Follow
Read the full blog below.
Share
When Silicon Valley Bank collapsed in March 2023, the Bank of England initially stated that it would place the UK bank subsidiary (SVB UK) into a bank insolvency procedure under the Banking Act 2009 (a specialised insolvency proceeding for failed banks). The initial assessment was that SVB UK did not have critical functions supporting the financial system, especially as it only held a limited volume of insured deposits.
However, it became clear that SVB UK's insolvency could have a significant impact on many UK companies, especially in the technology and life-sciences sector, if those companies could not access their deposits (including the uninsured part of those deposits). In the event, the Bank was able to use its powers under the special resolution regime in the Banking Act 2009 to transfer all SVB UK's shares to a buyer, after writing down SVB UK's other capital instruments, without the Bank having to provide additional funding.
However, SVB UK's failure highlighted the potential challenge of resolving a failing smaller bank where it is in the public interest to use resolution powers but where additional capital is needed to support the resolution, e.g., to absorb losses, to meet the bank's minimum levels of capital or to cover the costs of restructuring as part of a transfer of the bank or its business to a purchaser or a bridge entity.
Smaller banks are not generally subject to a minimum requirement for own funds and (subordinated) eligible liabilities (MREL) capable of being written down to recapitalise the bank in resolution.
Existing rules limit the ability of the Financial Services Compensation Scheme (FSCS) to provide significant resources to support a resolution. The FSCS's contribution to resolution must not exceed its net notional expenditure in hypothetical insolvency proceedings relating to the failing bank, i.e., the FSCS's likely payouts to insured depositors less its likely recovery in respect of those payouts in those proceedings (where the FSCS's claim would rank ahead of the claims of uninsured depositors and other creditors, meaning its net notional expenditure may be small or even zero).
The UK does not have a separate, segregated industry-funded financing arrangement to support bank resolutions. Banks pay a bank levy to the government and the Bank of England can ask the government to contribute to a resolution, but any contribution is subject to certain threshold conditions and is provided out of general public funds.
The new Act aims to fill this financing gap by requiring the FSCS to provide funds to the Bank of England upon request to recapitalise a failing bank (including a building society or PRA-authorised investment firm) or to meet other costs arising from the use of the resolution regime to manage the failure of a bank. The Act gives the Bank of England the flexibility to call on the FSCS to fund the resolution of any in-scope bank, regardless of the size of the bank and whether the bank is subject to a requirement to maintain additional MREL-eligible liabilities (the government resisted proposed amendments which would have limited this flexibility).
The Bank will be able to call on the FSCS for funds in connection with the sale or transfer of the failing bank to a commercial purchaser or a bridge entity using the resolution powers under the 2009 Act. Both the HM Treasury and PRA proposals for implementation of the new Act envisage that the powers can be used to support the sale or transfer of part of the bank (using a property transfer instrument under the 2009 Act) as well as the sale of the bank itself (using a share transfer instrument under that Act). The Bank may also be able to use the new powers in relation to the resolution of a holding company or other 'banking group company' of a failing bank.
However, the Bank cannot use the new powers when it is resolving a failed bank by bailing-in the bank's liabilities otherwise than in conjunction with a sale or transfer to a commercial purchaser or bridge entity. In addition, the new powers will not be available where the Bank uses resolution powers in relation to UK branches of non-UK banks. Credit unions fall outside the scope of the special resolution regime and thus outside the scope of the new Act even though their deposits are covered by the FSCS.
The new Act allows the FSCS to recover any funds provided to the Bank of England by imposing levies on the banking sector as a whole, including UK branches of non-UK banks but not credit unions. The FSCS would initially meet the cost through cash in hand or by borrowing and then recover the cost from the industry through additional levies over time (where the burden will mainly fall on larger banks). However, the Bank of England must refund the FSCS where the Bank's costs are lower than expected or the Bank recovers money that can be used to defray resolution costs (e.g., out of the purchase price from a sale of the bank by the Bank or by a bridge entity).
There is no overall cap on amount that the Bank of England can call for and no specific statutory requirement on the Bank to seek to minimise the costs to the industry. However, the Bank can only use its resolution powers where this is necessary having regard to the public interest in the advancement of one or more of the special resolution objectives. In addition, the FSCS recovery from the industry in any year will be subject to the annual cap on FSCS levies on deposit-takers (currently £1.5 billion per year).
To provide transparency, the Act requires the Bank to provide a report on any use of the new mechanism to the Chancellor of the Exchequer (which will be laid before Parliament) and to notify the chairs of relevant Parliamentary Committees. The Act gives the Bank of England a specific power to require the failed bank to issue shares in connection with a resolution to facilitate the use of funds provided by the FSCS. It also makes a number of minor and consequential legislative amendments to support the use of the mechanism.
The Act will enter into force on a day or days to be appointed by regulations.
In October 2024, HM Treasury published a draft update to its special resolution regime code of practice to explain how the Bank of England will take account of the costs to the FSCS (and the costs to the industry) when considering whether to use the new mechanism in its assessment of the resolution conditions and objectives.
The draft update also indicates that the Bank would not assume use of the new mechanism when setting a preferred resolution strategy of bail-in and the corresponding MREL for a large bank. The Bank would be expected to write down or otherwise expose to loss any MREL resources available for bail-in before using the new mechanism for a failing bank.
In March 2025, the PRA published CP4/25 Depositor Protection which included proposed rules detailing the FSCS powers to collect levies in respect of recapitalisation payments from members of the deposit guarantee scheme other than credit unions, i.e., UK banks, building societies and overseas banks with a deposit-taking UK branch (but not PRA-authorised investment firms or insurers).
HM Treasury and the PRA are expected to finalise the amendments to the code of practice and PRA rules shortly.
In 2023, the European Commission published legislative proposals to amend the EU's crisis management and deposit insurance framework to facilitate resolution authorities' access to funds of deposit guarantee schemes and segregated resolution financing mechanisms to support the resolution of smaller banks (e.g., by changing the ranking of deposits in the insolvency creditor hierarchy and counting contributions from deposit guarantee schemes towards the thresholds for calls on resolution financing arrangements). For more information, see our briefing, EU Reforms Bank Crisis Management and Deposit Insurance Regime (April 2023). However, these proposals are currently being negotiated by the European Parliament and the Council, which have each proposed significant amendments to the proposals.
Authors: Caroline Dawson, Chris Bates
