Bank of England sets out tough regime for failed banks

By Huw Jones LONDON (Reuters) - Top managers of a failed bank would be replaced immediately and creditors told within two days the losses they will bear, the Bank of England said on Thursday in its blueprint for avoiding taxpayer bailouts in future financial crises. This is the first time the British central bank has set out the steps it would take over an initial 48-hour period to deal with a collapsing bank. The lender's top executive management would be fired on the spot and the bank's liabilities used to pay off losses and recapitalise in a bid to restore confidence and avoid a run. The new regime comes into effect in January 2015. Had it been in place in 2008 when Royal Bank of Scotland failed, taxpayers would not have had to funnel 45 billion pounds ($72 billion) into the bank. "This is a significant milestone in our resolution regime," said Andrew Gracie, executive director of resolution at the BoE. With this blueprint regulators and banks aren't leaving a failure to chance but are planning ahead so that, should it happen, it will be orderly and everyone will be clear on the sequence of events and who will pay for it. The Bank expects its regulatory early warning system to spot a pending collapse much earlier than in the past so that by the time it pulls the trigger on restructuring, it would have a team of seasoned bankers waiting in the wings to run the firm. Replacing top executives is seen as key to signaling a fresh start for a bank and a way of emphasising that a failure of management does not go unpunished. Banks already must have plans outlining how they would recover from a market shock or how critical parts, such as deposits and payments, would continue unaffected by a collapse. The Bank of England would, at the end of a 48-hour resolution period -- which can be over a weekend or midweek -- announce which of the bank's bonds will be frozen or cancelled to pay off losses and replenish capital, and which ones won't be affected. This public announcement is aimed at avoiding runs on stricken banks, though it will take several years before all the banks under the BoE net have a stack of "bail-inable" bonds equivalent to 8 percent of their assets, as required under a new European Union law that takes effect next January. The taxpayer-funded rescue of RBS was equivalent to less than 8 percent of its assets. The world's top lenders, which include Britain's HSBC and Barclays, will also be required to hold a form of "bail-inable" debt under global requirements due to be endorsed by the Group of 20 economies (G20) next month. Richard Bussell, banking partner at law firm Linklaters, said the reforms will have significant implications for financial institutions by changing their access to equity and debt funding, as well as being required to produce detailed recovery plans on an entity and group basis. "But how well this works in practice will be down to how the European and national supervisors and resolution authorities across the EU work together," Bussell said. The BoE's first port of call for cash would always be shareholders and creditors, including senior bond holders who escaped losses during the financial crisis when taxpayers had to shore up lenders in Europe. If not enough cash can be raised from shareholders and creditors, then the funds being garnered from the current levy on banks will be used, making the need to go cap in hand to taxpayers again only a remote possibility. (1 US dollar = 0.6250 British pound) (Reporting by Huw Jones; Editing by Andy Bruce and Vincent Baby)