David Ramsden: The weekend starts here
Speech by Sir David Ramsden, Deputy Governor for Markets and Banking of the Bank
of England, at the Deloitte Academy, London, 15 December 2023.
* * *
Good morning. It's a great pleasure to be able to speak to you today on the subject of
resolution. Thank you to the Deloitte Academy for hosting.
A key lesson I took from working in HM Treasury during the global financial crisis is that
a credible resolution regime for banks is a cornerstone of financial stability and
essential to protect the public purse. Without resolution, there were only two choices in
that crisis: let banks enter insolvency and cause huge disruption, or bail them out with
taxpayers' money. The UK chose the second option, safeguarding financial stability in
the process, but at a cost of £137 billion.1
Dealing with the issue of banks that were 'too big to fail' has been the key achievement
of the post crisis reforms to financial regulation and supervision, in the UK and globally.
The Financial Stability Board's (FSB) evaluation of the effects of too big to fail reforms
Opens in a new window showed significant net benefits for society resulting from the
reforms; and market-based measures of systemic risk have fallen.
Credible resolution is a cornerstone of those reforms. In the UK we now have a range of
tools in the resolution toolkit, in the form of the legal powers which are available to be
used in the event of a failure of a financial institution. The UK's special resolution
regime for banks and building societies, which gives us the legal powers under the
Banking Act 2009, is well established and aligned with international standards for
effective resolution regimesOpens in a new window, as set out by the FSB. As the UK's
resolution authority the Bank has capabilities to deal with failing firms according to the
circumstances. And we have demonstrated in 2023 our readiness and willingness to
act, as quickly as necessary, to apply those powers.
When I gave my first speech on resolution back in early 2021 it was almost nine years
since the Bank last did a resolution. It is nine months since our resolution of Silicon
Valley Bank UK (SVBUK); as well as of actions by the Swiss authorities to respond to
the failure of Credit Suisse. In resolving SVBUK over a single weekend, we were able to
successfully deploy the available tools in a way which protected the UK banking
system, reduced systemic risk, supported public and investor confidence and avoided
significant impacts that would otherwise have been caused to a key sector for the UK
economy.
In October the FSB published its report into the preliminary lessons learntOpens in a
new window from the 2023 bank failures. In the case of Credit Suisse the FSB conclude
that the Swiss authorities were ready to deliver a single point of entry (SPE) resolution
of a global systemically important bank (G-SIB) but also identify areas for further work.
The resolution regime can never be 'done'. The Bank has always been a leading voice
in the FSB, and I support the conclusions and lessons identified in the report.
Today I want to give my perspective on those two March weekends, in the context of
my experience of the last three years as the Deputy Governor with responsibility for
resolution, as well as my membership of both the Financial Policy Committee and
Prudential Regulation Committee.
It's 60 years since that classic TV show, 'Ready Steady Go!' first aired on UK TV, with
its catchphrase, 'the weekend starts here'. And that sense of being at the starting line,
on a Friday, is an apt description of how those two weekends back in March felt.
2
My remarks today apply to the resolution and resolvability of banks and I will frame my
remarks around learnings under three key headings and with two common themes of
feasibility and credibility.
The first heading is the importance of operational readiness, in particular that the
credibility of our framework is reinforced by retaining optionality. Each resolution will be
different in terms of the nature of the failing firm and the context in which it is failing,
including the time available. And retaining optionality on the outcome will maximise the
chances that resolving it will be feasible.
The second heading relates to enhancing readiness. Because of the nature of
resolution we should be humble in recognising that there will always be lessons to learn
from putting the regime into practice and so we should be ready to improve our
approach. From the experience of 2023 two particular enhancements come to mind;
enhancing our toolkit and feasibility to resolve smaller firms, where there is a greater
need to provide continuity of access to deposits. And also enhancing our readiness for
bail-in, including working with cross border authorities.
My third heading relates to the process of ensuring resolvability. As the UK's resolution
authority we have a role to play but the primary responsibility rests with the banks
themselves to ensure and maintain their resolvability, whatever their size, from the
smallest firms where a simple strategy will suffice to the largest cross-border G-SIBs
where the strategy will be more complex.
