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HMRC SDLT: Banking Act 2009: Stabilisation Options for Financial Institutions in Resolution

Understanding Resolution Stabilisation Options for Financial Institutions

The special resolution regime established by the Banking Act 2009 provides the Bank of England (BoE) with a range of powers to help stabilize failed banks and restore their ability to function.

What Are Stabilisation Powers?

Stabilisation powers enable the BoE to take various actions when a bank fails, allowing it to continue operating while it is restructured.

Key stabilisation options include:

– Resolution instruments: Tools that allow for the effective transfer of the bank’s shares and other assets.
– Share transfer instruments: Orders that move shares away from the failing institution.
– Property transfer instruments: These ensure the transfer of land and other properties associated with the failed institution.

The BoE may execute one or more of these instruments based on how the bank can be restored and the nature of its difficulties.

Requirements When a Firm is Placed in Resolution

When a financial institution enters resolution, it is necessary to address the losses it faces. According to Section 6B of the Banking Act, current shareholders must absorb initial losses. This involves transferring their shares away from them and canceling all debts owed by the failing institution.

This process ensures that financial institutions prioritize the protection of taxpayers and maintain the integrity of the financial system.

Resolution Stabilisation Options Explained

When a bank reaches a point where it can no longer function (known as the Point Of Non-Viability or PONV), the following stabilisation options may be implemented:

1. Mandatory Reduction Instrument

The mandatory reduction instrument serves to cancel all subordinated debts of the struggling institution. Subordinated debts are lower-priority loans that rank behind other loans in terms of asset claims.

This instrument operates in one of two ways:

– The bank’s shares may be directly transferred from current shareholders to holders of subordinated loans.
– Alternatively, shares may be moved to a temporary holding bank authorized by the BoE, where they are kept on behalf of those who held subordinated loans.

While this instrument alone may suffice to stabilize the institution, it often works alongside other measures, such as a bail-in.

2. Bail-in (Section 12A of the Act)

A bail-in occurs when the resolution instrument cancels existing debts of the failed institution. This might include both subordinated and unsecured debts, and can involve converting these debts into shares. The aim is to restore the capital needed for the bank to function effectively again.

Here’s how the process works:

– Once debts are canceled, the resolution instrument may also transfer the remaining shares of the failed institution, along with its assets—including land or securities—to a temporary holding bank.
– A resolution administrator is then appointed to manage the voting rights of the shares during this period.

After the bail-in announcement, each creditor receives what is known as a Certificate of Entitlement (CE). This document signifies the creditor’s potential right to compensation once the institution’s value is reassessed.

Holders of a CE will exchange it at the temporary holding bank for their share of compensation once the bank’s revaluation is complete. Compensation usually comes in the form of shares. After a majority of shares return to CE holders, voting rights transfer back to them, allowing the institution to return to standard operation.

If any compensation in the form of shares remains unclaimed after a certain duration, it is liquidated in the market, with proceeds distributed to any CE holders who did not claim their rights.

3. Private Sector Purchaser

Under Section 11 of the Act, a transfer of shares or property can occur directly to a buyer in the private sector, without needing the failed institution’s permission. This allows for swift action in recovering some value from the distressed bank.

4. Bridge Bank

A bridge bank provides a temporary solution controlled by the BoE, aimed at preserving vital operations of the failing institution.

Under Section 12(2) of the Act, a transfer instrument can be executed that allows a share or property transfer to a bridge bank. This ensures that essential services continue while the failed institution’s business is assessed.

After revaluation, the bridge bank will later sell the business to a private sector buyer.

5. Asset Management Vehicle (AMV)

This option allows parts of the failed institution’s business to be transferred to an Asset Management Vehicle, which can be entirely or partly owned by the BoE or HM Treasury.

According to Section 12ZA(3) of the Act, the AMV can facilitate an onward sale of the institution’s holdings, including securities and land, after an internal reassessment has determined the value of those assets.

6. Temporary Public Ownership

For cases where it is deemed necessary, Sections 13(2) and 85 of the Act allow for a share transfer order transferring the failing institution’s assets into public ownership temporarily.

After the institution’s valuation process concludes, any public holdings can be sold to a private sector company, ensuring that vital financial operations are not disrupted while preserving the potential sale value.

Summary of Resolution Stabilisation Options

The resolution stabilisation process is designed to ensure that when financial institutions face crises, there are clear pathways and options available to stabilize them and prevent wider economic issues. The combination of mandatory reductions, bail-ins, private sector involvements, and temporary public ownership provides flexibility to respond to each unique situation, aiming to safeguard the interests of both taxpayers and the economy.