Major UK banks told to fix faults in resolution plans

U.K.-based HSBC Holdings PLC, Lloyds Banking Group PLC and Standard Chartered PLC have "shortcomings" in their plans aimed at protecting customers and avoiding drawing on taxpayers' funds should they fail, according to the Bank of England.

In a review of resolution plans, the BoE said banks must fix the issues, which include failing to effectively identify resolution options. The BoE also noted that all lenders assessed meet requirements for the level of shares, debt and other liabilities that can be converted to absorb losses in the event of a failure — known as the minimum requirement for own funds and eligible liabilities, or MREL.

Major banks have more than £500 billion of MREL resources that could be used to absorb losses via a "bail-in" and avoid a repeat of financial crisis-era taxpayer-funded bailouts, according to the BoE.

Lloyds' MREL ratio — MREL components as a percentage of risk-weighted assets or total liabilities and own funds — stood at 37.2% at the end of 2021, above its minimum requirement of 19.7%. HSBC's total loss absorbing capital — an equivalent to MREL for global systemically important banks — was 32.3%, compared to a requirement of 16.0%. The MREL ratios of NatWest Group PLC, Barclays PLC, Virgin Money UK PLC and Standard Chartered were 39.8%, 34.7%, 31.9% and 31.7%, respectively.

The rules covering MREL changed in January 2022 when transitional relief allowing banks to discount their exposures to central banks ended. Lloyds and Barclays reported lower MREL ratios of 31.6% and 31.0%, respectively, as of March 31.

Six banks, including HSBC and Standard Chartered, need to work on "enhancements" to resolvability plans to reduce execution risks, according to the central bank.

HSBC had shortcomings related to its analysis of how it would fund itself in the event of resolution. It has been asked to take steps to improve the resolvability of its international infrastructure. The bank said the changes required would be "complex" and tackling the issues raised could take some years to fully implement.

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Standard Chartered also had shortcomings in its identification of its liquidity needs for resolution and was criticized for failing to identify all available restructuring options in various resolution scenarios. The bank said in response that it had enhanced its existing capabilities to ensure it could understand its liquidity needs more rapidly.

Lloyds was identified as having shortcomings in this area, which could affect the ability of the bank's senior management and the BoE to take timely and robust decisions.

"We have since implemented and tested improvements which we believe will work towards addressing the BoE findings," Lloyds said.

NatWest, Barclays and Virgin Money were each criticized for their plans to ensure they could continue to operate smoothly during resolution — NatWest, for instance, was criticized for its record-keeping. All three banks said they were working on improvements following the BoE's report.

Only Santander UK Group Holdings PLC, a subsidiary of Banco Santander SA, had prepared a resolution plan that did not present any material issues, the central bank said.