Transparency of approach is important to so much of what the Bank does in support of
its mission to deliver monetary and financial stability. And transparency is also key to
the credibility and practical feasibility of the resolution regime. While SVBUK may have
been the first resolution for a while, the existence of the regime, the emphasis we put
on it, and the market discipline it brings, has helped to deliver better outcomes for UK
financial stability. We have incorporated our learnings including from 2023's events into
an updated Purple Book , which we are publishing today and which sets out our
approach to resolution.
Operational readiness
Operational readiness is fundamental to both feasibility and credibility - it means having
the necessary legal framework in place to act, preparing firms to ensure they have
removed barriers to resolvability ahead of time and ensuring our own and other
authorities' readiness to act. As part of credibility, you must also have capabilities - the
optionality to use the tools at your disposal flexibly to best respond to the circumstances
you face.
There are three broad strategies we use to plan in advance for resolution: bail-in,
transfer to a private sector purchaser - both of which we effect through use of powers -
and using the bank insolvency procedure or BIP. Bank3 Transfer can also be to a
owned temporary bridge bank, pending an onward sale back to private ownership.
The statutory tools which underpin these strategies are very powerful, allowing the
authorities to act at real pace, interfere with property rights and override other
processes such as shareholder approvals for a sale. Ahead of resolution they give us
powers to direct firms to remove known impediments to resolvability.
The updated Purple Book sets out how the three preferred resolution strategies would
be implemented. Whilst we might want to be able to predict the path of each resolution
with certainty, we cannot, no more than we can predict what might lead to a bank
failure. So the Purple Book can only serve as a guide to how the Bank might use the
resolution powers to seek to balance the objectives for the special resolution regime.
The actual use of powers must respond to the particular facts and circumstances of
each case. The execution of the resolution might not always be the same as the
preferred resolution strategy that had been originally envisaged. As we found in
SVBUK, circumstances drive how we act. But for the largest firms, bail-in is always
going to be the key tool.
In the UK, we have stated and restated that in the context of a bail-in AT1 instruments
rank ahead of equity and behind Tier 2 in the creditor hierarchy. Holders of such
instruments should expect to be exposed to losses in resolution or insolvency in the
order of their positions in this hierarchy.
In practice, all this means we as the resolution authority need the operational ability to
plan and prepare for the execution of multiple resolution strategies in parallel, as
contingency planning for the failure of a firm unfolds and as the weekend itself unfolds.
That optionality helps to ensure we are able to best meet our statutory resolution
objectives, even when time is short as it can be over a resolution weekend.
For firms, this is also why our policy framework asks them to achieve outcomes in
resolution. We need firms to have flexible capabilities to support their own resolvability
and facilitate actions by the authorities - not systems and processes that cannot adapt.
This flexibility in times of crisis or when contingency planning, allows us to respond
more effectively to the specific circumstances; and deliver a better outcome for
depositors and other customers of the bank in resolution, and for overall UK financial
stability.
Silicon Valley Bank UK
th
Silicon Valley Bank or SVB, was the 16 biggest bank in the US when it failed due to a
combination of sharp and unusually rapid increases in depositor withdrawals and losses
on sales of long-dated bonds where the interest risk was not hedged.
The deposit run quickly spread to the UK subsidiary, SVBUK. On Friday 10 March,
SVBUK saw an extraordinarily rapid run on deposits with outflows of £2.9 billion - 30%
of its total deposit base. That Friday afternoon, US authorities informed the Bank that
SVB would be put into receivership. Later on the Friday evening, following consultation
with HMT, the PRA and FCA, we announced that absent any meaningful further
information, the Bank intended to put SVBUK into a BIP, in line with the planned
resolution strategy for SVBUK.
We were clear that a BIP, executed over the weekend, was a viable solution that could
be delivered. Our Friday evening statement was additionally a way of signalling to the
market that the firm was up for sale. Over the weekend, several parties expressed a
potential interest in purchasing all or part of SVBUK. By Saturday evening, it became
clear that selling SVBUK to a private sector purchaser could be a viable option.
A sale will almost always be a better outcome than putting a firm into a BIP for the
authorities and for the firm, because it provides continuity of banking services for a
bank's customers. However, there was no guarantee of a sale - both from the
perspective of finding a buyer and from the perspective of executing that sale within
such a short timeframe. The Bank therefore continued to prepare for other outcomes in
parallel.
The Bank and the other authorities determined before markets opened on Monday that
HSBC's bid would best advance the resolution objectives, and the sale was announced
as markets opened at 7am.
