First, because they can only be initiated at the point of insolvency, whereas a loss of confidence in a bank by its depositors will often precede that point. Second, normal insolvency procedures are not well suited to ensuring continuity of key banking functions, particularly access of depositors to their funds, but also the provision of credit. Third, a bank failure may involve substantial negative spill over and externalities – for instance to other banks via their inter-connectedness. But in normal insolvency procedures these externalities would not be taken into account when determining what to do in insolvency. Fourth, depositors play a special role as creditors of a bank. Unlike the creditors of a typical company, they are very numerous in number, most are not professional market participants, and their claims in the bank are in the form of money. The recent experience in the UK These are therefore strong reasons for treating the resolution of banks differently. But we didn’t start in this position at the onset of the financial crisis in 2007. At the time of the start of Northern Rock’s problems, the UK did not have a special resolution regime; rather, we were relying on the tools of the past. Northern Rock was a good example of a bank that had a liquidity problem, caused by the closure of its major funding market, for residential mortgage backed securities, and had a heightened probability of experiencing a solvency problem in the future.
It is possible to direct part or all of a failing bank’s business to a private sector purchaser after a sale process has been undertaken. Second, it is possible for the Bank of England to take control of part or all of a bank’s business through a bridge bank controlled and owned by the Bank. A special bank administration procedure can be used in combination with a partial property transfer or bridge bank. This administration procedure is broadly the same as a conventional administration save for the very important difference that the administrator has a statutory objective to support the transferred business with any infrastructure left in the insolvent rump. Finally, under the SRR provisions, it is possible to take a bank into temporary public ownership. For this approach, the Treasury would be in the lead, and there is a higher test of systemic importance to be passed (there must be a serious threat to financial stability) for this approach to be used. As I have indicated, the SRR contains important roles for all of the authorities. The FSA is responsible for triggering the SRR by determining, broadly, that a bank no longer meets its threshold conditions for authorisation, and there is no reasonable prospect of it taking actions to correct the situation within an acceptable timeframe. The FSA is also responsible for approving the transfer of business to another institution that it authorises.