Under the UK’s resolution framework, banks will have to disclose a substantial part of their planning to the public – something that is causing them considerable concern. Justin Pugsley reports.

What is happening?

The UK prudential regulatory authorities have stipulated that banks with a material presence in the country must publish resolution plans in the event of their demise, and aspects of this have not gone down well with the banking community. 

Reg rage anxiety

The Bank of England and the Prudential Regulation Authority (PRA) say banks must produce plans every two years on how they would be wound down in the event of failure, also known as living wills. This applies to firms with £50bn ($60.4bn) in retail deposits and to foreign firms with a material presence in the UK. They must file their first report by October 2020 with summaries of those reports to be made public by June 2021, which will also contain comments from the PRA, though there will be no pass or fail marks.

By 2022, the UK authorities expect covered banks to meet three resolvability outcomes; namely that they have adequate financial resources for the task, can do business during a resolution, and they are able to manage their own resolution and continue to work with the regulators during such an event. 

Why is it happening? 

It is, in effect, the final major piece of the UK’s resolution regime for banks, and complements existing measures such as the EU Bank Recovery and Resolution Directive (BRRD), stress testing and the UK’s ring-fencing of retail-type banking activities from riskier parts of the bank such as investment banking. It is also the implementation of bank resolution guidance issued by the Financial Stability Board over a period of several years.

What do the bankers say? 

The trade association, UK Finance, seemed to largely welcome the finalisation of the resolvability framework as it will ensure losses are borne by investors rather than taxpayers, and means that failing institutions would be wound down in an orderly fashion. 

Indeed, UK banks are already familiar with the concept of living wills thanks to the BRRD. What the UK regime does is put the exercise in a much more operational context, with some added tweaks. However, the bit that has gone down badly with bankers is that detailed summaries of their resolution plans will be made public from June 2021. One banker described this requirement as “awful” and felt it should be completely removed.  

The regulators believe it will bring transparency and, doubtless, force banks to yield more to market discipline and deal with problematic divisions more decisively and swiftly.  

The argument from bankers is that it will allow banks to get a good insight into their competitors’ strategies: highlighting, for instance, divisions that might need to be sold off or closed down because they are too complex, risky or capital intensive. This could force a bank to act sooner than it wanted to, under the glare of the public spotlight, and possibly alienate clients – thereby speeding up a division’s demise. 

Related to that, any negative comments on the resolution plans by the PRA could also cause problems for banks, which could hit their share and bond prices, thereby driving up their cost of capital. 

On the plus side, it should help bankers make their institutions more robust since it helps them to better understand their risk profiles and to mitigate against them. Also, for larger banks, the work on ring-fencing should make resolution planning a bit easier – after all, it is designed to ensure that the utility aspects of banks, such as payments, continue to function during a bank failure. 

Will it provide the incentives?  

The objective of these living wills is to ensure a bank failure never again leads to a taxpayer-funded bail-out. But there are aspects of the UK approach that could prove troublesome for the banking sector, such as the public disclosure requirement, which could create unintended consequences around a bank’s cost of capital or the value it may get for selling off a division. 

There are other challenging aspects, such as an obligation to produce instant valuations of assets – which can be difficult for illiquid instruments, such as exotic derivatives products – and would be even more challenging during a period of financial turmoil. 

It is another step in the right direction towards making banks safer, and even bankers should find some aspects of resolution planning useful in helping better understand their businesses – but there are clearly a few wrinkles that might need ironing out over time. 

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter