29 July 2009

Bank of England Special Resolution Regime for failing banks in an international context

The report concludes that the SRR is at the forefront of best practice internationally. This explains why other countries look to the SRR as they seek to reform their own approaches.

The report concludes that the SRR is at the forefront of best practice internationally. This explains why other countries look to the SRR, as they seek to reform their own approaches.

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The paper shows that the new Special Resolution regime (SRR) draws on and in several respects goes beyond best practice internationally. This reflects:

 

·         its design, which has been influenced by the approach of other countries with special regimes, notably the United States, and is intended to be fit for purpose in modern financial markets;

·         the fact that, unlike most other countries’ regimes, it is based on a set of statutory objectives;

·         the ability to trigger the regime before a bank is balance sheet insolvent, which is not available in some other countries but which increases the prospects of an orderly resolution preserving franchise value;

·         linked to this, an approach designed to reduce the generic risk of regulatory forbearance that applies to all such regimes but is not addressed by most of them;

·         a more flexible and broader set of tools to resolve failing banks than is available in most other countries;

·         the ability to split a failing bank between its good and bad parts, a particularly important feature given the current financial crisis, in which many banks have toxic assets which no one wants to buy;

·         a more explicit, comprehensive and transparent set of safeguards to protect shareholders, creditors and counterparties of a failing bank than any other country, while still preserving the overriding ability to resolve a failing bank in the public interest; and

·         more developed provisions facilitating the resolution of banking groups than in most other SRRs.

 

Much of the public debate leading up to the adoption of the UK SRR was not closely informed by the approaches of other countries to resolving failing banks. This paper therefore seeks to close this gap by placing the SRR in an international context. It concludes that the SRR is at the forefront of best practice internationally. This perhaps explains why some other countries are looking at the United Kingdom’s SRR closely as they seek to reform their own approaches. Greater harmonisation of approaches may help to address some of the difficulties of resolving cross-border banks and other complex financial institutions

 

Full report

© Bank of England