18.09.2012
By Simon Miller
Bank bail-ins must not be used in isolation from other resolution tools when a bank is in trouble, director of the Special Resolution Unit at the Bank of England Andrew Gracie said today.
Speaking at the British Bankers' Association's Recovery & Resolution seminar, Gracie argued that "bail-in cannot, and should not, be used in isolation from other tools or powers".
He continued: "It cannot and should not be used simply to keep a loss-making business artificially alive. Rather, its role is to help keep a bank's vital operations function, and avoid the disorder that would result from the bank suddenly ceasing to trade."
Gracie conceded that like other resolution tools, some interference with property rights existed with bail-ins but he noted that "safeguards will apply which will ensure that no creditor is left worse off than they would have fared in a counterfactual insolvency".
He added: "Bail-in, like other resolution tools can only be used when it is necessary to do so in pursuit of clearly defined public interest objectives."
The director said that resolution tools would only be sued if efforts to avoid the firm reaching a point of non-viability were unsuccessful.
Gracie added that the authorities would take a formal decision on which of the resolution powers at their disposal to use but with a bail-in, in particular, the process could consist of four key steps:
1) stabilisation - where the authorities would take control of an institution over a resolution weekend;
2) valuation and exchange; - Determination of losses occurred or likely to occur;
3) relaunch - After creditors had been written down equity would be assigned to affected creditors as a quid pro quo;
and 4) restructuring - to prevent disruption to the provision of critical economic functions while directly addressing the causes of the firm's failure
Gracie concluded: "We are moving closer to an operational bail-in regime, A large number of outstanding challenges remain, but these challenges are largely surmountable."