Throughout, the Bank coordinated effectively with the US authorities to ensure the
implementation of the resolution of SVBUK. Together these actions ensured that all
deposits, including those not covered by the Financial Services Compensation Scheme,
remained safe, secure, and importantly, accessible. Through this, the authorities
maintained public confidence in the stability of the UK financial system.
In the resolution of SVBUK, public funds were not exposed to loss. Instead bank capital,
equity, AT1 and Tier 2 instruments issued by the firm, were fully written down to bear
loss as intended in a resolution. This is the intended approach of the bail-in mechanism,
underlining the important role bank capital plays in a resolution as well as in going
concern. And it worked.
Credit Suisse
Apparently the catchphrase used on Ready Steady Go!, 'the weekend starts here', was
first coined on a Tuesday in 1963Opens in a new window. And it was the publication of
Credit Suisse's 2022 accounts on Tuesday 14 March which was the specific trigger,
against the backdrop of febrile markets, which intensified doubts about the viability of
Credit Suisse's business model, which had built up over a much longer period.
During the subsequent weekend the Swiss authorities acted in relation to Credit Suisse,
ultimately leading to it being taken over by UBSOpens in a new window . This
transaction took place outside the formal resolution regime, but had elements common
to a resolution and was designed to prevent losses accruing to public funds. Although
equity was not wiped out around CHF16 billion of AT1 capital instruments were written
downOpens in a new window. That sounds economically very similar to a bail-in of
those bonds.
The failure was the most significant since the fall of Lehman Brothers in 2008, and was,
unsurprisingly, headline news around the world. But notably these resolution-like
actions did not lead to financial instability. As my colleague Sam Woods noted in his
recent Mansion House speech , the actions did not lead to a sustained tightening in
international bank funding costs; and the today market for AT1 issuance is open and is
functioning.
Nor did we see any contagion into the UK financial system. Credit Suisse had
significant operations in the UK. Had Credit Suisse entered a Swiss authority-led
resolution, the Bank was well prepared to recognise those actions in UK law and
support the Swiss home supervisor, FINMA, to deliver an orderly SPE resolution.
Avoiding the disruption that occurred, for example when Lehman Brothers failed.
The relevant international authorities, including the Bank, had resolution plans in place,
ready to be implemented. This was only possible due to close engagement both
formally, through the relevant Crisis Management Group (CMG), and informally over
many months and throughout the weeks of resolution planning preparations. This
experience served to further reinforce the importance of proactive cross-border
engagement, and having frameworks in place that give authorities a range of credible
options to resolve firms in the most effective way. This is a real benefit of the
international development of the resolution regime.
Enhancing readiness
Whilst actual resolutions are rare, our pro-active approach to planning means we step
up contingency planning for the resolution of individual firms each year. Although there
may be differing levels of proximity to failure, each case provides a chance to reflect
and improve how the Bank might use resolution tools in a live case. We also invest
heavily in our preparedness to deliver resolutions, undertaking testing and internal
exercising across a broad range of scenarios, and with the other domestic financial
authorities.
Readiness for small bank resolution
One of the lessons we have taken from SVBUK is that even for smaller banks, there
may be circumstances where the public interest is better met by the stabilisation tools
such as transfer, rather than a BIP. For example, while an individual institution may not
be considered systemic, if a risk is common - or perceived to be common - among
similar institutions, the collective impact through contagion can pose a more material
risk to financial stability.
Larger banks are required to hold a certain amount of their own equity and debt -
MREL - that can be drawn on to recapitalise them when they fail, in order to reduce the
risk of contagion. But we know it is harder for smaller firms, because of their size, to
4
issue marketable debt securities that can count as eligible liabilities for MREL in the
way that larger banks can.
The Bank has been working closely with HM Treasury to develop an option to maintain
continuity of access to deposits in the resolution of smaller firms, in a way that
minimises the risk to public funds. The aim of this work is to help provide more flexibility
when addressing the failure of smaller banks, where it is in the public interest to use
resolution tools, and without public funds bearing the ultimate costs. We look forward to
engaging in the debate on how this is achieved once proposals are brought forward.
