United Kingdom: Resolvability Will Never Be Done

It has been almost two years since the banking failures in 2023 and recovery and resolution continue to be a topic that dominates both the political and regulatory agenda. When the new Labour Government issued its legislative agenda in the King's speech in mid-July one of the more notable Bills was the Bank Resolution (Recapitalisation) Bill.

The Bill follows HM Treasury's consultation on reforms to the resolution framework to provide greater flexibility for the Bank of England (BoE) to respond to the failure of small banks. It essentially does this by expanding the statutory functions of the Financial Services Compensation Scheme by requiring it to provide funds to the BoE upon request which could then be used to meet certain costs arising from the resolution of a failing bank. The UK regulators, the Prudential Regulation Authority (PRA) and Financial Conduct Authority, will also consult on any relevant updates to their rulebooks resulting from the Bill.

But the Bill has not been the only development.

At the beginning of this year the PRA issued a 'Dear CEO' letter to UK banks setting out its 2024 supervisory priorities. The letter said that the events of 2023 had highlighted the importance of banks' resolvability and recovery planning and that larger firms would be subject to a resolvability assessment during 2024 and that work would also be undertaken with small and medium-sized firms to improve the quality of their recovery planning.

As regards small and medium sized firms, the PRA subsequently issued a further 'Dear CEO letter' in May outlining the findings from its thematic review of non-systemic firms' recovery planning. The PRA found that, although many firms understood the basics of recovery planning, there were significant areas for improvement, most notably relating to the development of recovery scenarios and the calculation of recovery capacity.

In relation to this latter point, it's interesting to note that the PRA found that firms were not calculating their recovery capacity effectively, nor are they adequately showcasing it in an understandable and usable way, which reduced the accuracy and reliability of the capacity calculations. The PRA reminded firms that a well calculated recovery capacity analysis gives both the firm and the board an insight into the strengths and weaknesses of the capital and liquidity generating capabilities under various scenarios. It may be that firms outside the UK might also consider this?

In August, the PRA published its assessment where eight major UK banks were assessed against the second of the BoE's three outcomes for determining resolvability–the ability to continue to do business through resolution and restructuring. The BoE said that its assessment provided reassurance that if a major UK bank were to fail it could enter resolution safely, remaining open and continuing to provide vital services. Shareholders and investors would bear the cost of any failure not taxpayers. In light of the progress made on resolvability and to give the BoE and the major UK banks time to further enhance and progress testing of their resolution capabilities the next resolvability assessment will be delayed by a year to 2026-27.

However, Dave Ramsden (BoE Deputy Governor for Markets, Banking, Payments and Resolution) reminded banks that "maintaining a credible and effective resolution regime is a continuous process" and that "resolvability will never be 'done' and there will always be lessons to learn from putting the regime into practice."