Rather than constructive ambiguity, we need credible clarity that when a bank gets into trouble, the losses will be made to fall on shareholders and creditors and not the taxpayer. And if the bank provides critical services to the economy, that these can continue while the bank is resolved in an orderly way. The Purple Book  It is in order to achieve such credible clarity, that next week the Bank will publish an update of its approach to resolution. This document – known by the colour of its cover as the Purple Book - was first published in October 2014. Its purpose is to set out very clearly the options that the Bank has to deal with a failure of a bank and the way in which we would use our powers. Explaining how resolution is designed to work in practice and what is needed to remove barriers to resolvability are necessary steps to ensure that resolution regimes are credible. 4  All speeches are available online at www.bankofengland.co.uk/speeches  4  The Purple Book illustrates the scale of progress that has been made in the UK towards putting in place a credible and effective way of dealing with bank failures. I would pick out three crucial areas of reform:  First, there is now a comprehensive statutory framework to deal with failing banks, for which the Bank of England is formally responsible. We have statutory powers to match this responsibility and there are a wide range of options available to us.
This is key to allowing clearing members to measure and manage their exposures at a time of stress. It is therefore important that if the resolution authority intervenes it avoids disturbing the order of losses in the rule-book. 10  All speeches are available online at www.bankofengland.co.uk/speeches  10  This requires a robust ‘No Creditor Worse Off’ (NCWO) safeguard which takes as its counter-factual the loss allocation rules in the CCP’s rule book. The issue of NCWO protection is the subject of current debate in the draft EU regulation on CCP Recovery and Resolution. One school of thought is that it is essential to have a weaker NCWO safeguard so that resolution authorities have flexibility to deviate from the way in which losses would fall under a CCP’s rules. This degree of flexibility puts particular focus on the objectives by which home authorities would exercise this discretion. Resolution aims principally to deliver financial stability. But in the case of a global CCP, whose financial stability will be given prominence? This uncertainty may leave participants located outside of the home jurisdiction fearing that they will be exposed to disproportionately greater losses in order to protect the home jurisdiction’s financial stability. The UK does not support that approach. As with banks, it is entirely possible to establish resolution frameworks for CCPs that ensure that interests are mutually aligned and that do not permit or require the home authorities to protect national financial stability at the expense of participants outside of that jurisdiction.