flexibility in setting the eligibility criteria for instruments to count as MREL as long as three conditions are fulfilled, i.e. the instrument must: a) be within the scope of bail-in, b) not be subject to preference in insolvency, and c) not contain features which are likely to make it difficult to bail-in or otherwise expose to loss in resolution in a manner that meets the statutory objectives of resolution. These conditions mean that the scope of the bail-in tool extends widely to include many liabilities that would not count as MREL.
See BOE CP44/15 “The minimum requirement for own funds and eligible liabilities (MREL)—buffers and threshold Conditions,” December 2015.
From January 2016, U.K. banks with retail deposits greater than GBP 50 billion implement a minimum leverage ratio requirement of 3 percent.
The holding company should not provide critical functions itself. When losses arise in an operating entity such that it is no longer viable, intragroup liabilities are written down or converted to equity, passing losses up to the holding company. If losses cannot be sufficiently absorbed by the resolution entity, the bail-in tool will apply (see BOE’s approach to setting an MREL, Consultation on a proposed Statement of Policy, December 2015).
BOE’s approach to setting MREL, December 2015.
Operational aspects related to the quantum and forms of internal TLAC, mechanisms for triggering, writing down, and converting internal TLAC are still debated in international fora. In the EU, the EBA is working on preparing guidance on the internal MREL implementation, while the FSB is also expected to issue similar guidelines for G-SIBs by the end of 2016.
For example, in regards to pre-positioning internal TLAC (established in the form of claims of the parent that are paid in or secured by high-quality and liquid collateral). Host countries may wish to preposition more internal TLAC, which may be less efficient for the home country from both a business and resolution perspective.
See BoE’s Approach to Resolution, October 2014.
Recognition of third-country resolution action may only be refused where (i) recognition would have an adverse effect on financial stability in the U.K. or other EEA state; (ii) the special resolution objectives are best realized by a U.K. resolution action in respect of a U.K. branch of a third-country bank; (iii) there would be discrimination by the third-party country resolution action, against EAA creditors (especially depositors) relative to third-country creditors; (iv) there would be material fiscal implications that would arise for the U.K. from recognizing such foreign resolution action; or (v) the foreign resolution action is unlawful under the ECHR.
The proposed rules would allow the BoE to transfer, in the specified limited circumstances, the “business of the branch,” including any assets and liabilities held locally, to an entity incorporated in the U.K., to which bail-in powers could be applied.
The PRA’s proposed rules requiring contractual stay provisions in financial contracts governed by third country law will be effective from June 1, 2016 in respect of financial arrangements with counterparties that are credit institutions or investment firms, and from January 1, 2017 in respect of financial arrangements with all other counterparties.
The scope of Art. 55 is rather broad and could potentially affect all financial and non-financial obligations of U.K. banks.
BRRD (Art. 88.2) provides for membership from all member countries with subsidiaries covered by consolidated supervision, significant branches, or where a parent of the institution subject to the BRRD is established. It also includes, apart from relevant resolution authorities, all relevant supervisory (competent) authorities, as well as representatives from the competent ministries and of the authorities responsible for the deposit guarantee schemes. EBA is also a participant.
For example, HSBC’s network spans over 72 countries and territories in Europe, Asia, the Middle East and Africa, North America and Latin America, serving 48 million customers.
FSB Guidance on Cooperation and Information Sharing with Host Authorities of Jurisdictions where a G-SIFI has a Systemic Presence that are Not Represented on its CMG, November 2015.
Resolution specific data needs are very granular (daily position forecasts for the resolution timeframe, legal entity information, currency liquidity positions, intraday liquidity requirements), while the balance sheet might be subject to heighten volatility (due to runs, rising asset encumbrance, restructuring, etc.).
When the bail-in tool is applied FSCS would contribute the amount by which covered deposits would have been written down in order to absorb the losses in the institution, had covered deposits been included within the scope of bail-in and been written down to the same extent as creditors with the same level of priority. When one or more resolution tools other than the bail-in tool is applied, the FSCS would contribute the amount of losses that covered depositors would have suffered, had covered depositors suffered losses in proportion to the losses suffered by creditors with the same level of priority.
Target level to be reached by 2024.
For resolution actions surrounding an institution, the resolution fund could be used up to the lower of 5 percent of total liabilities including own funds or the means available to the resolution fund and the amount that can be raised through ex-post contributions.
See TN on the “Review of the Bank of England’s Liquidity Provision Framework”. In principle, both short term repo and the Indexed Long Term Repo (ILTR) operations and the discount window facility (DWF) could be used by a solvent bank.
The BOE requires counterparties to be solvent to receive DWF funding and other conditions may be constraining to a firm in resolution. The DWF provides short term (30 day) sterling liquidity in the form of a collateral swap which may be rolled over at the discretion of the BOE. The cost of liquidity is on a sliding scale dependent on the amount borrowed and the nature of the collateral.
The ELA is considered to be all liquidity insurance provided outside of the published SMF (see the Technical Note covering the Liquidity Provision framework for details).
The ELA may in principle be provided to any institution, although the expectation is that it will be provided mainly to financial institutions. There is no statutory requirement for ELA recipients to be systemically important.
For example, location of assets, encumbrance, transferability, intraday liquidity management within the group, etc.
See FSB Consultative Document on the Guiding principles on the temporary funding needed to support the orderly resolution of a G-SIB, November 2015.
For example, levies raised in 2013/14 were about GBP 0.8 billion, compared to GBP 0.3 billion in 2012/13.
These are based on a historical approach regarding observed failures of small credit unions (i.e., about 10 small credit unions fail per year).
FSMA 2000, Section 213. The FSCS raises levies from the industry to cover expenses incurred or expected to be incurred, in paying compensation, borrowing, or insuring risks.
The NLF was established on 1 April 1968 by the National Loans Act 1968 to separate government revenue and expenditure (Consolidated Fund) on the one hand and government borrowing and lending on the other. There is no upper limit on borrowing from the NLF, although public finance constraints at the time would apply.
During the recent crisis, the FSCS paid out compensations in sum of GBP 23.6 billion. The funds required to cover the compensation costs were borrowed by the FSCS from HMT (initially borrowed from the BoE and subsequently refinanced by the HMT). At present, FSCS has an outstanding obligation of GBP 15.9 billion towards the HMT.
See Banking Reform Act 2013, Section 14, Article 224 ZA.
The FSCS provides protection for a wide range of industry sectors and its activities are not restricted to deposittaking institutions.
This is the EU DGS target to be achieved by January 1, 2024 by all EU-DGSs.
In line with the 2014 IADI Core Principles, IADI CP 9 Sources and Uses of Funds, EC 1 “Funding for the deposit insurance system is provided on an ex ante basis”. In IADI’s acceptance, ex-ante funding refers to the regular collection of premiums, with the aim of accumulating a fund to meet future obligations (e.g., reimbursing depositors) and cover the operational and related costs of the deposit insurer.
DGDS Article 10 Financing of DGSs. These requirements can be met through existing schemes of mandatory industry contributions, under the condition that an equivalent amount of the target level is made immediately available at the DGS’s request.
The authorities confirm that the protocol has been updated after the finalization of the FSAP Update.
See IADI “Funding of Deposit Insurance Systems”, Guidance Paper, May 2009.