The Bank of England, the central bank of the United Kingdom responsible for maintaining monetary and financial stability, has updated its guidance on handling bank failures. On Monday, the institution introduced an alternative bail-in mechanism designed to alter how bondholders are compensated during a bank rescue. This significant change comes after the BoE secured crucial assurances from U.S. regulators, addressing potential cross-border regulatory complexities in emergency situations. The new guidance draws directly from lessons learned during the recent failures of global financial institutions like Credit Suisse and Silicon Valley Bank.
Under the newly adopted approach, bondholders whose debt is either wiped out or converted as part of a bank rescue will initially receive temporary placeholder rights, rather than immediate shares in the rescued bank. These provisional entitlements, referred to as PROPPs, will later be converted into actual shares once regulators have precisely determined each creditor’s final entitlement in the recapitalised entity. The central bank stated that “the key addition is the introduction of an alternate approach to bail-in where affected creditors receive non-transferable contingent beneficial interests,” outlining the shift in the compensation process.
A critical component of this update is the “no-action letter” received from the U.S. Securities and Exchange Commission (SEC), providing additional assurance that U.S. authorities would not recommend enforcement action if a failing bank uses the PROPPs mechanism without registration under the U.S. Securities Act. This regulatory clarity is vital because U.S. securities law applies whenever bondholders are based in the United States, regardless of the bank’s headquarters. U.S. SEC Chair Paul Atkins noted on Friday that he has directed staff to draft a rule to exempt banks from having to register securities offered and sold in foreign bail-in rescues, directly addressing a compliance issue first identified during the 2023 collapse of Credit Suisse. Atkins emphasised the priority of providing regulatory clarity for bail-ins, which are by nature emergency operations often requiring completion over a single weekend.
