Bank Of England sets new rules designed to end bank bailouts

Bank Of England Purple Book

The Bank Of England has laid out strict new guidelines for the UK banking industry to deal with the consequences of any future financial crisis, avoiding the need for public funds to bail them out.

The Bank’s Purple Book outlines clearly what will happen if the 2008 financial crisis repeats itself and banks are in danger of collapsing.

‘Bail-in’

The banks have been ordered to set up £116 billion in special debt by 2022 so there can be a ‘bail-in’ instead of a ‘bail-out’, removing the need for taxpayers’ money to keep the banks afloat.

It is understood that the banks are already well advanced in raising the required cash.  The rest is likely to be raised by issuing new types of debt when current bonds mature between now and the deadline date.

Resolution process

The Purple Book also lays out a new resolution process by which the balance sheet of a bank in trouble would be stabilised over the weekend to ensure depositors’ cash is protected and to allow the retail side of the bank to continue as normal on Monday.

Shares in publicly traded banks would be suspended while the resolution process was conducted and there would be an independent valuation of the losses.  This process could take as long as three months.

Banks will also be asked to draw up ‘living wills’, detailing their proposed resolution plans on how they would cope with a future crisis.  Summaries of the plans will be published from 2019.

Too big to fail

Bank Of England governor Mark Carney said: “This policy is a significant milestone on the journey to end ‘too big to fail’ in the UK.  It will ensure that banks that provide essential economic functions hold sufficient resources to be resolved in an orderly way, without recourse to public funds.”

The resolution process is designed to allow a bank’s business to be wound up in an orderly manner.

Foreign banks

Foreign banks headquartered in London will have to find £4 billion of the £116 billion total to comply with the new rules.

The Bank’s deputy governor for financial stability, Sir Jon Cunliffe, said “International co-operation remains a critical component of ensuring banks with cross-border activities can be resolved.

“It is 10 years since the financial crisis began. Like many countries at that time, the UK did not have a regime for dealing with banks which failed.

Resolution

“Faced with potentially disastrous consequences governments, the UK’s included, felt they had no choice but to bail the banks out. Resolution aims to change this. It ensures banks can be allowed to fail in an orderly way. Just like when any other business fails, losses arising from bank failure would be imposed on shareholders and investors.”

Under the Purple Book Resolution plans the UK banking industry will be split into three, all of which will be allowed to fair if they cannot resolve their own problems.

Purple Book

Source: Bank Of England


A spokesman for the Bank said: “Moving from bail-out to bail-in:

  • Makes banks no longer too big to fail
  • Makes shareholders and investors pay for losses – not taxpayers
  • Makes sure risks banks takes are properly priced by investors who know they will suffer if things go wrong