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Resolution reduces the risks to depositors, the financial system and to public finances that could arise due to the failure of a bank. By ensuring losses will fall on a failed bank’s investors, resolution can both reduce the risk of bank failures and limit their impact when they do occur.
To be effective, a resolution authority needs powers that can be applied without risk to financial stability and to the broader economy.
The Bank, as resolution authority, operates within a statutory framework that gives it legal powers to resolve banks in order to meet certain objectives.
Resolution takes place if a bank is ‘failing or likely to fail’ and it is not reasonably likely that action will be taken to change this. But resolution powers are only used if it is in the public interest.
To achieve the public objectives of resolution, the Bank has powers that affect the contractual rights of counterparties and investors in the failed firm, so the regime provides statutory safeguards for creditors and counterparties.
Shareholders and creditors must absorb losses before public funds can be used.
The Bank prepares for resolution by planning for the failure of every firm and co-ordinating with international counterparts.
To make sure a firm is resolvable the Bank undertakes a resolvability assessment to identify barriers to resolution.
If the Bank finds there are barriers to resolvability it has powers to direct a firm to remove these through changes to their operations or structure.
In the interests of transparency, the Bank will publish summaries of major UK firms’ resolution plans and its assessment of their effectiveness from 2019.