Banking Act 2009

[F1 Mandatory write-down, conversion etc of capital instruments U.K.

Textual Amendments

F1 Ss. 6A-6D and cross-heading inserted (1.1.2015) by The Bank Recovery and Resolution Order 2014 (S.I. 2014/3329), arts. 1(2), 10

6A. Cases where mandatory write-down, conversion, etc applies U.K.

(1) Section 6B applies in relation to a bank in the cases set out in subsections (2) to (6).

(2) Case 1 is where—

(a) the conditions imposed by sections 7 to 9 on the exercise of a stabilisation power in respect of the bank are met,

(b) the Bank of England or the Treasury (as the case may be) has decided to exercise the power, and

(c) section 12AA (mandatory write-down etc in bail-in cases) does not apply.

(3) Case 2 is where—

(a) the PRA is satisfied that Condition 1 in section 7 is met in respect of the bank, and

(b) the Bank of England is satisfied that—

(i) (ignoring section 6B) Condition 2 in section 7 is met, and

(ii) that Condition will continue to be met unless the action required by section 6B is taken in respect of the bank.

(4) Case 3 is where—

(a) the bank is viable,

(b) it is a subsidiary,

(c) relevant capital instruments issued by it are recognised for the purpose of meeting own funds requirements on an individual basis and on a consolidated basis, and

(d) [F2 the Bank of England makes a determination] that the group of which the bank is a member will not be viable unless the action required by section 6B is taken in relation to those instruments.

(5) Case 4 is where—

(a) the bank is a parent undertaking,

(b) relevant capital instruments issued by the bank are recognised for the purposes of meeting own funds requirements on an individual basis at the level of the parent undertaking or on a consolidated basis, and

(c) the Bank of England makes a determination that the group will not be viable unless the action required by section 6B is taken in relation to those instruments.

(6) Case 5 is where—

(a) extraordinary public financial support is required by the bank other than in circumstances where subsection (5E) of section 7 applies by virtue of paragraph (c) of that subsection, and

(b) the Bank of England is satisfied F3 ... that, in order for the bank to fulfil its own funds requirements, relevant capital instruments of the bank need to be written down or converted into Common Equity Tier 1 instruments (or both).

(7) For the purposes of Case 3, the bank is viable unless—

(a) the PRA is satisfied that the bank is failing or likely to fail (within the meaning of section 7(5C)), and

(b) having regard to timing and other relevant circumstances, the Bank of England is satisfied that it is not reasonably likely that (ignoring section 6B and the stabilisation powers) action will be taken by or in respect of the bank that will result in the bank no longer being a bank which is failing or likely to fail.

(8) For the purposes of Cases 3 and 4 a group is not viable if (and only if)—

(a) the consolidating supervisor is satisfied that a requirement under the capital requirements regulation[F4 or CRR rules] that applies, on a consolidated basis, to a bank which is a member of the group is infringed (or will in the near future be infringed) in a way that justifies action by the consolidating supervisor, and

(b) having regard to timing and other relevant circumstances (but ignoring section 6B and the stabilisation powers), it is not reasonably likely that action will be taken by or in respect of the bank that will prevent the requirement being infringed.

(9) In this section—

• F5 ...

• [F6 “on a consolidated basis” means on the basis of the consolidated situation,

• “consolidated situation” means the situation that results from an entity being treated, for the purposes of the capital requirements regulation or CRR rules (as appropriate), as if that entity and one or more other entities formed a single entity,

• “consolidating supervisor” means supervisor responsible for the exercise of supervision of an entity on a consolidated basis,]

• “group” has the meaning given in section 3(2)(b),

• “parent undertaking” has the meaning given by Article 4.1(15)(a) of the capital requirements regulation, and

• “subsidiary” has the meaning given by Article 4.1(16) of the capital requirements regulation.

