March 05, 2024

UK Government consults on new rules to recapitalise small banks in resolution – What does this mean for potential buyers of distressed UK banks?


What is the government proposing?

  • The UK government (“HM Treasury”) has launched a Consultation setting out its proposals to amend the UK special resolution regime (“SRR”) to direct that the UK depositor guarantee scheme is used to fund the resolution of small non-systemic banks, building societies and other financial institutions falling within scope of the SRR (each a “bank”).
  • The proposal is for the UK depositor protection guarantee scheme (the “Financial Services Compensation Scheme” or “FSCS”) to provide funding to recapitalise failing small banks, where these banks are placed into resolution (or orderly wind-down) rather than insolvency.  The FSCS is currently the vehicle through which eligible depositors are repaid on any failure of a UK deposit taking bank. The funding proposed under the consultation will be raised by additional levies placed on UK deposit taking banks. In short, the Bank of England will recover the costs of resolving and recapitalising small banks by recouping those costs from the deposit taking banking sector as a whole.  By placing these costs on the banking sector, it mitigates the risk of taxpayer funds being utilised to resolve small banks and eases the exit of a small bank from a bridge bank to facilitate a sale to a third party purchaser.

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