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UK banks have urged the Bank of England to dilute its plans for handling failing lenders, arguing that they go beyond equivalent rules in the US or the EU, and will impose “significant costs” on the sector.
The City of London’s clash with the central bank comes as the government is pressing regulators to do more to revive economic growth by slashing the bureaucratic burden faced by businesses.
Trade body UK Finance said the BoE would “create capital instabilities” and be “burdensome” for the sector if it gives itself extra powers to wipe out a special form of debt that is designed to be written off during a crisis.
The lobby group’s response to the BoE, seen by the Financial Times, said the central bank should raise thresholds for which banks need such loss-absorbing debt more than it is currently planning. Failure to do so would be “a disincentive to investors” and harm the sector’s competitiveness, it said.
The thresholds are set by asset size and number of active accounts. Financiers estimate that at least five fast-growing banks, such as Revolut, are likely to soon be caught by the requirement to issue the loss-absorbing debt.
Under rules introduced after the 2008 financial crisis, banks above a certain size need an extra layer of debt that regulators can wipe out or convert to equity in a crisis, known as MREL — minimum requirement for own funds and eligible liabilities. This is designed to avoid governments ever needing to use taxpayer funds to rescue failed lenders.
The rules came under fresh scrutiny after the BoE intervened to transfer the UK subsidiary of failed US lender Silicon Valley Bank to HSBC over a weekend in 2023.
In response, the government introduced new legislation allowing the BoE to use funds from the sector’s deposit insurance scheme to finance the transfer of a failed bank to a rival.
The BoE said in October it plans to introduce a “contractual trigger” into loss-absorbing debt that allows officials to wipe it out if the foreign parent of a British bank is put into resolution, even if the UK subsidiary remains operationally viable.
UK Finance said regulators in other jurisdictions “have not taken such an expansive approach to the use of contractual triggers” and warned the plans would create “significant challenges” for lenders.
The sector fears that it would be costly to rewrite the terms of billions pounds worth of loss-absorbing debt to give the BoE this extra power, while warning it could change the accounting treatment of the securities. UK Finance said the central bank should at least exclude existing debt.
In October, the BoE said it planned to raise the size threshold above which banks need to raise such debt from total assets of £15bn-£25bn to £20bn-£30bn. It also said banks caught by a separate threshold based on the number of active accounts would no longer have to raise this loss-absorbing debt.
UK Finance called for the central bank to go further by increasing the size threshold to £40bn-£50bn to take account of inflation since the rule was introduced in 2015. It also called for the active account threshold to be scrapped or raised from 40,000-80,000 to 100,000-150,000.
Revolut, which was granted a UK banking licence last year, increased its total assets from £14.1bn in 2022 to £17.4bn in 2023. The bank declined to comment.
UK Finance said its proposals were designed to “reflect technological advances and consumer preferences, alongside regulatory reforms in the past few years and to be consistent with major international jurisdictions such as the EU and US”.
The BoE said the consultation ended on Friday and it was considering responses.
