The UK's progress on resolvability
Speech given by
Dave Ramsden, Deputy Governor for Markets and Banking
At the Institute of Chartered Accountants in England and Wales
26 February 2021
With thanks to Anika Duggal and Amy Lee for their assistance in preparing these remarks, and to
Bank colleagues including Andrew Bailey, Adam Cull, Andrew Hewitt, Sasha Mills, Michael Salib,
Ruth Smith, Tom Smith and Sam Woods for their many helpful comments and suggestions.
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Thank you for inviting me to come to speak at the virtual ICAEW. I can't think of a better venue for my first
speech on resolution - particularly because of the vital role which the accountancy profession plays in some
of our key resolvability judgements and safeguards, which fundamentally underpin the credibility of the
regime.
The Bank of England is the UK's Resolution Authority; within the Bank I took on Deputy Governor level
responsibility for resolution a year ago. It has been a fascinating time for me to take on this important
responsibility, allowing me to contribute to the ongoing shaping of our resolution regime as it develops
towards its immediate goal.
ending by making sure
That goal, a strategic goal for the Bank, is 'too big to fail' the firms we supervise can
fail in an orderly way no matter their size. Put more practically we committed to Parliament that major UK
PRA's general objective
banks should be resolvable by 20221. That goal is central to the to promote the
safety and soundness of the firms we supervise, as well as to the Bank's financial stability objective of
ensuring that the UK financial system can serve UK households and businesses in bad times as well as
good.
I want to use my speech today to set out my thinking on where our resolution framework has got to as we
move closer to our 2022 commitment, and convey three key messages relating to that commitment. First,
that progress towards the commitment reflects a regime which is built on robust and coherent principles:
credibility, transparency, flexibility and proportionality. Second, how we apply these principles to the
operationalisation of our regime - specifically, through the Resolvability Assessment Framework which is key
to ensuring our resolvability regime is 'fit and ready' -
fit for purpose and ready for use: and where there
have been some important developments this week which I want to update you on. And third, that
resolvability is not a binary concept; even once the 2022 commitment is fulfilled the work doesn't
stop. 2022
will see us pass the important milestone for the resolvability of major banks - but the work to maintain and
improve the resolvability of firms within the UK resolution regime will continue.
Credibility and transparency in the making
UK banks' resolvability, or lack of it,
There are many previous milestones in the history of very few of them
positive. With the 2021 Budget just around the corner I want to take you back to the April 2009 Budget, just
under twelve years ago, when, in my role as Chief Economic Adviser to the Treasury, I had to advise on the
consequences of the deficiencies in the global and UK pre-crisis regulatory framework. By spring 2009, what
had started in the summer of 2007 as a liquidity crisis in global financial markets turned into a solvency crisis
for a number of global and UK firms, resulting in the UK government bailing out banks and injecting public
1
Bank of England's written evidence submitted to the TSC'S 2017 capital inquiry
For more information see the
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money to the tune of £137bn to stabilise the financial sector2. The contingent liabilities that the UK
government had taken on to support bank funding or to underpin some major banks' balance sheets dwarfed
that sum.
