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No taxpayer bailouts under Bank of England’s new plans No taxpayer bailouts under Bank of England’s new plans
(about 5 hours later)
The Bank of England will fire bosses of collapsing banks and force investors to take losses under plans announced on Thursday intended to avoid another taxpayer bailout of the banking system.The Bank of England will fire bosses of collapsing banks and force investors to take losses under plans announced on Thursday intended to avoid another taxpayer bailout of the banking system.
Threadneedle Street intends to conduct any rescue operation over 48 hours – most likely over a weekend – and would install new management at the failed business. Threadneedle Street would conduct any rescue operation over 48 hours – most likely over a weekend – and install a new management team at the failed business. Instead of pumping public money into the collapsed bank, as happened in the £45bn bailout of Royal Bank of Scotland, the losses would fall on shareholders and bondholders.
In an attempt to avoid a repeat the £45bn bailout of Royal Bank of Scotland, the Bank of England would require shareholders and bondholders to take the losses rather than asking taxpayers for support. The central bank would have “temporary access to public funds” only in some circumstances – if it needed to make a loan to the financial services compensation scheme, which protects up to £85,000 of individual savings in a bank account; or if the bank’s losses reached 8% of its balance sheet.
The central bank would have “temporary access to public funds” only in some circumstances. These would include a loan to the financial services compensation scheme, which protects up to £85,000 of individual savings in a bank account, or if losses at the bank had reached 8% of its balance sheet. RBS would not have met these terms because it received £45bn from taxpayers when its balance sheet was £2.4tn at the time of collapse, well below the 8% limit. RBS would not have met these terms as its balance sheet was £2.4tn at the time of collapse, well below the 8% limit.
The decision to use public money would “only be available as a last resort, where a serious threat to financial stability cannot be avoided by other measures or where necessary to protect existing public funds”, the Bank of England said. Public money would “only be available as a last resort, where a serious threat to financial stability cannot be avoided by other measures or where necessary to protect existing public funds”, the Bank of England said.
The plans have been drawn up because the 2008 banking crisis demonstrated that usual insolvency practices used for companies did not work for banks because of their deposit holders – savers – and bondholders. The plans have been drawn up because the 2008 banking crisis showed that the usual insolvency practices used for companies did not work for banks because of their deposit holders – savers – and bondholders.
Instead it has devised a “resolution” regime for collapsing banks which will also require them to be structured in a way that avoids the complex legal structure of the past. Instead the Bank of England had devised a “resolution” regime for collapsing banks which would require them to be structured in a way that avoided the complex legal structure of the past. The introduction of a ringfence between high street banks and investment banks – recommended by Sir John Vickers – would be part of this simplification, although it would not be in place until 2019.
The introduction of the ringfence between high street banks and investment banks – recommended by Sir John Vickers – is part of this simplification. Andrew Gracie, executive director of resolution, said: “The failure of these firms should have the same impact as that of the failure of any other institution, ie the rest of the system is not impacted and taxpayers do not bear the cost. That is what resolution achieves.”
“Firms that fall within scope of the UK regime need to be resolvable,” said Sir John Cunliffe, deputy governor of the Bank. While the new approach will come into effect on 1 January 2015, it could take a number of years for banks to issue enough bonds to be able to cover 8% of their balance sheet in losses.
The aim is that the “firm stays open for business, to allow for access to protected deposits to be maintained and for payments to continue to flow, to ensure that the risk of disorderly fire sales of the firm’s assets or termination of its derivatives contracts is minimised”, Cunliffe said. The Bank of England will be able to access a resolution fund of £2.6bn – worth 1% of the UK’s deposits and funded by the coalition’s bank levy – once the losses at a failing bank crash through all its equity and bonds.
The Bank of England will be able to turn to a resolution fund of £2.6bn, worth 1% of the UK’s deposits. “Firms that fall within scope of the UK regime need to be resolvable,” said Sir John Cunliffe, deputy governor of the Bank, in the documents published on Thursday.
The aim was that the “firm stays open for business, to allow for access to protected deposits to be maintained and for payments to continue to flow, to ensure that the risk of disorderly fire sales of the firm’s assets, or termination of its derivatives contracts is minimised”, Cunliffe said.