BoE updates bank rescue rules with US support

By Aarav Garg

The Bank of England has updated its guidance on handling bank failures, introducing an alternative bail-in mechanism for bank rescues after receiving assurances from USA regulators.

The BoE said it had obtained a no-action letter from USA regulators, giving it assurance that USA authorities would not take enforcement action over the use of the new mechanism. The updated guidance was informed by lessons from the failures of Credit Suisse and Silicon Valley Bank, the central bank said.

Under the new approach, bondholders whose debt is written off or converted as part of a rescue will first receive temporary placeholder rights rather than shares in the rescued bank. These rights, known as PROPPs, will later be converted into actual shares in the recapitalised bank once regulators have determined how much each creditor is owed.

“The key addition is the introduction of an alternate approach to bail-in where affected creditors receive non-transferable contingent beneficial interests,” the BoE said.

The central bank said the US Securities and Exchange Commission had issued the no-action letter, providing additional assurance that US authorities would not recommend enforcement action if a failing bank uses the PROPPs mechanism without registering under the US Securities Act.

U.S. SEC Chair Paul Atkins said that he had directed staff to draft a rule that would exempt ​banks from having to ​register securities offered ⁠and sold as part of a foreign bail-in rescue with the SEC.

Commenting on the move, Hyder Jumabhoy, Global Co-head of Financial Institutions Industry Group & EMEA Co-head of Financial Services M&A at White & Case, said, “This new mechanism is a welcome development and ensures greater stability within the UK financial sector by giving the BoE more options if confronted with a crisis involving a UK lender.” He also added, “This development reflects important lessons from historic bank failures and should provide greater confidence to global investors by reducing uncertainty around how a UK bail-in / resolution process involving US securities would work, in practice. By strengthening international regulatory coordination, it also helps ensure that bank resolution frameworks remain sufficiently robust and credible in an increasingly interconnected financial system.”