UK's Bank Resolution (Recapitalisation) Bill Advances Amid Debate Over Scope

New legislation aims to protect taxpayers from costs of small bank failures, while debate arises over its potential application to larger banks.

The UK's proposed Bank Resolution (Recapitalisation) Bill has passed further legislative hurdles, promising measures intended to prevent taxpayers from bearing financial burdens due to the failure of small banks.

Treasury minister Emma Reynolds emphasized the Bill's role in strengthening the protections for public funds, though some Members of Parliament raised concerns about the potential application of these measures to larger banking institutions.

The legislation seeks to empower the Bank of England to direct the Financial Services Compensation Scheme (FSCS) to provide financial support to struggling banks, with costs to be covered by increased levies on the financial services industry.

This approach aims to increase flexibility in managing bank failures while maintaining financial stability.

During the Bill’s second reading, Reynolds highlighted the importance of avoiding new upfront costs on the banking sector to support competitive growth within the UK's financial services landscape.

The Bill's introduction follows the recent collapse of Silicon Valley Bank (SVB), which triggered the need for adjustments to the UK's banking resolution regime.

Reynolds noted that only 14% of SVB's deposits were covered by the FSCS, highlighting a shortfall in protection for depositors.

Mark Garnier, Conservative shadow treasury minister, supported the Bill, recognizing its potential to enable the Bank of England to manage financial system stability more effectively.

However, he raised reservations about a proposed amendment from the House of Lords that suggested FSCS funds should not support large banks.

The concern that applying such measures to substantial institutions could lead to significant financial implications was articulated.

Deputy leader of the Liberal Democrats, Daisy Cooper, echoed the call for clarity to prevent the Bill's scope extending to large banks, which are already subject to separate loss-absorbing mechanisms under the minimum requirement for own funds and eligible liabilities (MREL).

In response to these debates, Reynolds revealed that the government plans to delete the Lords amendment to preserve flexibility in legislative applications.

This move aims to ensure the Bank of England retains the ability to respond dynamically in a crisis, thereby protecting public finances and ultimately, taxpayer interests.