The UK’s banks should no longer be “too big to fail”, under revised rules announced by the Bank of England.
The regulations will force banks to hold enough money from their investors to absorb losses without help from the taxpayer.
If any bank does face collapse, the funds will be spent to finance an orderly wind-down.
The Bank’s governor, Mark Carney, said the new rules were a “significant milestone”.
“The implementation of [the rules] will ensure that banks that provide essential economic functions hold sufficient resources to be resolved in an orderly way, without recourse to public funds, and whilst allowing households and businesses to continue to access the services they need,” he said.
About 400 banks and building societies will have to hold a collective cushion of £223bn, raised by selling bonds (glorified IOUs) to investors, but the current shortfall is estimated at only £20bn.
The new rules were first suggested in the aftermath of the 2008-2009 banking crisis when the UK government had to spend £115bn to rescue the Lloyds Banking Group and the Royal Bank of Scotland from imminent collapse.
The then chancellor, Alistair Darling, said at the time that RBS had been within just a couple of days of having to shut down its ATM machines because it was about to run out of cash.
At one point, the direct government subsidy to the entire UK banking industry reached more than £1tn, according to the National Audit Office.
If an insolvent bank does have to be rescued by being sold off or broken up, the investors’ funds will be used to keep it going in the interim without taxpayers being asked to dip into their pockets.
International rules already require the world’s biggest banks, some of which are based in the UK, to have similar financial cushions in place by 2019.
The new UK rules will widen the requirements to all UK banking institutions and will be introduced in two stages: interim requirements by 2020 and then final rules by 2022.
The final date represents a two-year extension by the Bank from its original proposals, which have been the subject of consultation with the banking industry.
“Banks are now required to hold several times more loss-absorbing resources than they did before the crisis, while annual stress tests check firms’ resilience to severe but plausible shocks,” the Bank said.
“Banks are now also structured in a way that supports resolution.
“The Bank of England now has the legal powers necessary to manage the failure of a bank, and significant progress has been made to ensure there is coordination between national authorities should a large international bank fail,” it added.
‘Too big to fail’
The size of the financial cushion will be decided individually for each bank.
However smaller banks, building societies and investment firms – those with fewer than 80,000 accounts – whose collapse would not disrupt the banking system, will not have to raise fresh cash.
They will simply have to continue covering savers under the requirements of the Financial Services Compensation Scheme (FSCS).
The 2008-2009 banking crisis triggered a short but deep recession which led to a big cut in living standards for millions of people in the UK.
The sight of some of the most highly paid individuals in the country being rescued from a problem produced by their own reckless behaviour, produced widespread anger.
The financial authorities in the UK and internationally decided that taxpayers should not be on the hook for failed banks in the future.
“During the financial crisis, governments were forced to bail out failing banks, rather than risk the damage that a disorderly failure would have had on the wider economy and financial system,” the Bank said.
“Some banks were too big to be allowed to fail,” it pointed out.