British banks must find £4bn extra in 'bail-in' debt by 2022 says Bank of England

Jasper Jolly
Follow Jasper
Bank Of England Interest Rate Decision
The Bank of England is tasked with protecting financial stability (Source: Getty)

The Bank of England today said it expected British banks to raise an extra £4bn by 2022 from investors who will take the hit if the lender fails, as it seeks to prevent the need for massive government bail-outs in the future.

The Bank said that UK banks have a gross shortfall of up to £116bn in special capital holdings which must be in place by 2022 in a consultation document published today, although it noted this is at the higher end of estimates.

British-headquartered banks will only need to raise an extra £4bn net by 2022 to comply with the regime, or 0.1 per cent of assets, with the vast majority of the gross shortfall made up by changing the terms of existing debt as it rolls over, making it clear to investors they will be on the hook for losses.

Read more: Biggest banks must bolster bail-in funds to reduce rescue risk

The Bank of England announced large banks will have to hold the capital, labelled as minimum requirements for eligible liabilities and own funds (MREL), last November. MREL capital can be used to absorb losses when the bank is under stress, and in the case of a failure will allow banks that are too big to go through standard insolvency procedures to continue operating until they are wound down safely, without cash injections from government.

The adjustment of debt terms will force investors to take into account the higher risk of losses when buying bank debt without the implicit backing of government, potentially raising borrowing costs for banks. The Bank of England will be able to impose losses on investors who hold the MREL debt if it deems the bank has failed.

Shareholders and creditors must now bear losses equal to at least eight per cent of the liabilities of a firm before government will consider stepping in, although the Bank’s guidelines also say that no shareholder or creditor can be left worse off than under a standard insolvency.

Read more: Bank of England to make banks hold £10bn more to cover consumer credit

The rules apply to all the major global and domestic systemically important banks, as well as eight other high street lenders. Smaller banks will not be required to hold the additional debt.

The process of bank “resolution” came under heavy scrutiny during the financial crisis, when government had to step in to ensure businesses and customers could access their deposits at banks such as Lloyds and Royal Bank of Scotland.

While most businesses would simply fail if insolvent, the systemic shockwaves from a bank failure are greater because of the reliance of other businesses on access to their deposits, meaning government was forced to bail out banks threatened by collapse.

The bailouts – which took the form of massive injections of capital – faced criticism because the implicit backing of government for “too big to fail” banks gives them a competitive advantage, as some of the risks of lending are essentially transferred onto taxpayers.

John Cunliffe, the Bank of England’s deputy governor for financial stability, said: “We have seen major development in the United Kingdom on resolution over the past 10 years. The way a bank failure would be dealt with today is very different from the crisis.”

Read more: Mark Carney: Brexit shock risk justifies slower return to target inflation

Related articles