LONDON (Reuters) - Banks operating in Britain must find a net 4 billion pounds ($5.3 billion) by 2022 to comply with rules aimed at shielding taxpayers if lenders go bust, the Bank of England said on Monday.
Ten years after the financial crisis that cost British taxpayers billions of pounds to rescue banks like Royal Bank of Scotland (RBS.L) and Lloyds (LLOY.L), the BoE said its was putting the finishing touches to a system for dealing with failing banks.
This would ensure that even large banks can be wound down and would be no longer “too big to fail” and hold taxpayers to ransom. BoE Deputy Governor Jon Cunliffe said the BoE does not run a “zero failure regime”.
“We don’t want a financial centre that doesn’t take risks,” Cunliffe also told reporters.
Regulators want to ensure the City of London will remain attractive to big international financial companies as Britain prepares to leave the European Union in March, 2019.
The BoE was setting out detailed proposals on so-called mandatory “bail-in” debt that can be written down to replenish a bank’s burnt-out capital in a crisis.
It aims to make sure there is enough of the “bail-in” debt, known as MREL, in UK subsidiaries of banks based elsewhere and in British banks’ standalone retail divisions.
Banks are currently 116 billion pounds short of debt that qualifies as “MREL”, but nearly all of this will be plugged by rebadging existing bank bonds.
The net shortfall is 4 billion pounds, a figure the banks are expected to raise via the bond markets without difficulty.
The BoE said in any given year, Britain’s gross domestic product would be 0.02 percent lower due to MREL requirements, but the bank said the upside was that “too big to fail” was ended, a bank could continue to function in a crisis, and taxpayers would be protected.
With interest rates low, British banks like HSBC (HSBA.L) have already been rebadging debt over the past year.
UK Finance, which represents British banks, said it would continue to work with regulators to ensure that households and businesses could access banking if a bank fails, with shareholders and creditors bearing the costs, not the taxpayer.
The BoE also made clear it would be willing to provide liquidity to support temporarily a bank being closed down, but only if the bank’s own resources were exhausted and access to private sector funding was disrupted.
Cunliffe said the BoE would publish summaries of resolution plans of major British banks from 2019, but he was still working out what the summaries should contain. The plans set out what would happen to a bank if it crashed.
The rules on bail-in debt are based on European Union law and are expected to be copied on to Britain’s statute book by Brexit.
The Bank has been conducting tests with regulators in the United States and the EU to check that rules on winding down banks can work for cross-border lenders.
“International co-operating remains a critical component of ensuring banks with cross-border activities can be resolved,” Cunliffe said.
($1 = 0.7515 pounds)
Reporting by Huw Jones. Editing by Louise Heavens, Ed Osmond and Jane Merriman