Capital inquiry: recovery and resolution

19 December 2016

The Treasury Committee examines recovery and resolution in the first stage of its capital inquiry.

Ending 'too big to fail'

Commenting on the launch of the inquiry, Rt Hon Andrew Tyrie MP, Chairman of the Treasury Committee, said:

"The public was forced to foot the bill – and a large one - when the banks got into trouble during the crisis. They are still footing the bill now, with the profitable disposal of RBS looking like an ever more distant prospect.

Eight years on from the crisis, a great deal of effort has gone into ending 'too big to fail'.

It is vital this problem be solved. As the Parliamentary Commission on Banking Standards concluded, the assumption that failing banks would receive public support was part of a toxic cocktail of misaligned incentives which contributed to the financial crisis.

The public have a right to know whether they are now adequately protected. Ring-fencing and resolution regimes are intended to ensure that the failure of large banks can be managed in an orderly way, without relying on public support. It is vital to establish how robust they now are.

The Committee will examine what progress has been made and whether the regulators are getting it right. Interested parties are invited to address any or all of the relevant questions."

Call for written submissions

The financial crisis revealed that banks were holding insufficient capital relative to the risks they were taking. It also demonstrated that, in the absence of means to re-capitalise failing banks from private sources, the taxpayer would be forced to fund bail-outs of banks which were judged too big to fail. Ensuring that banks could be recapitalised if necessary without recourse to taxpayer funding, is therefore of crucial importance to the UK economy. Parliament has a key role to play in assessing whether the rules and institutions created to achieve this aim are working, or will work, properly. The Treasury Committee intends to examine recovery and resolution in the first stage of its capital inquiry.

The inquiry invites written evidence from interested parties to address any or all of the following points and questions:

1. What progress have the major UK banking groups made in developing realistic and effective resolution and recovery plans, including ring-fence arrangements?

  • What are the main steps still to be undertaken and what are the key uncertainties?
  • Is it possible to establish, in the absence of a bank failure, whether the UK’s recovery and resolution regime is sufficiently robust to achieve its objectives?

2. What progress has been made by major foreign economies in developing realistic and effective resolution and recovery plans?

  • What are the main steps still to be undertaken and what are the key uncertainties?
  • Are there any differences in the way recovery and resolution regimes are being implemented in other countries that have significant implications for the UK financial system?
  • What conflicts are likely to arise between UK, European and other major economies as a result of different approaches to recovery and resolution? 
  • Based on experience to date, including in the euro area, are there any elements of the UK’s recovery and resolution regime that should be re-examined?
  • What is the best way to monitor for and ensure consistency between international jurisdictions on recovery and resolution regimes?

3. What impact might Brexit have on the likely effectiveness of the UK’s recovery and resolution regime?

  • What actions should the Bank of England and the UK Government take regarding recovery and resolution policy in response to the Brexit vote?
  • How will Brexit affect the management of cross-border resolution for banks that have operations in both the UK and EU, as well as other places?

4. What assumptions has the FPC made as to the efficacy and feasibility of resolution plans? What are the risks to effective implementation, and how is the probability of non-implementation, non-effectiveness or contagion effects factored in?

  • Is the FPC's judgment of the appropriate reduction in capital requirements resulting from effective resolution plans a reasonable one?
  • Has the FPC made the correct judgement of the balance between the weights placed on equity capital and bail-in securities?
  • What evidence is there, if any, that the development of recovery and resolution regimes have already reduced moral hazard and the 'too big to fail' subsidy?

5. How serious is the risk that falls in the prices of particular bail-inable securities will cause contagious uncertainty about the solvency of banks in general? If there are contagion risks, how could these be reduced?

  • Does the market for bail-inable securities need any minimum degree of continuous liquidity? If so, how could it be assured?

6. Would it be desirable to have more transparency about the resolution and recovery plans of the major UK banks, and about the PRA’s and Bank of England’s assessment of them?

  • Would there be merit in greater transparency concerning international technical discussions on recovery and resolution?

Further information

Image: iStockphoto

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