Policy background
The UK has a resolution regime for banking institutions (the "special resolution regime", which is set out in Parts 1 to 3 of the Banking Act 2009), which was implemented in 2009 in the wake of the Global Financial Crisis. The regime made the Bank of England (the Bank) the UK’s resolution authority and provided it with a set of options and powers to stabilise banking institutions that fail, in order to protect financial stability, enhance confidence in the financial system and protect depositors, whilst limiting risks to public funds.
	The UK’s regime was used in March 2023 in response to the failure of US bank Silicon Valley Bank, which triggered the failure of its UK subsidiary, Silicon Valley Bank UK (SVB UK). In the case of SVB UK, the Bank used its powers to write down regulatory capital and transfer SVB UK to HSBC, delivering good outcomes for financial stability, customers and taxpayers, and demonstrating the effectiveness and flexibility of the resolution regime.
	SVB UK was classed as a small bank. Normally it is expected that when small banks fail, they would be placed into a modified insolvency procedure. Instead of the Bank using resolution powers, this means placing the bank into insolvency and eligible depositors being paid out by the Financial Services Compensation Scheme (FSCS), currently up to £85,000 per eligible depositor. Placing SVB UK into insolvency would have resulted in an interruption of full access to deposits placed at the firm, particularly in relation to eligible deposits in excess of £85,000 and ineligible deposits. In the case of SVB UK, the Bank ultimately determined that use of its resolution powers would better meet the public interest compared to placing SVB UK into insolvency.
	Whilst a good outcome was achieved in this case, it exposed the potential challenges of managing the failure of a small bank where resolution action is judged to be necessary in the public interest at the time of failure. Small banks are not required to maintain additional equity and debt in excess of their minimum capital requirements that can be written down and converted into equity (a process called bail-in). These resources provide a means to recapitalise the firm, after its existing resources have absorbed losses and is known as the Minimum Requirement for Own Funds and Eligible Liabilities (MREL). Larger banks are subject to these requirements. Without these additional resources, there is not the means to recapitalise the firm, absent use of external, such as public, funds.
	If a credible buyer is not forthcoming when a small bank fails, this means the only option available to preserve immediate continuity for customers is to transfer the firm (or some of its business) to a bridge bank. As set out in section 12 of the Banking Act 2009 (bridge bank), a bridge bank is wholly or partially owned by the Bank of England, with the aim of maintaining continuity for the failed bank’s critical functions until the sale of the bridge bank.
	Whether a failing bank is sold to a private sector purchaser or transferred to a bridge bank to achieve stabilisation, a failed bank may need additional capital, for example in order for the bank to meet the minimum levels of capital required for them to be allowed to operate (known as the minimum capital requirements for authorisation) or to cover the costs of restructuring. At present, these costs (as well as any costs of operating a bridge bank) may at least initially have to be borne by taxpayers. This means taxpayers are exposed if a small bank failure is judged to require resolution action but the firm in question does not possess sufficient MREL resources to provide for recapitalisation, unlike larger banks that do possess these resources.
	For these reasons, while insolvency remains an important part of the toolkit for managing bank failures, the government believes it is important to ensure that, subject to the existing statutory tests being met, certain existing resolution tools can be applied to small banks in a way that achieves good outcomes for financial stability while also protecting taxpayers.