UK: The Bank Resolution (Recapitalisation) Act 2025 - Enhancing the special resolution regime

What is the special resolution regime? 

In response to the 2008 financial crisis, the Government moved to reinstate public confidence in the UK's financial system by introducing a special resolution regime (SRR) under BA09 for UK banks (firms). The regime also applies with modifications to a range of other entities including building societies and certain investment firms. 

The SRR comprises 5 stabilisation powers and 2 insolvency powers (as described further below), which are intended to allow the Bank of England (BoE), HM Treasury (HMT) and the PRA / FCA to take steps to resolve a firm where failure is imminent and those steps are needed (amongst other things) to protect and enhance the stability of the financial system in the UK and the public’s confidence therein, and support financial security by limiting the risk to public funds posed by a failed Institution. 

The stabilisation powers are: transfer (in three forms, namely to a private sector purchaser, a bridge bank or to an asset management vehicle); bail-in (where the firm’s losses are absorbed and it is recapitalised through mandatory write down or conversion of its own resources including share capital, CET1, AT1 and T2 instruments and write down of certain other liabilities; or temporary public ownership. 

The 2 insolvency powers are: bank insolvency (which is available to UK banks with depositors eligible for compensation under the Financial Services Compensation Scheme (FSCS)¹ ) and bank administration. Note, however, that bank administration is only available to deal with a failed institution where part of its business has already been transferred under the SRR, it is not a stand-alone process. 

In order to use any of the stabilisation powers, the following 4 conditions must be met: 

1. the PRA must be satisfied that the firm is failing or likely to fail; 
2. the BoE (after consultation with the PRA, the FCA and HMT) must be satisfied that: 
   1. it is not reasonably likely that, ignoring the stabilisation powers, action will be taken which will result in the firm recovering; 
   2. resolution action is necessary having regard to the public interest in the advancement of one or more of the special resolution objectives; and 
   3. the resolution objectives would not be met to the same extent by placing the firm into insolvency. 

The role of MREL 

The BoE, as the UK's resolution authority, sets preferred resolution strategies for individual firms to assist in planning for their potential failure². The BoE’s policy to date has been that if a firm’s preferred strategy is bail-in or transfer, then the firm is required to hold a certain level of capital (known as MREL or minimum requirement for own funds and eligible liabilities), over and above the minimum capital requirements, in order to ensure that there are sufficient funds for loss absorption and recapitalisation. To guide the choice of resolution strategy, the BoE indicated that firms with a transfer strategy should have 40,000-80,000 transaction accounts, and firms with a bail-in strategy should have total assets of £15-25bn. As firms with accounts or assets below these levels (commonly, smaller banks) are not required to hold MREL in excess of the minimum capital requirements, consequently it is more likely the preferred resolution strategy for such firms, will be an insolvency process, rather than resolution using the stabilisation powers. 

However, the insolvency of Silicon Valley Bank UK (SVB) in March 2023 highlighted challenges with the SRR in relation to its application where stabilisation of a small bank was considered a more appropriate outcome than insolvency. SVB was a significant lender to the UK technology sector and while the Government's initial assessment was to place SVB into bank insolvency proceedings, it instead exercised its stabilisation powers to write down SVB's shares and capital instruments before transferring ownership of SVB to HSBC for £1. In SVB's case, the BoE did not have to make use of any additional public funding to facilitate the transfer. However, the matter highlighted the fact that there may be circumstances in which it is better to pursue stabilisation rather than insolvency of a small or smaller bank and in the absence of holding sufficient MREL, stabilising it could require the BoE to call on public funds. The Government has therefore sought to address this challenge by introducing a further funding mechanism involving an industry levy, to safeguard public money. 

The changes 

The Act, through amendments to BA09 and FSMA, expands the statutory functions of the FSCS. It introduces the ability for the BoE to require the FSCS to make a ‘recapitalisation payment’ to the BoE, where the BoE has decided to exercise a stabilisation power under the BA09 in order to resolve a firm, either by way of a sale to a private purchaser or transfer to a bridge bank. A ‘recapitalisation payment’ can include the estimated costs likely to be required for the recapitalisation of the firm, and any other expenses that the BoE or a relevant person (namely, the Treasury, a bridge bank or asset management vehicle) has incurred or might incur in connection with the recapitalisation of the firm or the exercise of the stabilisation power. In turn, the FSCS is provided with a new levy-raising power under FSMA whereby it may recoup such payments from the banking sector. In this way, it should be possible for the BoE to pursue stabilisation measures in relation to firms which don’t have the necessary own funds to absorb losses and recapitalise without necessarily requiring recourse to taxpayer funds. 

Notably, notwithstanding the Government's stated desire when introducing the bill in July 2024 to enhance the resolution regime in response to the failure of smaller banks, the Act does not actually limit the new powers to the recapitalisation of only small banks. During the bill's passage through Parliament, this point was keenly debated. Critics noted that larger banks already have robust MREL requirements to support their recapitalisation, and that the BoE should not be able to access this new funding instead. However, amendments to the bill seeking to restrict its scope to smaller banks were rejected by the Government, which indicated that it wished to maintain flexibility to use the funding mechanism for large, as well as, small banks. The Government emphasised the important role of the SRR code of practice, which provides guidance on how UK authorities use the resolution tools, and noted that recently published draft updates to that code have clarified the Government’s expectation that the BoE will bail in “all readily available MREL that a bank holds, on top of the regulatory capital that must be bailed in” before using the new source of funding³. Accordingly, the Government’s expectation is that the new levy will only be used by larger banks as a back stop but wants to retain the flexibility of having the option for larger banks as well. 

While the Act places requirements on the BoE to report to the Chancellor of the Exchequer, and to certain Parliamentary Committees, in the event that it requires the FSCS to make a recapitalisation payment, it appears such reports are not a precursor to such payments being made. Therefore, the SRR code of practice will remain the key source of criteria for application of the resolution tools. 

In addition to the new funding regime, the Act also extends the BoE's ability to require the bank under resolution to issue new shares which (according to the Government response to the initial consultation, published in July 2024) will facilitate the BoE's use of the funds provided by the FSCS to meet a failing bank's recapitalisation costs. 

FSCS consultation 

To facilitate the new funding regime introduced by the Act, changes will be required to the FSCS rules. The PRA launched a consultation on these changes on 31 March 2025, including proposed amendments to introduce the concepts of recapitalisation payments and levy; specify the classes of levy-payers (not including credit unions); amending the process for management of recoveries; and other general amendments. Details can be found in our article Depositor protection: UK PRA consults on changes to FSCS protection limits and amendments required for Bank Resolution (Recapitalisation) Bill. The consultation closed on 30 April 2025 and it remains to be seen whether the proposed amendments will be adopted in full. While the consultation stated HMT’s expectation that expected lifetime costs for levy payers would be lower under the new funding mechanism, than if they were required to fund depositor payouts in an insolvency situation, it emphasised that this would not necessarily be the case in all circumstances. 

Conclusion 

The new legislation will increase flexibility in managing bank failures by allowing the BoE to exercise its stabilisation power in relation to a wider range of firms and mitigate the risk of the costs of such exercise falling to the taxpayer. 

Authored by Camilla Eliott Lockhart and Margaret Kemp.