When banks go bust – an overview of the UK Special Resolution Regime

Key takeaways

• The special resolution regime (SRR) applies to UK deposit taking institutions, as well as building societies, investment firms, and recognised central counterparties. It provides a toolkit of stability measures and modified insolvency processes.
• The regime is aimed at preventing a systemic collapse of banks, protecting eligible deposits, and avoiding the need for future bank bail-outs
• The SRR survived its first major test in March 2023, when it was used to facilitate to the sale of Silicon Valley Bank UK Ltd to HSBC Bank Plc, avoiding an imminent insolvency process

What is the SRR?

It comprises a toolkit – or stability powers - to rescue failing banks. Where that is not achievable, it provides modified insolvency processes to facilitate an orderly wind-down. The tools are not mutually exclusive and certain tools may only be used in conjunction with others.

1. transfer to a private sector purchaser 
2. transfer to a bridge bank (as a temporary measure)
3. transfer of assets and/or liabilities to an asset management vehicle with a view to wind-down (note this must be combined with another stability tool) 
4. bail-in, i.e. writing down unsecured, non-guaranteed debts
5. temporary public ownership i.e. HM Treasury will assume control of the bank’s shares.

Alternatively, there are two modified insolvency processes:

1. Bank insolvency procedure (BIP)
2. Bank administration procedure (BAP). 

BAP is used for the residual ‘bad’ bank where a bridge bank or a private sector transfer tool has been used. The idea is for the residual bank to support the ‘good’ bank.

BIP is a modified winding-up procedure with two objectives:

1. to work with the Financial Services Compensation Scheme (FSCS) to ensure depositors receive compensation 
2. to wind-up the bank with a view to achieving the best result for creditors as a whole

Who takes the decisions?

There are four key resolution entities charged with administering the SRR. These are:

1. the relevant Regulator i.e. the PRA and/or FCA 
2. The Bank of England
3. HM Treasury
4. The FSCS

The Regulator’s role is to determine whether the bank satisfies the conditions for entry into the SRR. Once the SRR is engaged, the Bank of England, in consultation with the Regulator and HM Treasury, will decide which tool(s) to use. HM Treasury is responsible for decisions affecting public money and only the Treasury can initiate the public ownership stability tool. Finally, the FSCS provides protection for depositors. Generally deposits are protected up to a cap of £85,000 per customer, but certain entities are not eligible for protection, such as financial institutions and pension funds.

Are there safeguards?

Safeguards are built into the SRR to protect creditors, counterparties, and shareholders from an unfair outcome. The core principle that no creditor should be worse off when compared with the bank’s insolvency applies. There is statutory provision for the making of compensation orders in certain circumstances.

Do the stability tools have to be used? 

There may be instances where it is inappropriate to use a stability tool or the bank simply cannot be rescued through one or more of the tools. On 13 March 2023, Silicon Valley Bank UK Ltd (SVB) narrowly avoided entering the BIP following the occurrence of a series of events including rising interest rates and the collapse of its US parent bank, by being the subject of a transfer to HSBC Bank Plc. SVB had no individual depositors and there were no real concerns that its insolvency would spark a systemic collapse. However, SVB had more than 4,000 corporate customers, particularly technology companies. The public and market reaction following the Bank of England’s announcement of the proposed BIP suggest that the effects of its insolvency could be significant (including for employees of affected customers). To stabilise the tech sector the Bank of England used special resolution powers under the BA 2009 to bypass shareholder and regulatory consents and facilitate a sale of its shares to HSBC. This also had the effect of avoiding a BIP that would have triggered deposit guarantee claims to the FSCS.

Is SVB evidence the SRR works?

SVB was the first major test of the SRR since its introduction. The SRR has yet to be tested in the context of a major retail bank, where there are systemic risk and public money concerns. All the same, that SVB avoided entering BIP is a credit to the SRR toolkit and the resolution entities. It also demonstrated the power of industry, in this case the tech sector, to help shape resolution outcomes in a time-critical situation by lobbying for state intervention. There is no doubt that the SRR has delivered in its first major test.