We are also taking steps to minimise the risk of disruption from firm failures where
modified insolvency is the appropriate option. For small firms that may be placed into a
BIP, retail depositors are protected up to £85,000Opens in a new window - more in
certain circumstances. We've been working with the FSCS and PRA to improve
depositors' outcomes in a BIP by building the capability to pay out more quickly
electronically as an alternative to a cheque in the post. Once in place, our focus will be
on supporting depositor transition to new accounts and financial institutions.
Readiness for large bank resolution, including cross-border cooperation
Given London is a global financial centre, engagement with international authorities is
also vital for our resolution readiness, particularly for larger banks. The role of CMGs
has been invaluable in developing a coordinated approach and response to our largest
international firms. The Bank is a member of over 20 different CMGs, whether as home
authority or host to a major international firm. That latter group included the Credit
Suisse CMG as already discussed.
There is little doubt in my mind that these discussions ultimately strengthened our
response to the turbulence back in March. CMGs together with constructive dialogue
with our stakeholders, for example via the Trilateral Principal Level Exercise (TPLE)
Opens in a new window with US and EU authorities, have built a deep understanding of
our respective resolution frameworks, and set a clear path for future work. I very much
support the FSB's guidanceOpens in a new window that CMGs should focus more on
testing and exercising going forward. As well as that authorities should extend their
communication and coordination efforts outside of the core CMG.
A common theme in international discussions is the need to continue enhancing
crossborder capabilities to deliver a bail-in for our largest firms. In its report on this year's
bank failuresOpens in a new window, the FSB identified bail-in execution as an area for
jurisdictions to continue to prioritise, including issues related to national securities laws
and exchange requirements. We will do so as we continue to develop our own
operational approach to bail-in which we published in 2021, together with detailed
template legal instruments. It is important that stakeholders - firms, shareholders,
investors, other market participants and other authorities - understand and are
prepared for how we might use our resolution tools.
We have also set out more guidance on the powers we have to recognise in UK law
resolution actions by other authorities, including the kinds of information we need to
make our decisions. We worked closely with FINMA in the lead up to the Credit Suisse
actions to be ready to act if needed. And we previously used those recognition powers
in relation to the bail-in of certain creditors of PrivatBank by the National Bank of
Ukraine.
Another important aspect of readiness is liquidity, and our readiness to provide liquidity
to firms in stress; a key finding from the FSB's report into the failures in March. I gave a
speech last month about how liquidity risks have evolved and the Bank's response to
this. As part of a credible resolution regime, we need the ability to offer firms emergency
liquidity. Under the Resolution Liquidity Framework, the Bank has put in place a flexible
approach for the provision of liquidity in order to support a resolution as required, at the
necessary scale and for a sufficient period of time to allow the firm to transition back to
market-based funding.
But the execution of any resolution, especially bail-in for larger banks, involves many
more contributors beyond public authorities, such as market infrastructures,
independent valuers, and restructuring experts. Readiness can be enhanced by
working with these counterparts to better understand our collective ability to overcome
operational barriers.
We have a Resolution Procurement Framework so we can appoint advisors quickly to
support work on resolution contingency planning including for valuations, insolvency
and restructuring and corporate finance transactions. We plan to continue developing
our readiness for bail-in through engagement with FMIs, leveraging their knowledge
and infrastructure.
Ensuring resolvability
Much of what I've said so far has focused on the role of the authorities. But firms must
play their part to be ready for prompt resolution actions, and take ownership of their
own resolvability. We assess banks' resolvability on an ongoing basis using the
Resolvability Assessment Framework (RAF). It is the lens through which we judge a
firm's resolvability, to ensure a firm can financially and operationally support itself
through resolution.
Given the speed at which resolution events can occur, and indeed have occurred, firms
also need to ensure they can react quickly and flexibility.
The benefits of resolution are not only seen when firms actually fail, which despite the
experience of this year thankfully remains infrequent. Resolution must be seen as a
credible alternative or backstop when a firm is in stress, focusing the minds of the firm's
management to find a solution by itself, such as a capital raise, accessing and
managing liquidity, a liability management exercise or a restructuring. More broadly,
credible resolution can also inform the actions of investors and other stakeholders, if
they understand the extent and purpose of the powers. This promotes market discipline.
The RAF is structured so different firms can think about how their individual business
works, and what capabilities they need to achieve the three resolvability outcomes:
having adequate financial resources; being able to continue business through resolution
and restructuring; and effective communication and coordination.
