Overview

The Banking Act 2009 established a special resolution regime for banks in the UK, providing procedures to handle failing banks and protect depositors and the financial system. It includes three stabilisation options (sale to a private sector purchaser, transfer to a bridge bank, and temporary public ownership), as well as bank insolvency and bank administration procedures. The Act also introduced changes to the Financial Services Compensation Scheme and oversight of inter-bank payment systems.

Description

Special Resolution Regime:

This regime aims to address situations where a bank faces financial difficulties. It offers three stabilisation options: selling all or part of the bank to a private sector buyer; transferring assets to a bridge bank (a temporary entity wholly owned by the Bank of England); or temporarily placing the bank under government ownership. These transfers involve share and property transfer powers, overseen by the Bank of England, the Treasury, and the Financial Services Authority (FSA). The act sets out objectives for these actions including protecting the financial system, maintaining public confidence, safeguarding depositors, protecting public funds and avoiding interference with property rights. A code of practice guides the use of these powers.

Bank Insolvency and Bank Administration:

The Act details processes for bank insolvency and administration, involving court orders, the appointment of liquidators or administrators, and procedures to protect depositors (through the Financial Services Compensation Scheme) and creditors. These procedures largely rely on and adapt existing insolvency legislation, modifying it for banks' unique characteristics.

Financial Services Compensation Scheme (FSCS):

The Act amends the FSCS to manage potential costs arising from the special resolution regime. It introduces contingency funding mechanisms, including levies and borrowing from the National Loans Fund. It also clarifies the FSCS’s role in supporting depositors in failing banks.

Inter-bank Payment Systems:

The Act gives the Bank of England powers to oversee certain inter-bank payment systems to ensure their stability and prevent systemic risk. This includes the ability to recognize systems, publish principles and codes of practice, issue directions, conduct inspections, and impose penalties for non-compliance.

Government Spending

The Act allows for government spending from the Consolidated Fund and the National Loans Fund to support failing banks and the financial system under the special resolution regime. Specific figures for spending are not detailed within the Act itself; the act establishes that expenditure will be paid out of money provided by Parliament.

Groups Affected

• Banks: Potentially significant impact depending on their financial health. Could face sale, transfer to a bridge bank, temporary nationalization, insolvency, or administration.
• Depositors: Protected through the FSCS in cases of bank failure.
• Creditors: Their rights and recovery are affected by the insolvency and administration procedures. The Act aims for fair treatment but the relative treatment of creditors will vary between the different processes described in the act.
• Financial Services Authority (FSA): Plays a key role in assessing bank solvency and participating in the resolution processes.
• Bank of England: Plays a major role in the special resolution regime, including the bridge bank process and the oversight of inter-bank payment systems.
• Treasury: Oversees the use of public funds, provides financial assistance, and makes key decisions on stabilization.
• Building Societies and Credit Unions: The act allows for these types of organizations to be brought under the special resolution regime, with appropriate modifications.

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