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Bank of England highlights UK bank shortcomings in plans to fail ‘safely’

HSBC, Lloyds Banking Group and Standard Chartered have “shortcomings” in their plans to ensure they could fail without harming customers and taxpayers, the Bank of England said in its first assessment of big lenders’ preparations to manage their demise.

The regulator on Friday ordered the three lenders to fix issues including how they would fund themselves if they ran into trouble and how they would smoothly serve customers.

The BoE said four other big UK banks must make “enhancements” to their resolution plans.

Banks were told to create so-called resolution plans as part of 2019 measures to make sure the bailouts of the 2007-08 crisis would not be repeated, even if lenders were to collapse. Taxpayers were forced to spend tens of billions of pounds rescuing Royal Bank of Scotland and Lloyds in 2008 as their funding dried up.

The regulator had committed to parliament that big banks would be “resolvable” by 2022.

The UK offshoot of Spain’s Santander was the only one of the UK’s eight top banks that came through the BoE’s assessment without any recommendations for improvement.

The BoE stressed that while there were many areas for improvement, all of the banks could fail safely, “remaining open and continuing to provide vital banking services to the economy”.

The central bank’s assessments mirrored those that have been carried out by US regulators led by the Federal Reserve since 2016.

“When the Fed and the FDIC did their assessment there was a clear desire to have some fails in order to provoke further work,” said Alastair Morley, partner at Deloitte. “The Bank [of England] took the decision to be more optimistic.”

The banks’ plans were judged on how they would fund themselves through their demise, how they would keep their businesses operating smoothly and how they would communicate their plans and co-ordinate decision making.

Funding — a key pinch point of the 2007-8 crisis when banks turned to emergency support after their normal funding sources dried up — was the area where the BoE identified the most problems.

HSBC, Lloyds and Standard Chartered all had funding “shortcomings” and NatWest, Nationwide and Virgin UK were asked to make “enhancements” to address less serious issues.

HSBC, the UK’s largest bank by assets, was also found to have shortcomings in its plans for how it would be restructured during its demise, as was Standard Chartered.

In its statement, HSBC said it had been asked to take steps to improve the resolvability of its international infrastructure, which spans 64 countries and territories.

“The changes that would be required to this infrastructure to support certain restructuring actions, which may be needed in resolution, would be complex,” the bank said, adding that it had been working on the issue for several years. HSBC shares were down 0.9 per cent in early trading.

Standard Chartered was criticised for failing to identify and evaluate “all available restructuring options in a wide range of resolution scenarios”. The bank said it had “enhanced” its restructuring planning and would assess the credibility of those plans every year.

Weaknesses in Lloyds’ resolution funding plans included issues with the bank’s capacity to take “timely and robust decisions” on its liquidity. In its statement, Lloyds said it was already making some enhancements that would address the BoE’s concerns.

NatWest, Barclays and Virgin Money were all criticised for their plans to ensure they could operate smoothly through a collapse and were asked to make enhancements.

NatWest’s said it was working to improve the robustness and accuracy of its record keeping.

Virgin UK said the BoE had identified weaknesses related to the “execution of restructuring options and flexibility to cost options” and the “Group will continue to engage with the BoE on these items”.

Barclays said it had “identified some areas for further refinement, including continued optimisation of processes and use of automation where appropriate, which it will continue to progress”.

“Safely resolving a large bank will always be a complex challenge so it’s important that both we and the major banks continue to prioritise work on this issue,” Sir Dave Ramsden, deputy governor for markets and banking at the BoE, said on Friday.

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