BOE’s Bailey Says New Bank Entrants Must Be Easy to Wind Down

Bank of England Deputy Governor Andrew Bailey said he will prioritize approving new banks that can demonstrate they will be simple to wind down in a crisis without needing a public bailout.

If new entrant banks can “satisfy us on their resolvability in order to be authorized, we will lower the barriers and costs of opening for business,” Bailey, chief executive officer of the Prudential Regulation Authority, said in a speech in Edinburgh late yesterday.

“Put simply, if we don’t know how to deal with a failed firm, we will inevitably set a higher barrier to entry,” he said. “We have already started to put this new approach into operation.”

The PRA, which took over from the Financial Services Authority as the U.K.’s chief banking supervisor last month, announced plans in March to reduce by half both the time it takes startups to get approval and the amount of capital they must hold. The regulator will let new lenders operate with a capital ratio as low as 4.5 percent, the minimum allowed under global standards, in an attempt to encourage competition.

In contrast, the PRA ordered Britain’s biggest banks the same month to plug a 25 billion-pound ($39 billion) capital shortfall to cover bigger potential losses, possible compensation for mis-selling and stricter risk models.

Restraining Booms

Bailey also said that one of the objectives of macro-prudential policy is to restrain booms with tighter rules and damp the impact of crises.

“If the banking system is sufficiently capitalized against future losses, it can play a full role in counter-cyclical policy which seeks to respond to and lean against the conditions of the day,” he said. “That is the essential use of forward-looking judgment, done with the explicit objective in mind of using financial regulation as a counter-cyclical tool.”

Bailey said that while there is still work to do to fully solve the problem of banks that are too big to fail, regulators are “making progress.”

“I have a background in resolving banks, and I regard having the capacity to resolve failed large banks –- including the largest –- as the Holy Grail,” he said. “Unlike the legendary Holy Grail, I think there is a good reason to believe that the objective of being able to resolve large banks that fail can be within our grasp.”