The Bank of England will fire bosses of collapsing banks and force investors to take losses under plans announced on Thursday intended to avoid another taxpayer bailout of the banking system.
Threadneedle Street intends to conduct any rescue operation over 48 hours – most likely over a weekend – and would install new management at the failed business.
In an attempt to avoid a repeat the £45bn bailout of Royal Bank of Scotland, the Bank of England would require shareholders and bondholders to take the losses rather than asking taxpayers for support.
The central bank would have “temporary access to public funds” only in some circumstances. These would include a loan to the financial services compensation scheme, which protects up to £85,000 of individual savings in a bank account, or if losses at the bank had reached 8% of its balance sheet. RBS would not have met these terms because it received £45bn from taxpayers when its balance sheet was £2.4bn at the time of collapse, well below the 8% limit.
The decision to use public money would “only be available as a last resort, where a serious threat to financial stability cannot be avoided by other measures or where necessary to protect existing public funds,” the Bank of England said.
The plans have been drawn up because the 2008 banking crisis demonstrated that usual insolvency practices used for companies did not work for banks because of their deposit holders – savers – and bondholders.
Instead it has devised a “resolution” regime for collapsing banks which will also require them to be structured in a way that avoids the complex legal structure of the past.
The introduction of the ringfence between high street banks and investment banks – recommended by Sir John Vickers – is part of this simplification.
“Firms that fall within scope of the UK regime need to be resolvable,” said Sir John Cunliffe, deputy governor of the Bank.
The aim is that the “firm stays open for business, to allow for access to protected deposits to be maintained and for payments to continue to flow, to ensure that the risk of disorderly fire sales of the firm’s assets or termination of its derivatives contracts is minimised,” Cunliffe said.
The Bank of England will be able to turn to a resolution fund of £2.6bn, worth 1% of the UK’s deposits.
