In August 2024, the Bank of England released its second Resolvability Assessment Framework (RAF) report, examining how prepared the UK’s largest banks are for potential financial crises. Following recent collapses like Credit Suisse and Silicon Valley Bank, this assessment highlights improvements in crisis planning but also reveals areas needing enhancement, particularly around liquidity assessment and restructuring plans. Natalie Todd, Partner and Anna-Rose Davies, Associate of Cooke, Young & Keidan LLP explore how these findings underscore the importance of banks meeting regulatory expectations to avoid future taxpayer bailouts and maintain financial stability.
Progress in Crisis Preparedness
The RAF findings show that major UK banks have continued to make significant progress in improving their preparations for resolution (i.e., shutting down) and these findings provide reassurance to the public and to the UK Government that the major banks could enter resolution safely if needed. A “safe” resolution of a bank involves a bank remaining open and continuing to provide vital banking services to customers, with shareholders and investors (rather than public funds) first in line to bear the costs of failure. In the RAF assessment, the Bank of England asked banks to prove they could assess their liquidity needs—meaning they had to demonstrate whether they had enough funds to repay depositors looking to withdraw cash on short notice—within 24 hours’ notice.
Areas Needing Improvement
The Bank of England identified a number of areas for “further enhancement” for various of the major banks. These areas include how quickly Barclays, HSBC, and Standard Chartered were able to provide “timely” and detailed assessments of their assets. Standard Chartered was also singled out for the only “shortcoming” in the report, related to expectations that banks should be ready to put their restructuring plans into action.
The Bank of England commented following its RAF assessment that the resolution of a bank will never be easy to execute and that the system cannot be fully resilient to all possible shocks, but preparedness for resolution provides a better alternative to bailing out a failed bank.
Reassuring Findings Amid Fiscal Concerns
Overall, the RAF findings are reassuring. In the 2008 financial crisis, the Labour government spent £137 billion to stabilise the banking system, including a £45 billion bailout of NatWest. Keir Starmer has recently commented that public finances are in a “more severe crisis” than Labour thought before the election. The UK Government is seeking to prepare for the future in order to avoid having to prop up the banking system should there be any failures of major banks. The ongoing work by the Bank of England in its RAF assessment is in place to avoid this happening.
Ongoing Expectations and Future Assessments
The Bank of England’s overall expectation is that the major banks will continue to embed resolvability into their business practices, with the next RAF assessment expected to take place within the 2026–2027 financial year. In the meantime, the Bank of England has said it will work with the major UK firms to ensure they continue to meet its expectations, and will ask firms to undertake targeted activities ahead of the third RAF assessment. Resolvability is an ongoing obligation for major banks. So, if a bank fails to engage with the Bank of England on resolvability and/or fails to address areas that require “further enhancement” or those in which it had a shortcoming, this could well lead to increased scrutiny or more stringent regulatory requirements from the Bank of England and its regulator, the Prudential Regulation Authority.
A Rapidly Changing Banking Landscape – Legal Challenges for Banks and Customers
The banking landscape is changing rapidly, and in response, the RAF’s approach is designed to be iterative, meaning that as banks improve their resolution capabilities, new challenges and expectations will emerge as a result of changes in market and economic conditions. Banks that fail to keep pace with these evolving standards could face penalties, increased oversight by the Bank of England and its regulator, or additional capital requirements. It is crucial for financial institutions to address the issues identified in the recent assessments while also staying ahead of potential future regulatory demands.
The evolving regulatory landscape presents several legal challenges for both banks and their customers. If a bank fails to manage a crisis effectively, it could face claims from shareholders, customers, and even regulators. The FCA in particular did not hesitate to take enforcement actions against the major banks following the 2008 financial crisis. A lack of adequate crisis planning could also expose banks to claims of negligence, particularly if it can be shown that they failed to follow the recommendations outlined by the Bank of England.
For customers, the legal risks are different but no less significant. In the event of a bank failure, customers could face delays in accessing their funds or lose money if their bank’s resolution plan is not effectively executed. This could lead to class action lawsuits or other legal actions against the bank. Separately, the Bank of England’s focus on resolvability may lead banks to introduce new terms and conditions or alter existing ones, which could result in disputes with customers if they believe that they had been negatively affected by these changes.
Conclusion
The Bank of England’s 2024 RAF assessment underscores the importance of continuous improvement in banks’ crisis management capabilities. Compliance with these recommendations is essential to protect the financial system and the economy. Banks and their customers must prepare for a future where regulatory expectations will only become more demanding. By addressing these challenges, financial institutions can better navigate the complexities of the modern regulatory landscape and ensure they are prepared for any future crises.