At that time, we saw the very serious consequences of the lack of appropriate focus on the safety and
soundness of individual banks and the financial system as a whole, including the absence of a credible
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resolution regime by which I mean a regime that sets out our aims, to manage the orderly failure of
institutions, accompanied with the tools to deliver them. As a result of these various failings globally and
domestically the financial system acted as an amplifier, intensifying the UK economic downturn at great
economic and fiscal cost. Budget 2009 detailed the largest fall in UK GDP since the Second World War and
forecast a near doubling in the fiscal debt ratio in just four years, from 36% of GDP in 2006-07 to 69% in
economic and fiscal position,
2010-11. In order to underpin the UK's the Government took the unusual step,
at least in public finance terms as I am sure this expert audience would appreciate, of making, what
amounted to, a provision of up to £50bn, or 31⁄2% of GDP, for expected losses on its many and various
interventions in the UK banking system.3
Clearly, the options authorities had to manage the failure of financial firms were insufficient, which led to
some difficult and disruptive choices. The lack of a credible resolution framework is self-evident in the scale
of taxpayer bailout. Of course, in the absence of the counterfactual, it is impossible to precisely quantify the
impact of the lack of a credible regime. But I agree with my colleague, Jon Cunliffe, that the negative impact
was likely to be considerable.4
Transparency around what is likely to happen if a bank fails is a fundamental complement to a credible
relied upon it being
resolution regime. Authorities previously 'constructively ambiguous' as to whether or not
bank. This was thought of as 'constructive'
they would bail out a failing because it was meant to encourage
banks not to rely on bailouts, while at the same time not tying governments' hands so that they could not act
in a crisis. There was very little ex-ante transparency about the path the authorities would follow in a
resolution. That led to a hidden subsidy in market pricing of the shares for our largest banks, driven by the
market's belief that the largest banks were 'too big to fail', and would be rescued by governments, as
proved
to be the case in the UK.
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The importance of having transparency with a resolution regime is well recognised globally and was
highlighted in the 2020 FSB Consultation Report evaluating the impact of too-big-to-fail reforms on G-SIBs5.
2
The House of Commons Library Research Briefing Bank rescues of 2007-09: outcomes and cost summarises the actions that were
taken.
3
sets out more detail of these calculations. Table C.1 in the OBR's
Box 2.3 of the April 2009 Budget document November 2020
Economic and Financial Outlook gives updated estimates of the net effect on the public finances.
4
As Jon put it in his 2017 speech Ten Years On: Lessons from Northern Rock - "Had the authorities had better, less disruptive options
available over the previous 18 months to deal with a series of failing institutions, the disruptive, explosive nature of the crisis might well
have been minimised. There would still have been very major losses and failures. But we would, in my view, have had a much better
chance of a more orderly, less damaging correction of an overleveraged banking system."
5
Available here.
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The FSB highlighted that greater transparency would support the credibility of reforms already made, and
that it would continue to encourage appropriate levels of disclosures on resolvability from authorities.
The Bank led the way on efforts to increase transparency in the publication of its Approach to Resolution in
resolution regime is in firms' interests, further increasing the resilience of
2014.6 A credible and transparent
the UK banking system by reducing systemic risk and giving the public and investors confidence that any
failure, should it occur, will be orderly. To somewhat quantify this benefit: in December 2019 the Financial
Policy Committee (FPC), of which I am a member, reaffirmed its 2015 judgement that effective resolution
arrangements reduce the appropriate level of Tier 1 capital requirements by about 5 percentage points for
the UK banking system.7
The benefit is quantifiable in market pricing too. The hidden subsidies given to the largest banks have been
reduced; estimates of the value of these implicit subsidies to UK bank shareholders fell from c. £45bn in
2010 to less than c. £5bn at end-2016. This was also corroborated in the FSB Consultation Report, which
noted that the funding cost advantages enjoyed by SIBs are negatively correlated with the degree to which
resolution reforms have been implemented. Requiring the largest banks in the UK to maintain additional loss
absorbing capacity has made a significant contribution to remove these distortions. Removing this hidden
subsidy has made the financial system more transparent, and banking sector competition more effective.
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The risk of unexpected events such as the Covid pandemic is the very point of having strong prudential
standards and a credible resolution regime, and underlines the need for the financial system and those
active in it to be capable of responding successfully to maintain financial stability. The significant progress
the UK has made in strengthening its prudential standards and in developing and implementing a resolution
regime can be seen clearly from the response to the current Covid pandemic. The major UK banks and
to the pandemic, and the FPC's
building societies have so far proved resilient reverse stress tests have
shown that banks are can withstand a wide range of scenarios.8 In the Global Financial Crisis the banking
system amplified the shock. In the current Covid crisis, the banking system has not just been resilient to the
shock but, supported by the authorities' actions, has played its part in cushioning the shock, providing credit
Although next week's Budget will update on the very
to help minimise longer-term scarring from the shock.
significant fiscal impact of the shock, this will reflect the consequences of supporting households and
business through this unprecedented period rather than supporting banks.
it is clear we have come a long way since 2008, we can't just settle for making
While a promise that no bank
will be 'too big to fail': as Resolution Authority the Bank must be able to deliver on that commitment.
