UK plans new system to tackle small bank failures after SVB collapse

London, January 11, 2024

Britain's finance ministry plans to introduce new procedures to manage the failure of small banks more effectively, it said on Thursday, following last year's high-profile collapse of U.S.-based Silicon Valley Bank (SVB).

The consultation on the proposals comes less than a year after the sudden collapse of California-based SVB sent shockwaves through financial markets. HSBC (HSBA.L) stepped in to buy the UK arm of SVB for a symbolic one pound last March.

The proposals would require the industry to meet some costs associated with the bank failures rather than the taxpayer, Britain's Treasury said.

The government believes that it may be in the public interest to transfer a failing small bank into a "Bridge Bank" or, as happened with SVB UK, to a willing buyer, rather than place such a bank into insolvency.

But this could pose risks to taxpayers given the potential need for such a bank to be recapitalised, the Treasury said. To address this, the proposals provide more options in terms of sources of capital for a resolved financial firm.

The new process would allow the BoE to use funds provided by the banking sector to cover costs associated with a resolution, including those associated with recapitalising and operating the failed bank, it added.

The BoE welcomed the proposals in a separate statement.

Britain's resolution regime for banking institutions aims to ensure public funds are not put at risk in resolving a failing bank. It was first put into action in 2009 following the global financial crisis.

The absence of such a regime during the 2008 financial crisis meant that the government had to step in and inject 137 billion pounds ($174 billion) of public money to stabilise the banking sector.

The proposals would reinforce Britain's regulatory system and ensure there continued to be sufficient protections for financial stability, customers and public funds when banks fail, the government said.

[Reuters]