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Can you stop a bank from going bust?

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    Can you stop a bank from going bust?

    People rely on banks in their day to day lives, whether it’s for looking after their money or helping them pay for things.

    Not surprisingly, then, if banks stopped working, the entire economy would grind to a halt.  It’s the Bank of England’s job to make sure that banks (and the entire financial system) continue to work in a safe and sound way.

    As part of this, we put a lot of effort into reducing the chances of a bank getting into financial difficulty in the first place.

    But it is not possible to prevent all banks from ever failing.

    Just like any other type of business, it is important that a bank that doesn’t make a profit is able to fail.

    What happens if a bank goes bust?

    Thinking about your bank going bust may be a scary prospect.

    But in fact, the way that the banking sector is overseen means that you do not need to worry about losing any money up to £85,000 or your ability to make payments – even if your bank goes bust.

    What does matter is how a bank failure unfolds.  In particular, who pays the price when things go wrong?

    Who pays the price when a bank goes bust?

    What did we learn from the 2007-08 financial crisis?

    The crisis that broke out in 2007 was one of the worst ever seen.

    We learnt two important lessons about how to deal with a failing bank:

    Who deals with bank failures? Who pays for bank failures?
    At the time of the crisis, no single authority was formally responsible for dealing with failing banks. During the crisis, public funds were used to bail out a number of UK banks and building societies.

    The bailouts came at a huge cost to taxpayers.  They were necessary, though, to make sure that people with money in bank accounts did not lose access to it.

    What happens when a bank fails today?

    Things are very different today.

    An important change is that the general public will not pay the price when things go wrong. In the new set-up, there is no need for bailouts.

    The Bank of England has been given new powers to step in if a bank fails. We also work with banks to create ‘living wills’ to show how they could be dealt with if they suffered a catastrophic shock.

    So if a large commercial bank did go bust today, it could now do so in an orderly way. The losses would fall on the bank’s investors, not taxpayers. And if your bank failed, you could claim back up to £85,000 of your money through the Financial Services Compensation Scheme.

    The new rules are designed so that even the biggest, most complex banks can fail if they become unprofitable – but they can do this without the need for taxpayer support and without causing disruption to the financial system or wider economy.

    3 comments

    1. Jerzy Wieczorkiewicz (Canada)
      8th October 2016

      The premise that banks can sustainably operate like other businesses is flawed. Eventually banks will become not-for-profit organizations but not before few more financial crisis and public outrage. There is too much money at stake so don’t expect this change to be voluntary.

    2. Hormoz firouzbakhsh
      21st February 2017

      Is this really true that today a large bank can fail without the need for taxpayer intervention?! If Barclays fail tomorrow how would their living will facilitate an orderly wind down? How about the systemic risk they induce in their transactions with other banks (and a domino effect as per Lehman Bros?)

      1. KnowledgeBankLeanne
        27th February 2017

        Thanks for your question Hormoz!
        Since the crisis, the Bank has worked closely with the Government to ensure that future failures of banks are managed in a way that it does not fall on the taxpayer. We call this resolution, and as part of our remit to maintain financial stability, we are responsible for ending the ‘too big to fail’ culture and for managing the failing of a bank through resolution.
        More information can be found here, otherwise please email enquiries@bankofengland.co.uk, where we will be able to provide you with further information.
        I hope that answers your question, and thanks for visiting KnowledgeBank.

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