Fundamental to that delivery, the UK now has the requisite statutory tools, and powers to underpin a credible
bank resolution framework. These are set out transparently in the Banking Act 2009 and there are
6
Also known as the Purple Book, and subsequently updated in 2017.
7
As set out in the December 2019 Financial Stability Report.
8
sets out the FPC's latest assessment.
The December 2020 Financial Stability Report
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safeguards in place so that these powers can only be used in the right circumstances. These features allow
market participants to have confidence in the integrity and predictability of our decision-making, which is
supported by the UK's strong and effective institutions. These powers also form an important complement to
supervisory and prudential tools; that these are embedded within the UK legal framework ensures they
function as a credible and independent backstop for banks at risk of failure.
Flexibility and proportionality in implementation
While a credible and transparent policy regime is necessary it requires flexibility and proportionality in
development and implementation to ensure overall effectiveness of the regime.
The Bank is attuned to the 'proportionality problem' -
we understand the need to balance the costs of
operating in a complex regulatory environment with the benefits of having a diverse and competitive banking
sector, as my colleague, Sam Woods, set out in his speech on the PRA's 'strong and simple' approach to
regulation.9 Indeed as someone who is both a member of the Prudential Regulation Committee and who has
operational responsibilities of my own, I see both sides of this trade-off in action. As the Resolution Authority,
our aim is to ensure firms can fail in an orderly way, whatever their size. To deliver that, we seek to ensure
our policy requirements are proportionate and appropriate for the UK banking system: proportionate to the
impact of failure, and appropriate to the institutions they are applied to.
Readiness to execute an orderly resolution is an inherently flexible concept; to be effective it must be
capable of adapting to wider circumstances as they evolve. In recognition of this, we undertake public
consultations for our policies and have sought to provide more detail on our policy expectations as the
resolution regime develops, and review the efficacy of our existing requirements to meet the objectives of the
resolution regime, including supporting financial stability and protecting public funds. This allows us to listen
to and understand different stakeholders' experiences and perspectives; particularly important given that
resolution is a relatively new part of the regulatory regime. We are responsive to the feedback in these
consultations, and use it to inform our policy decisions, to ensure they remain proportionate, reflecting the
nature of the diverse UK banking sector to which they apply. This includes subjecting our policies to ex-post
review to check they remain fit for purpose.
As part of our ongoing development, we are working on revising expectations on Operational Continuity in
Resolution requirements, incorporating lessons since the initial policy was published in 201610. We are
currently reviewing comments from industry and other stakeholders on our proposals communicated last
year.11
9
See Sam Woods' 'Strong and Simple'
speech
10
Our initial policy is here: Ensuring Operational Continuity in Resolution
11
Updates to the policy are here: Operational Continuity in Resolution: Updates to the Policy,
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Ensuring sufficient financial resources to support an orderly resolution is another core element of our
resolution regime. And again we have coupled this with an appropriately flexible and proportionate approach,
12
the
through our policy on MREL, 'minimum requirement for own funds and eligible liabilities'. MREL
resources which can be
represents a requirement for banks to maintain 'bailed in' or otherwise be exposed
to loss if they fail13. The ability to bail in these additional resources for these firms means we can be
confident that they will be able to continue providing critical services in the event of a resolution, while
maintaining appropriate prudential resources and with any costs borne by bank owners and investors rather
than by depositors or taxpayers.