Some of the capabilities are similar to those they would use to execute corporate
finance transactions, such as debt-for-equity swaps or transitional service
arrangements in M&A transactions. But the RAF places greater emphasis on readiness
and flexibility, given the need for resolution to be implemented quickly, which will of
course will be more useful if stress arises quickly.
The RAF is a key vehicle through which we incentivise firms to take accountability for,
and assure themselves of, their resolvability. We publicly communicated the findings
from our resolvability assessment for the major UK firms for the first time in 2022. We
found those firms could enter resolution safely - remaining open and continuing to
provide vital banking services to the economy, and with shareholders and investors, not
taxpayers, in line to bear the costs. That represents a major step forward in overcoming
the problem of too big to fail.
Major firms must also publish their own RAF disclosures, including to demonstrate
senior management and board level accountability. The credibility of the resolution
regime is reinforced by the transparency provided by these publications.
The Bank is repeating its resolvability assessment of the major UK firms at the moment,
and we will publish our findings in summer 2024. This will judge the progress made
since the first assessment, and will monitor firms' overall progress in maintaining and
enhancing their resolvability. We are also undertaking a more detailed assessment on
the outcomes of adequate financial resources, delivering on our commitment to
undertake more detailed work to assess firms' preparations for resolution and drawing
on our experience of planning to execute a resolution. We are finding this process
valuable and plan to continue to develop our approach to testing firms' capabilities in
future RAF cycles.
The RAF is inherently flexible, and there is no one-size-fits-all approach to resolvability.
RAF policies also apply to certain smaller and simpler firms who are expected to meet
the resolvability outcomes on an ongoing basis - but in a way that reflects their size,
complexity and interconnectedness. Simpler firms may therefore develop
correspondingly simpler capabilities.
But the ability for a firm to fail or exit the market in an orderly way includes the smallest
firms, where having accurate, complete, and up to date Single Customer ViewOpens in
a new window files ensures protected depositors can be paid out quickly, including
electronically.
Firms in scope of the RAF should meet these outcomes on an ongoing basis.
Maintaining a credible and effective resolution regime is a continuous process, and we
need to respond as the financial system and regulatory landscape changes. Over time,
our assessments will evolve to account for those changes, including to delve deeper
into specific resolvability outcomes.
Conclusion
The Bank's Financial Policy Committee, which I'm a member of, reaffirmed last week
that the UK banking system is well capitalised and has high levels of liquidity. Those are
key elements in maintaining financial stability. But the overall risk environment remains
challenging.
That doesn't mean I think a failure is imminent; the next real resolution weekend doesn't
start here. But as and when we are faced with another resolution we must be humble
and recognise it is impossible to predict how it will unfold in real time. No matter how
much preparation is done, a resolution is always going to be complex to carry out and is
almost certainly going to be messy to execute.
In 2023 we have seen the successful application of key elements of the resolution
toolkit including stabilisation and write-down powers, without using public funds. But
given our experience this year we must continue to invest in our toolkit and in places
enhance it to ensure we have the optionality we need so that the regime remains
credible. In that way we can ensure that progress on overcoming too big to fail
continues for the largest banks. While ensuring that smaller banks don't become a new
source of systemic risk.
This year has been a reminder that we may need to use our powers at any time. In
future we may not even have an actual weekend to deliver the resolution. To safeguard
feasibility we and the firms we supervise need to maintain a high degree of operational
readiness and continue to ensure resolvability as a foundation of financial stability.
With thanks to Freya Ball, Mary Bentley, Tom Carr, Rupal Patel, Amandeep Rehlon,
Amy Sinclair and Ruth Smith for their assistance in preparing these remarks and to
Andrew Bailey, Sarah Breeden, Ali Moussavi, Rob Zammit and many other colleagues
for their helpful comments.
1
The House of Commons Library Research Briefing Bank rescues of 2007-2009:
outcomes and costsOpens in a new window summarises the actions that were taken.
2
The resolution regime for central counterparties was enhanced earlier this year
through the Financial Services and Markets Act. Like the bank resolution regime, it is
now also in line with the international standards set out by the FSB in the Key
Attributes. HM Treasury recently consulted on proposals for an Insurer resolution regime
Opens in a new window .
3
The building society insolvency procedure applies to building societies.
4
Minimum requirement for own funds and eligible liabilities.