The Bank of England (BoE) has received approval from US regulators to implement a new mechanism to simplify the process of rescuing failed banks without spending taxpayer money.

In a statement on Monday, the BoE said it had updated its guidance on its “bail-in” procedure, which facilitates the rescue of collapsed UK lenders by fully exposing shareholders and unsecured creditors of the firm to losses.

The update allows the bank to issue affected creditors of the bank with non-transferable contingent beneficial assets that entitle the bearer to shares, or proceeds from the sale of shares, of any bank that is created through the resolution process.

“This guidance gives further clarity and additional transparency on how the Bank, as the UK’s resolution authority, would operationally manage a bank failure, whether through bail-in or transfer,” said Ruth Smith, executive director of the resolution directorate. “By continuing to establish a shared understanding of how plans would be implemented in stress, we strengthen our preparedness and responsiveness to act if needed.”

The BoE said this update was supported by lessons learned from the failure of Silicon Valley Bank and Credit Suisse, two global banks that collapsed within days of each other in March 2023.

One key issue during the collapse of Credit Suisse was the question of whether US-issued securities could be traded for shares in the bank, which the Financial Times said was seen as restricting the capabilities of Swiss authorities to act.

As part of the BoE’s new guidelines, it requested and received a No-Action Letter from the US Security and Exchange Commission (SEC), giving written assurance that the UK will not face enforcement action for exchanging US-issued bail-in securities for non-transferable assets.

In a letter released 10 April, the SEC’s chairman, Paul Atkins, said he had instructed its Division of Corporate Finance to prepare a recommendation exempting sales and transfers of securities relating to a bail-in from US securities law.

---