The UK central bank works with financial institutions to minimize disruptions to the economy should the banks fail: a process called resolution.
The statement came after the BoE, prompted by the global financial crisis, conducted its first-ever assessment of top banks’ resolution plans.
“The Bank’s assessment of resolvability shows that even if a major UK bank were to require resolution, customers would be able to keep accessing their accounts and business services as normal,” the press release said.
“Shareholders and investors, not taxpayers will be first in line to bear the costs, overcoming the ‘too big to fail’ problem.”
During the 2007–08 financial crisis, the UK did not have a regime to resolve banks without the use of taxpayer money. As a result, failing banks were either allowed to collapse or bailed out with public money.
During the crisis, the UK government was forced to pay out £137 billion ($170 billion) of public money to support the banks.
Even with this support, the disruption to the financial system contributed to the recession that followed. This sparked a debate on bank resolvability tests.
In the BoE’s assessment of the resolution plans submitted by eight UK banks, the central bank identified “areas for further enhancement” for six banks and “shortcomings” for three.
The eight banks that took part in the assessment were HSBC, Standard Chartered, Lloyds, Barclays, Virgin Money, NatWest, Nationwide, and Santander.
BoE found shortcomings in the plans of Standard Chartered, Lloyds, and HSBC, as they were found not to have prepared adequately to absorb losses without risking public money. Without addressing these shortcomings, the three banks could unnecessarily complicate their ability to safely fail, the central bank said.
The banks that showed “areas for further enhancement” were Barclays, HSBC, Standard Chartered, Virgin Money, NatWest, and Nationwide. Santander was the only one of the eight banks that escaped unscathed from the BoE assessment.
The central bank will carry out its next resolvability assessment in 2024, reviewing the progress made by the banks every two years thereafter.
“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,” Dave Ramsden, deputy governor for markets and banking at the Bank of England, said in the press release.
“Safely resolving a large bank will always be a complex challenge so it’s important that both we and the major banks continue to prioritize work on this issue.”
