The UK’s banks should no longer be “too big to fail”, under revised rules announced by the Bank of England.
The Bank of England announced it has given banks until 2022 to comply with regulations forcing them to hold enough money to absorb losses, which could be drawn down in the face of collapse to finance an orderly wind-down.
The revised rules will require banks to hold sufficient capital to absorb losses in the event of a downturn, and if the bank does face collapse, the capital held will be used to finance an orderly winding down of its activities.
The new rules will “make it possible to resolve failing banks by ensuring that they hold sufficient equity and debt to absorb losses”, the Bank of England said.
“It will enable the recapitalisation of businesses that need to keep operating during the process because they provide important financial services to households and businesses.
“This process is called ‘bail-in’.”
The Bank’s governor, Mark Carney, said the new rules were a “significant milestone”.
“The implementation of [the rules] will ensure that banks that provide essential economic functions hold sufficient resources to be resolved in an orderly way, without recourse to public funds, and whilst allowing households and businesses to continue to access the services they need,”
The new rules will apply to banks with more than 80,000 accounts – double the threshold first suggested by the Bank.
UK banks have already been building up significant balance sheet buffers since the 2008 financial crisis and the shortfall to meet these new rules now stands at around £20 billion. About 400 banks and building societies will have to hold a collective cushion of £223bn, raised by selling bonds (glorified IOUs) to investors, but the current shortfall is estimated at only £20bn.