Currently 18 of the largest UK banks and building societies, 10% of the total number, are required to hold
MREL above their minimum prudential requirements. Major banks are on track to meet their 'end-state'
MREL requirements which will apply from 2022. Smaller banks are given transitional periods to meet higher
MREL requirements as they grow into them; the judgement as to when those requirements should apply is
guided by indicative published thresholds.14 And we have been flexible and responsive to the needs of
growing firms; in response to the difficulties reported by mid-tier firms in issuing MREL, in December 2020
we flexed our policy to give this subset of firms an additional year to comply with their end-state MREL
requirements.15
We have encouraged a broad dialogue on our policy on MREL thresholds throughout its development, and
reaffirmed in 2018 that we would review its calibration and the final compliance date prior to setting end-state
MRELs. As a first step in that review, we issued a Discussion Paper in December 2020 to gather feedback
and ideas from stakeholders to inform our views16. In particular, the Discussion Paper focuses on the
thresholds for resolution strategies, the calibration of the requirements, the eligibility of instruments and the
application of MREL within banking groups. The window for responses to that paper is open until 18th March
this year, and we would welcome thoughts from any of you on any of these issues. We plan to publish a
Consultation Paper in summer this year, informed by those responses and setting out any proposed changes
to the MREL framework, ahead of publishing our revised policy by the end of 2021.
While I am satisfied with the progress the UK resolution regime is making towards our 2022 commitment, the
UK's role as a global financial centre in an open and global financial system is much wider. We therefore
place great importance on having strong and effective common global regulatory standards and cross-border
cooperation. The UK continues to play a proactive role in global forums such as the Financial Stability Board
for policy development and supporting cross-border resolution planning. Keeping resolvability in the spotlight
on the international stage continues to be an important way for us to lean against fragmentary behaviour. I
12
This is the formal, legal term for the required loss absorbing capacity that can readily be used in a resolution.
13
the Bank's approach to setting
As set out in our June 2018 Statement of Policy on MREL.
14
As set out in the Statement of Policy, the indicative thresholds are 40,000 to 80,000 transactional accounts for partial transfer
strategies, and a balance sheet size of £15bn to £25bn for bail-in strategies.
15
Bank of England's statement on MREL and Resolvability deadlines
Details of the December 2020 update are here:
16
The Bank of England's review of its approach to setting a minimum requirement for
Please see our Discussion paper for more detail:
own funds and eligible liabilities (MREL)
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am not alone in recognising the feat of coordination which is required to deliver resolutions on a cross-border
basis.
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The UK is a strong supporter of enhancing these mechanisms for engagement with other authorities as
both home and host authority. This interest is underpinned by a suite of cooperation agreements with our
international counterparties and regular engagement with other jurisdictions to support cross-border
resolution planning and policy development. This has included a series of exercises involving senior officials
from a number of jurisdictions, including the United States and the euro area. Here we aim to have a shared
understanding of the actions and decisions on the path to resolution for our firms, and agree ways to test our
coordination mechanisms and our virtual communication capabilities.
Although my remarks today focus on the banking sector, in this context I also want to highlight the work the
Bank has done internationally and with HM Treasury on proposals to expand resolution for Central
Counterparties, which are a key part of the financial market infrastructure to improve safety and efficiency.
The UK was one of the first jurisdictions to establish a CCP Resolution regime and the current Consultation
Paper17, from HMT, sets out some important updates to our regime to align it with recently agreed FSB
guidance, as part of our commitment to implementing robust global standards.
The Resolvability Assessment Framework is key to being 'fit and ready'
I'm
going to focus now on our Resolvability Assessment Framework, or RAF, which brings together the Bank
and PRA's resolvability rules and policies into three outcomes which major UK banks must be able to
achieve by January 2022. That outcomes-based approach reflects the fact that resolvability is a spectrum
rather than a binary concept. The outcomes we look for are: i) having sufficient financial resources to support
a resolution; ii) being able to continue to do business through resolution and restructuring iii) being able to
co-ordinate and communicate effectively so that a resolution and restructuring can be orderly. The
overarching aim is to ensure that larger banks and building societies operating in the UK are, and are able to
demonstrate that they are, resolvable, and that they are accountable for this. The RAF is therefore central to
which is 'fit and ready' to achieve that.
