The Bank of England have initiated a comprehensive plan designed to preclude taxpayers from shouldering the costs of future failed lenders. Nader Beshara explores what the framework entails, and the impact it will have on the banks.
Last week a perspicacious plan was identified by the Bank of England in the form of a 28 page framework designed to preclude taxpayers from shouldering the costs of future failed lenders.
The powers set out instigate that, over a 48 hour period, the Bank of England would terminate a lenders management, freeze bond trading and levy losses on investors. This resolution aims to ensure that a failing bank remains open for business, sidestepping a much feared chaotic insolvency, similar to the travesty of the Northern Rock and RBS collapse in 2007 and 2008.
The new regime comes into effect in January 2015. It is believed that if this framework was around during the time of financial crisis, a £45.5bn injection by the UK government could have been avoided and ultimately a taxpayer bailout would have not been necessary.
Sir Jon Cunliffe, the Bank of England’s deputy governor for financial stability, said: “The bank seeks to ensure that firms, whether large or small, can fail without causing the type of disruption that the United Kingdom experienced in the recent financial crisis and without exposing taxpayers to loss.” It appears BoE are taking proactive steps to avoid another meltdown and are not leaving failure to chance. Following application of this framework, the BoE’s first port of call for cash would be shareholders, creditors and the elusive senior bond holders who surreptitiously escaped the losses during the financial crisis.
Nevertheless there have been warnings that engaging in such former debt re-structuring methods could prompt lengthy bartering and costly lawsuits. Richard Bussell, banking partner at Linklaters, said that how well this works in practice will be down to how the European and national supervisors and resolution authorities across the EU work together.