Prudential Regulation Authority Rulebook

5.1

The PRA’s approach to new and growing bank supervision aims to facilitate competition, in support of its secondary competition objective. Competitive markets involve firms being able to enter and exit. The PRA’s aim is not to avoid all instances of failure, but instead to work with firms and the Bank as resolution authority to make sure that banks progress from being a new and growing bank to becoming an established bank that would be able, if necessary, to exit in an orderly manner. This means without disruption to the financial system, interruption to the provision of critical functions or exposing public funds to loss. The orderly failure of a new or growing bank at an early stage of its life is likely to have no or minimal impact on financial stability, and is a natural part of a competitive economy.

5.2

The likelihood of failure is higher during the early years of a bank’s development.^[61] Factors which may lead new and growing banks to fail include failure to obtain the required loss absorbing capacity or an inability to realise their business model. Many new and growing banks operate in highly competitive markets and many have novel and untested business plans; this facilitates innovation and competition but not all may prove to be viable. Coupled with this, new and growing banks may have fewer recovery options available to them than established banks, meaning it is crucial they make preparations to exit the market in an orderly way, if required.

5.3

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5.3A

A bank may discontinue its businesses (whether in part or in full) via the following routes:

• Recovery: a firm implements recovery options such as asset sales and disposal options to maintain or restore its viability or financial position following a significant deterioration of its financial situation.
• Solvent exit: a firm ceases its PRA-regulated activities while remaining solvent. The firm should transfer or repay (or both) all deposits as part of its solvent exit.
• Resolution: a firm enters into the resolution regime.^[62]

5.4

New and growing banks should have credible recovery plans which are sufficiently detailed and practical to ensure they reflect the complexity and size of the firm and would be useable in a stress. Recovery plans are important for all firms; for new and growing banks which may have additional vulnerabilities to stress, a robust recovery plan ensures the bank is aware of the range of recovery options available, the impacts and limitations of these actions, and ensures that management actions can be undertaken in a timely manner. However, the PRA recognises new banks have a more limited range of recovery options.

5.5

The PRA has observed that recovery plans produced by many new and growing banks can initially be unrealistic and would not be useful in a stress. Boards of new and growing banks should ensure the bank’s recovery plan is relevant, credible, and executable in a severe stress. Banks should consider the components of recovery planning shown in the chart below, and ensure these are covered in their recovery plan, as well as consulting PRA recovery planning Policy. ^[63]

Figure 2: Components of recovery planning

5.6

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5.7

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5.8

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5.9

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5.10

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5.6A

According to Chapter 7 of the Recovery Plans Part of the PRA Rulebook, a firm should prepare for solvent exit so that, if the need arises, it can effect a solvent exit in an orderly manner. As set out in SS2/24 – ‘Solvent exit planning for non-systemic banks and building societies’,^[64] a firm should produce a ‘solvent exit analysis’ as part of its business-as-usual activities; and a ‘solvent exit execution plan’ when solvent exit becomes a reasonable prospect.

5.7A

A new and growing bank should have in place clear governance arrangements for solvent exit preparations. The Board is expected to play a key role in the approval of solvent exit analysis decision-making to initiate a solvent exit and monitoring of its execution. The PRA expects banks to engage with their supervisor at an early stage on decisions to execute (or not to execute) solvent exit actions.

5.8A

The PRA expects banks to have in place preparations for a solvent exit approved by the Board at the point of authorisation (or exit from mobilisation). A bank should review and update its solvent exit analysis to ensure it remains appropriate as the business develops.

5.9A

A bank should refer to Chapter 2 of SS2/24 – ‘Solvent exit planning for non-systemic banks and building societies’, which sets out the PRA’s expectations for how a firm should prepare for a solvent exit. The level of detail in the solvent exit analysis should be proportionate to the nature, scale, and complexity of the firm. A firm may find it helpful to include the solvent exit analysis as a discrete section in its recovery plan. The firm can also decide to set out the solvent exit analysis separately if the firm finds it appropriate.

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5.11

A series of conditions must be met before a bank may be placed into resolution (together, the resolution conditions). The first two resolution conditions are most relevant to new and growing banks. First, the bank must be deemed ‘failing or likely to fail’. This includes where a bank is failing or likely to fail to meet its threshold conditions in a manner that would justify the withdrawal or variations of authorisation.^[65] This assessment is made by the PRA. The second condition is that it must not be reasonably likely that action will be taken – outside resolution – that will result in the bank no longer failing or being likely to fail. Such actions could include the bank’s recovery actions. This assessment is made by the Bank, as resolution authority, having consulted the PRA, FCA and HM Treasury. The conditions for entry into the regime are designed to strike a balance between, on the one hand, avoiding placing a bank into resolution before all realistic options for a private sector solution have been exhausted and, on the other, reducing the chances of an orderly resolution by waiting until it is technically insolvent.

5.12

The Bank sets preferred resolution strategies for all banks. For smaller banks that do not supply transactional accounts or other critical functions to a scale likely to justify the use of resolution tools, the preferred resolution strategy is the applicable insolvency procedure. Usually, this is the Bank Insolvency Procedure (BIP).^[66] Under this, the bank’s business and assets are sold or wound up after covered depositors have been paid by the Financial Service Compensation Scheme (FSCS) or had their account transferred by the liquidator to another institution using FSCS funds. BIP is likely to be the preferred resolution strategy for most new and growing banks.

5.13

In order to support orderly resolution, banks must maintain a single customer view and exclusions file, ^[67] and are required to provide this to the PRA or FSCS within 24 hours of a request.^[68] Banks’ systems must automatically identify the amount of covered deposits payable to each depositor and identify any portion of an eligible deposit that is over the specified coverage level.^[69]

5.14

As a bank grows, the Bank can change its preferred resolution strategy to either a partial transfer or a bail-in resolution strategy. Banks should be aware of the PRA’s and the Bank’s Resolvability Assessment Framework (RAF) and, as part of their forward planning, anticipate when their preferred resolution strategy may change and when they will come into scope of different policies, for example the MREL^[70] or operational continuity in resolution (OCIR).^{[71] [72]} Banks should plan for this well in advance and consider how they will transition to meet these policies.

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