Plan for failing banks

The Bank of England, Financial Services Authority (FSA) and Treasury have been given new powers to deal speedily with failing banks.

The Banking Act 2009, which came into force last week, creates a permanent Special Resolution Regime which will act as a safeguard where the FSA decides a bank is failing or is likely to fail. The Bank of England will then choose from a range of options, including transferring the business to a commercial purchaser, transferring it to a “bridge bank” owned by the Bank of England, placing it into temporary public ownership, and closing the bank down with deposits protected up to £50,000. The regime has built-in protections for creditors, which will mean no creditor will be worse off than they would have been had the whole bank been put into administration.

The bank’s choice will be guided by the need: to maintain the stability of the UK’s financial systems; to maintain public confidence; to protect depositors; to protect public funds; and to avoid interfering with property rights.

The Act also provides for an overhaul of the Financial Services Compensation Scheme.