The Bank of England, the UK authority with powers to “resolve” failing banks, is consulting on how it might exercise its power of direction to remove impediments to resolvability. The Bank may require measures to be taken by a UK bank, building society or large investment firm to address a perceived obstacle to credible resolution. Concurrently, the Prudential Regulation Authority is proposing to impose a rule that would require a stay on termination or close-out of derivatives and certain other financial contracts to be contractually agreed by UK banks, building societies and investment firms with their non-EEA counterparties. This note discusses the proposed approaches by the UK regulators to ensuring that impediments to resolvability are removed, as well as certain cross-border implications.

Introduction -

Under the EU Bank Recovery and Resolution Directive (“BRRD”), a resolution authority must prepare a resolution plan for all credit institutions (banks and building societies) and certain large investment firms (each a “firm”) which, amongst other things, sets out the preferred resolution strategy for the firm. The resolution authority must also assess the resolvability of the firm, without assuming that the firm would receive any extraordinary public taxpayer/government financial support or central bank liquidity assistance. If a material impediment to the resolvability of a firm is identified, the resolution authority may, in consultation with the firm’s national regulator, require the firm to address the impediment.