Shearman & Sterling LLP | FinReg | UK Seeks to Enhance Resolution Regime for Small Banks Following SVB Failure
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  • UK Seeks to Enhance Resolution Regime for Small Banks Following SVB Failure

    HM Treasury has launched a consultation that sets out proposals for enhancing the Special Resolution Regime by introducing a new means for the Bank of England, as the U.K. resolution authority, to use stabilization powers to manage the failure of a smaller bank. The proposal arises from the lessons learned from the failure of SVB, which resulted in its U.K. subsidiary, SVB UK, becoming unviable. SVB UK was transferred to HSBC using the resolution powers of the Bank of England.

    The government does not intend to remove the Bank Insolvency procedure from the SRR. However, it is believed that the SRR could be enhanced to better manage the failure of smaller banks which are not identified as systemically important but which may be collectively impacted so as to create a systemic risk for the U.K. financial markets.

    Instead of insolvency, the current regime allows for a failing bank to be transferred to a bridge bank or a private owner. However, there is concern about the potential risk to taxpayers as the bank may need to be recapitalized. HM Treasury is proposing that the Bank of England should be permitted to use funds provided by the banking sector to cover the costs linked to a resolution, including those related to recapitalizing and operating the failed bank. The funds would be levied on the banking sector.

    Responses to the consultation may be submitted until March 7, 2024. The government will issue its response once it has analyzed feedback to the proposals and, if appropriate, legislate to bring the proposals into effect. If the proposal proceeds, changes will also be made to the Special Resolution Regime Code of Practice.

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