our commitment to end 'too big to fail' and to having a regime
As I said earlier, the UK' s resolution regime is well set up to give us options, in good or bad economic
situations, when a firm fails. While the Bank of England is responsible for undertaking a resolution, having
the legal powers is necessary but not sufficient for an orderly resolution; firms also need to play their part by
making the changes necessary to ensure a bail-in resolution transaction can be executed. Action by firms to
be prepared for a resolution reduces the risks of disruption as the authorities act and provides the authorities
with credible options and the flexibility to respond to a crisis. Earlier this week the Bank published a Dear
CEO letter which I sent to the CEOs of the eight largest UK banks and building societies18, providing more
17
HMT consultation paper on an expanded resolution regime for Central Counterparties.
18
You can find the letter here.
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guidance on our expectations under the RAF. Publishing this letter demonstrates our ongoing commitment to
make the regime and firms' resolvability more transparent and better understood.
which we will judge a firm's resolvability -
The RAF is the lens through in terms of being able to financially
and operationally support itself through a resolution, so that a resolution and restructuring can be orderly. In
one policy, it demonstrates our transparent, flexible, proportionate, and credible approach to resolvability.
Making the UK resolution regime more transparent and better understood is at the heart of the aims of the
RAF. Disclosures made by firms and the public statements with views on individual firms made by the Bank
are a major component of the RAF - and my Dear CEO letter reinforces our existing expectations.
Each of the major UK banks will assess their preparations for resolution, submit a report of their assessment
and publish a summary of their report every two years. The Bank will also make its own public statement on
the resolvability of these banks. Combined with our policy statements and our annual publication of loss
absorbency requirements, this aims to help investors better understand the progress firms are making to
become more resolvable, and what would happen in a resolution. This will ultimately help the UK banking
system function more efficiently by allowing the public and investors to hold banks more effectively to
account, with the confidence that any failure, should it occur, be more orderly.
The RAF is an inherently flexible framework. The focus is on banks and building societies to do what may not
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come naturally confront the difficult and complex judgements required in a resolution in advance and plan
for them. Identifying and having flexible capabilities that give the authorities options to respond to a range of
failure scenarios, rather than asking them to address a specific one, is important. This is because it is
inherently difficult for firms to predict which stress might tip them into failure. Firms will need to ensure that
they are embedding robust assurance, governance and oversight arrangements within everyday processes
so that they are always ready for the unpredictable.
This is particularly important given that resolution is not something which we will have a second chance to
Framing our approach around the three outcomes requires firms to think holistically and ask: "how
deliver.
will we be able to keep the business operating, while losses are borne by investors, and restructuring
occurs?" This is more fundamental than just complying with individual policies or submitting data to
authorities, and helps ensure that capabilities can be sustained for the long-term. We have also been flexible
in our application of the RAF. In May 2020, in recognition of the operational burden on firms arising from the
Covid pandemic, we extended the submission deadline for firms' first reports by a year.19
19
See Statement by the Bank of England and Prudential Regulation Authority on resolution measures and Covid-19
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The RAF is also designed to be proportionate. I am quite conscious that I have dedicated a large chunk of
my remarks focussing on larger banks and building societies - however being able to fail in an orderly way is
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a concept which speaks more widely than this and is something which all firms need to take into account.
The UK regulatory regime is not designed to ensure that no firm ever fails. Having a competitive market
means lowering the barriers to entry and exit; the orderly failure of a firm with minimal financial stability
implications is a natural part of an efficient economy. This is why we have modified insolvency rules for less
systemic firms, which include an explicit objective to prioritise the repayment of eligible depositors by the
FSCS within seven days, or have their accounts transferred to another firm. These powers also seek to act
as a backstop, complementing other important supervisory tools such as having comprehensive recovery
and solvent wind-down plans for firms to withdraw from the market before failure.
