Requiring the largest banks in the UK to maintain additional loss absorbing capacity has made a significant contribution to remove these distortions. Removing this hidden subsidy has made the financial system more transparent, and banking sector competition more effective. The risk of unexpected events – such as the Covid pandemic – is the very point of having strong prudential standards and a credible resolution regime, and underlines the need for the financial system and those active in it to be capable of responding successfully to maintain financial stability. The significant progress the UK has made in strengthening its prudential standards and in developing and implementing a resolution regime can be seen clearly from the response to the current Covid pandemic. The major UK banks and building societies have so far proved resilient to the pandemic, and the FPC’s reverse stress tests have shown that banks are can withstand a wide range of scenarios.8 In the Global Financial Crisis the banking system amplified the shock. In the current Covid crisis, the banking system has not just been resilient to the shock but, supported by the authorities’ actions, has played its part in cushioning the shock, providing credit to help minimise longer-term scarring from the shock. Although next week’s Budget will update on the very significant fiscal impact of the shock, this will reflect the consequences of supporting households and business through this unprecedented period rather than supporting banks.
Firms whose failure is unlikely to have financial stability consequences also have a part to play: they need to take a forward-looking realistic assessment to ensure they prepare for the event that they fail, which is likely to be a bank insolvency, and meet PRA rules on The RAF applies to such firms where they are a ‘material subsidiary’ of an overseas-based banking group for the purposes of setting internal MREL in the UK. 20  9  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  9  depositor protection. In placing an emphasis on the responsibility of individual firms to understand and plan for their own resolution, we are making firms accountable for this essential planning, reinforcing the credibility of those plans and the regime as a whole. Conclusion  Resolvability is better regarded as a spectrum than as a binary judgement. It is about ensuring authorities have credible options and the flexibility to respond to a crisis. A resolution is ultimately a transaction which occurs in a crisis situation and is unlikely to ever be a smooth process. But the work done by firms under the RAF should increase the chances that resolution is conducted in an orderly fashion and disruption to the financial system is minimised. Banks and building societies need to prepare themselves fully for these situations now.