The consultation, published today (11 January), comes nearly a year after the collapse of Silicon Valley Bank, when HSBC stepped in to buy the bank’s UK subsidiary for £1 in March 2023.
Under the proposals, a new mechanism would be introduced to facilitate the use of certain existing stabilisation powers to manage the failure of small banks, to shift the responsibility for certain associated costs from the taxpayer to the industry.
The government said it may be in the public interest to transfer a failing small bank into a ‘Bridge Bank’, or as happened in the case of SVB UK, to a willing buyer, rather than placing such a bank into insolvency.
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However, it said the use of the transfer powers can pose risks to taxpayers given the potential need for such a bank to be recapitalised.
To address this, the Treasury is proposing to use the Financial Services Compensation Scheme to fund a smaller bank that is failing, by recapitalising it and covering its operational costs, which would be subsequently funded by a levy on the banking sector.
This new mechanism would mitigate the risk that taxpayer funds would be needed to cover costs of a small bank failure by ensuring these costs are first met by the firm’s shareholders and certain creditors, and then by the wider banking sector as necessary, it added.
The government said the measures would complement the Bank of England’s resolution powers and would not necessarily be used in all instances of bank failure.
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“This proposal would introduce sensible and modest enhancements to the resolution regime to give the Bank of England increased flexibility to manage the failure of a small bank, without making significant changes to the regime itself and avoiding new upfront costs for firms,” the Treasury said.
“This would in turn reinforce the UK’s robust regulatory regime and ensure there continue to be sufficient protections for financial stability, customers and public funds when banks fail.”
In a statement, the Bank of England said it welcomed the Treasury’s consultation, which runs until 7 March, and supported measures to continue to enhance the UK bank resolution regime.
The UK’s resolution regime was introduced following the Global Financial Crisis as part of the Banking Act 2009 to ensure major firms can remain open and operating with shareholders and investors bearing losses and the costs of recapitalisation.
