SDLTM29210 - Reliefs: Financial Institutions in Resolution: Overview

The special resoution regime in the Banking Act 2009 is a mechanism which allows UK authorities (i.e. Bank of England (BoE), Financial Conduct Association (FCA) and HM Treasury) to intervene to manage the failure if a financial institution by exercising one or more resolution stabilisation powers outlined in the Act. A ‘financial institution’ includes

  • Banks;
  • banking group companies;
  • building societies;
  • major investment firms;
  • entities that are the subject of ‘third country resolution actions’. A third country resolution action means action under the law of a third country to manage the failure or likely failure if a third country institution, third country parent undertaking or an EU institution;
  • UK branches of third-country institutions, and
  • central counterparties.

These powers aim to prevent excessive disruption to the UK financial system in terms of the critical economic functions that these firms provide, and to avoid exposing taxpayers to losses.

Rather than permit a failing institution to become insolvent, the entity can be put into formal resolution if a number of conditions are met. These are:

  • a firm is failing or likely to fail;
  • there are no actions short if resolution that will allow a firm to avoid failure; and
  • placing the firm in resolution is necessary in teh public interest.

An institution reaches the ‘Point Of Non-Viability’ (PONV) once these conditions are met.

A fundamental requirement when placing a failing institution into resolution is that the shareholders of that institution bear losses first. This involves cancelling or transferring all the issued share capital away from the original owners and writing down (i.e. reducing the principal value of) all or part of the institutions issued by instruments held by creditors (i.e. loan notes, bonds etc), or converting them into shares.

Over a weekend, the BoE will announce that a failed institution has enterd resolution and execute a resolution and/or transfer instrument outlining how the failed entity is to be stabilised and revalued by using one or more stabilisation options through the exercise of a stabilisation power.

During the period of resolution and revaluation, all or some of the failed institution’s issued debt instruments (i.e. loan notes/bonds) may be cancelled and some or all of the issued share capital of, or property (which includes securities and/or land) held by, the institution may be transferred to a private sector purchaser or to a temporary holding bank appointed by the BoE. Once the failed entity has been revalued and stabilised (which can take several months), exiting resolution will be shaped by the nature of the stabilisation power used.

SDLTM29240 provedes information on the various stabilisation options.