Our disclosure requirements, as part of the RAF, also reflect this proportionality, with only the largest firms
currently in scope of our reporting and disclosure requirements. We are also taking a proportionate approach
in applying RAF for our international hosted firms20 by looking at whether they can achieve resolvability
outcomes which are broadly comparable to our framework. In many cases these firms may be able to rely on
group wide capabilities, avoiding unnecessary duplication.
By requiring firms to meet outcomes and in not being prescriptive, the RAF also acknowledges that the depth
and type of capabilities required to remove barriers will vary by firm and firms may be able to demonstrate
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that certain capabilities are not relevant to them simpler firms will need to develop correspondingly simpler
capabilities. It also allows firms to leverage existing capabilities and so avoid unnecessary compliance costs.
There is no one size fits all approach for banks to demonstrate their resolvability; banks themselves are best
placed to understand what they need to implement in order to ensure an orderly resolution process, keeping
their preparations under review as they grow and change over time. We expect firms' boards and senior
management to take responsibility for their own resolvability, and to satisfy themselves that, if the worst were
to happen, they could be resolved effectively.
For resolution credibility means effectively executing what we say we will do. The presence of a credible
resolution regime supports our aims, meaning that we can be more confident that if a firm does need to exit,
it can do so in a way which minimises contagion and disruption. The RAF strengthens our confidence in
these plans, by embedding increased accountability and setting strong expectations of firms and their
boards. Firms which are already at, or aspire to reach, a level such that their exit would cause an
unacceptable level of disruption should factor our resolvability requirements into their business plans - as
with any other regulatory requirement. Firms whose failure is unlikely to have financial stability
consequences also have a part to play: they need to take a forward-looking realistic assessment to ensure
they prepare for the event that they fail, which is likely to be a bank insolvency, and meet PRA rules on
20
where they are a 'material subsidiary' of an
The RAF applies to such firms overseas-based banking group for the purposes of setting
internal MREL in the UK.
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depositor protection. In placing an emphasis on the responsibility of individual firms to understand and plan
for their own resolution, we are making firms accountable for this essential planning, reinforcing the credibility
of those plans and the regime as a whole.
Conclusion
Resolvability is better regarded as a spectrum than as a binary judgement. It is about ensuring authorities
have credible options and the flexibility to respond to a crisis. A resolution is ultimately a transaction which
occurs in a crisis situation and is unlikely to ever be a smooth process. But the work done by firms under the
RAF should increase the chances that resolution is conducted in an orderly fashion and disruption to the
financial system is minimised.
Banks and building societies need to prepare themselves fully for these situations now. They need to
challenge themselves to think through how a crisis might unfold and how they would respond - as there may
not be the luxury of time or discretion to prepare when it is occurring. Resolvability also cannot be a static
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concept firms' capabilities may need to be improved or refined, and will need to be in step with the
changing nature of their businesses. Therefore it is important that these are kept 'live'. The more that firms
can truly embed these capabilities into their management processes, the more confidence we and they can
have that they are ready.
The UK is now much better placed to deal with the failure of a UK bank. We have a resolution regime built on
robust and coherent principles. As of now the UK banks are on track, as they should be 12 years after the
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end of the Global Financial Crisis, but it is vital that momentum is sustained. As and when for it is
not likely to be an 'if' -
ultimately we are called upon to use our powers to address a bank failure, we can be
confident that the options available and outcomes arising will be superior to the alternatives and past
experience. In the UK through establishing the RAF, we hope to embed the lessons that were so hard learnt
to be able to demonstrate that banks are resolvable in a transparent manner. Major firms will need to
'too big
continue to work to on demonstrating these capabilities in the run up to the 2022 deadline for ending
to And they will need to keep their capabilities 'live'.
fail'. While 2022 represents a clear milestone, it is not
the end of the process of ensuring that the UK has an effective resolution regime which continues to be
credible, transparent, flexible and proportionate.
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