UK banks could fail safely as they leave ‘too big to fail’ era behind – report

Three of the banks, Standard Chartered, HSBC and Lloyds, had ‘shortcomings’ in their plans (Victoria Jones/PA) (PA Wire)

The UK’s biggest banks are no longer too big to fail and could continue to provide vital services even if they are going through a crisis, according to a report.

The Bank of England said that all eight of the high street banks it had assessed would be able to fail without major knock-on effects, but it did find “shortcomings” in three of the banks’ plans.

“Today’s publication shows that if a major UK bank failed today it could do so safely: remaining open and continuing to provide vital banking services to the economy,” the Bank said on Friday.

The disruption to the financial system contributed to the UK and global recession that followed. We cannot forget these lessons

Bank of England

“Shareholders and investors, not taxpayers, will be first in line to bear the costs, overcoming the ‘too big to fail’ problem.”

If proven true in an actual crisis, it could save the treasury billions of pounds.

In the aftermath of the 2008 financial crash, the Government was forced to use £137 billion of public money to prop up the banks, protecting shareholders and investors.

“Even despite that support, the disruption to the financial system contributed to the UK and global recession that followed. We cannot forget these lessons,” the Bank said.

It was this that sparked the need for the so-called resolvability tests which the Bank will now be performing every two years.

High street lenders will have to submit their plans to officials on what will happen in the event that they fail.

In the first such publication, the Bank rated several different parts of the banks’ plans.

It found that there were no “deficiencies” or “substantive impediments” – the two worst assessments – in any of the plans.

Officials did identify “shortcomings” – the middle out of five scores – in how HSBC, Lloyds and Standard Chartered approached getting enough financial resources to be able to take the preferred path.

It also found two further shortcomings in the plans of HSBC and Standard Chartered.

There were six banks whose plans contained “areas for further enhancement,” the second best assessment that the Bank could give.

These included two for Barclays, two for HSBC, one for Nationwide, two for Natwest, one for Standard Chartered, and three for Virgin Money.

Only Santander UK’s plan escaped unscathed from the Bank’s assessment.

Dave Ramsden, the Bank’s deputy governor for markets and banking, said: “The Resolvability Assessment Framework is a core part of the UK’s response to the global financial crisis, and demonstrates how the UK has overcome the problem of ‘too big to fail’.

“The UK authorities have developed a resolution regime that successfully reduces risks to depositors and the financial system and better protects the UK’s public funds.

“Safely resolving a large bank will always be a complex challenge so it’s important that both we and the major banks continue to prioritise work on this issue.”