Bank Resolution (Recapitalisation) Bill [HL] 2024-25: Progress of the Bill

The Bank Resolution (Recapitalisation) Bill would allow the Bank of England to levy money from the banking industry to manage the failure of a bank, if doing so was in the public interest.

The Bank of England (BoE) already has special ‘resolution’ tools to manage the failure of large banks, which are intended to prevent the costs of bailing out a large bank from falling on the taxpayer. But the mechanism in this bill would provide another tool which might help the BoE manage small bank failure using money levied from the industry.

The bill has cross-party support and its overall design is supported by the industry, though there have been disagreements about which organisations might be charged for and covered under the mechanism.

The bill passed through the House of Lords after four unopposed government amendments, three unopposed opposition amendments and one opposition amendment which the government opposed but which was passed on division. The last of these would limit the use of the mechanism to smaller banks only. This amendment was reversed during the Commons committee stage. Commons report stage is scheduled for 24 April 2025.

Managing bank failure: The resolution regime

The BoE has a few tools to help manage bank failure if doing so would be in the public interest. These were developed in the aftermath of the financial crisis in the late 2000s when banks were largely bailed out by the taxpayer with the aim of ensuring the costs of bank failure are met by the industry.

Larger banks are now required to maintain a level of assets and liabilities which can bear losses should the bank fall into difficulty (called a minimum requirement for own funds and eligible liabilities, or MREL). If a large bank has to go through resolution, the costs of this are borne by the bank’s shareholders and some of its creditors (those have loaned it money). Some loans to the bank can be converted into shares should the BoE require which can be worth much less than the original loans. This can help stabilise the failing bank by restoring its capital.

By contrast, the BoE currently expects failing small banks to enter the insolvency process, where the bank would be dissolved with the proceeds going to pay off its remaining debts and liabilities, where possible. Bank deposits up to £85,000 per person are guaranteed by the industry-funded Financial Services Compensation Scheme.

Silicon Valley Bank and new policy

The government started developing the bill after the collapse of Silicon Valley Bank in March 2023 and the impending failure of its UK subsidiary SVB UK.

As SVB was a small bank it was expected to enter insolvency proceedings, but it was eventually sold to HSBC. The Treasury said the experience prompted policymakers to consider whether the resolution regime could be adjusted to better manage small bank failure, given there may be cases when doing so is in the public interest.

The Treasury proposed that the BoE be given powers to request money from the Financial Services Compensation Scheme (FSCS) to give to a failing bank (recapitalisation). The FSCS is funded by the banking industry.

It published its consultation in January 2024 and the response in July 2024.

Respondents to the consultation were broadly supportive of the plans. Some questioned whether large banks, which are not the intended focus of the mechanism, should bear its costs via the FSCS. Respondents also stressed insolvency should remain the normal process for dealing with a failing bank.

The bill

The bill was published on 18 July 2024 alongside explanatory notes provided by the government. A cost-benefit analysis was produced by the Treasury in January 2024 during the consultation stage. The House of Lords Library published a briefing on the bill.

The bill was first read in the House of Lords on 18 July as bill 2 of the 2024‒25 parliamentary session and passed third reading on 12 November. It had its first reading in the House of Commons on 13 November as bill 132 of the 2024‒25 parliamentary session, its second reading on 22 January 2025 and passed committee stage on 11 February 2025.

The bill has eight clauses and it would extend to the whole of the UK. It would allow the BoE to demand money from the FSCS for the purpose of recapitalising a bank.

The bill would require the BoE to reimburse the FSCS for any surplus funds taken and require it to report to the Treasury, the Commons Treasury Committee and the Lords Financial Services Regulation Committee on the use of this mechanism.

The bill was considered by the Delegated Powers and Regulatory Reform Committee which raised no concerns.

Lords stages

Members of the House of Lords debated whether the bill allowed the government sufficient oversight of the BoE’s use of the new mechanism. In particular, they were concerned the BoE might not limit the costs to industry as it should. The government tabled amendments to increase the amount the BoE would need to report to the Treasury and Parliament should it use the new mechanism.

Members of the House of Lords also debated why the mechanism was not limited to use only for the failure of smaller banks. They argued that allowing it to be used for larger banks could be costly to industry, and the BoE shouldn’t need to use the mechanism if its resolution strategies for bailing-in and transferring large banks are planned properly.

The government advocated the BoE have as much flexibility with the mechanism as it required, but opposition peers disagreed, voting against the government on division to limit the mechanism’s use to smaller banks which do not hold their planned MREL.

Commons stages

During the Commons committee stage, the government reversed the Lords amendment limiting the use of the mechanism to only smaller banks.

An opposition amendment to introduce a growth and competitiveness objective for the regime, similar to one that had been debated during the Lords’ stages, was not moved.