British banks need £116bn to cover shortfall - BOE
(6 October 2017 – United Kingdom) The Bank of England (BOE) has indicated that British banks will need to set aside another £116 billion in debt that can be "bailed in" should they get into financial trouble in order to avoid a repeat the 2008 bail-outs.
Central to the BOE’s plans is a requirement for 28 percent of the debt that banks issue by 2022 to be the type that can quickly swapped for equity in certain conditions - in order to help boost an institution's capital position if it gets into trouble.
Most lender are currently just a few percentage points short of the target for debt that can swapped out, equating to a £116 billion shortfall across the whole system.
The central bank also highlighted plans to activate a "resolution process" should a UK lender be in danger of going bankrupt. Under the process, which can be finalised over a weekend, the balance sheet would be stabilised to protect depositors and allow the retail bank to function as normal on Monday.
Once complete the Bank has the power to write down losses before handing management to the enlarged group of equity-holders, who would appoint a new board. The BOE believes this system will bypass the need for it to step in as it had done with Royal Bank of Scotland and Lloyds.
“We didn't suddenly arrive at RBS, we got there through a series of failures that really damaged trust,” said Sir Jon Cunliffe, deputy governor of the Bank.
“The feeling was: ‘Heads I win, tails the taxpayer loses.'
“The correction could have been done without as much contagion if we'd had resolution plans in place.”
“You have to have enough bail in-able resource, enough there to recapitalise you to our minimum standard so you trade as normal on Monday,” said Sir Jon.
Sir Jon said there were signs that bank investors were now taking the resolution plans seriously. He pointed to the fact that credit rating agencies had started withdrawing what had become known as a "public uplift" - the likelihood of a government bail-out - from their risk calculations.
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