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The Bank of England has given itself more options for dealing with a failing bank after US regulators agreed to a new mechanism that would give shareholders and creditors a more restricted interest in the rescued lender.
The move is a response by the BoE to the lessons it drew from the collapse of Credit Suisse in 2023, when legal concerns about whether US-issued securities could be swapped for shares in the bank were seen as restricting the capabilities of Swiss authorities.
The Bank of England said on Monday that instead of wiping out holders of bail-in securities at a failing bank, as happened to some Credit Suisse creditors, it could swap their securities for an interest in potential value of the recapitalised bank.
This new mechanism would give the BoE more options when confronted with a crisis at a major UK lender and needed to exercise the “bail-in” process designed to restore a bank’s financial viability while avoiding a taxpayer bailout.
The US Securities and Exchange Commission issued the BoE with a “no-action” letter saying it would not “recommend enforcement action” if a UK bank exchanged US bail-in securities for non-transferable interests that were then converted into shares.
SEC chair Paul Atkins said he planned to introduce a new rule exempting banks that are swapping US securities as part of a resolution from having to comply with the registration requirements for selling securities.
US banks do not issue the same bail-in securities as European banks. However, many European banks have sold such securities to US investors, raising doubts over how their conversion in a crisis would be treated by American regulators.
“Clarity and certainty are important to both the US and global markets because these bail-in processes are inherently an emergency and can occur over a single weekend,” said Atkins. “US investors may own securities in the foreign bank subject to the bail-in.”
The BoE said the changes were “supported by lessons learned from the failures of Silicon Valley Bank and Credit Suisse, as well as continued international work to enhance the credibility and effectiveness of bail-in”.
“The key addition is the introduction of an alternate approach to bail-in where affected creditors receive non-transferable contingent beneficial interests,” it said.
These interests, called potential rights to onward property or proceeds, would represent a right to shares or the proceeds from selling shares once a bank emerged from the resolution process.
“By continuing to establish a shared understanding of how plans would be implemented in stress, we strengthen our preparedness and responsiveness to act if needed,” said Ruth Smith, executive director of the BoE’s resolution directorate.
Under rules introduced after the 2008 financial crisis, banks above a certain size need an extra layer of debt that regulators can wipe out or convert to equity in a crisis, known as MREL — minimum requirement for own funds and eligible liabilities.
This layer of bail-in debt is designed to avoid governments ever needing to use taxpayer funds to rescue failed lenders. However, the rules came under fresh scrutiny after the BoE intervened to transfer the UK subsidiary of failed US lender Silicon Valley Bank to HSBC for £1 over a weekend in 2023.