Textual Amendments

F2 Words in s. 6A(4)(d) substituted (31.12.2020) by The Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 (S.I. 2018/1394), reg. 1(2), Sch. 1 para. 8(2); 2020 c. 1, Sch. 5 para. 1(1)

F3 Words in s. 6A(6)(b) omitted (16.12.2016) by virtue of The Bank Recovery and Resolution Order 2016 (S.I. 2016/1239), arts. 1(2), 6

F4 Words in s. 6A(8)(a) inserted (1.1.2022) by The Financial Services Act 2021 (Prudential Regulation of Credit Institutions and Investment Firms) (Consequential Amendments and Miscellaneous Provisions) Regulations 2021 (S.I. 2021/1376), regs. 1(3), 9(3)(a)

F5 Words in s. 6A(9) omitted (31.12.2020) by virtue of The Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 (S.I. 2018/1394), reg. 1(2), Sch. 1 para. 8(3)(a); 2020 c. 1, Sch. 5 para. 1(1)

F6 Words in s. 6A(9) substituted (1.1.2022) by The Financial Services Act 2021 (Prudential Regulation of Credit Institutions and Investment Firms) (Consequential Amendments and Miscellaneous Provisions) Regulations 2021 (S.I. 2021/1376), regs. 1(3), 9(3)(b)

6B. Mandatory write-down, conversion, etc of capital instruments [F7 and liabilities] U.K.

(1) In a case where this section applies, the Bank of England must without delay make—

(a) an instrument in relation to the bank containing the mandatory reduction provision, or

(b) two or more instruments which (taken together) contain that provision.

An instrument made under this subsection is a “mandatory reduction instrument”.

(2) “The mandatory reduction provision” is provision which produces the following results—

(a) existing Common Equity Tier 1 instruments of the bank are cancelled, transferred or diluted in accordance with the principle that losses should be borne first by the holders of such instruments,

(b) the principal amount of Additional Tier 1 instruments of the bank is reduced or such instruments are converted (directly or indirectly) into Common Equity Tier 1 instruments (or both)—

(i) to the extent required to achieve the special resolution objectives set out in section 4, or

(ii) to the extent of the capacity of the relevant capital instruments,

whichever is lower; F8 ...

(c) the principal amount of Tier 2 instruments [F9 of the bank] is reduced or Tier 2 instruments are converted (directly or indirectly) into Common Equity Tier 1 instruments (or both)—

(i) to the extent required to achieve the special resolution objectives set out in section 4 (so far as not achieved under paragraph (b)), or

(ii) to the extent of the capacity of the relevant capital instruments,

whichever is lower; [F10 and

(d) where this section applies by virtue of section 6A(3) (Case 2) and the bank is not a resolution entity, but is in a resolution group, the principal amount of the relevant internal liabilities is reduced or such liabilities are converted (directly or indirectly) into Common Equity Tier 1 instruments (or both)—

(i) to the extent required to achieve the special resolution objectives set out in section 4 (so far as not achieved under paragraphs (b) and (c)), or

(ii) to the extent of the capacity of such liabilities,

whichever is lower.]

(3) For the purposes of subsection (2), a mandatory reduction instrument may contain—

(a) provision cancelling existing Common Equity Tier 1 instruments of the bank,

(b) provision transferring (directly or indirectly), to holders of Additional Tier 1 instruments [F11 , Tier 2 instruments or relevant internal liabilities] of the bank, Common Equity Tier 1 instruments of the bank,

(c) provision converting relevant capital instruments [F12 or relevant internal liabilities] of the bank (directly or indirectly) into Common Equity Tier 1 instruments of the bank or a parent undertaking of the bank,

(d) provision cancelling a liability owed by the bank,

(e) provision modifying, or changing the form of, a liability owed by the bank,

(f) provision that a contract under which the bank has a liability is to have effect as if a specified right had been exercised under it.

(4) The following rules apply to the interpretation of subsection (3)—

• A. The reference to cancelling a liability owed by the bank includes a reference to cancelling a contract under which the bank has a liability.

• B. The reference to modifying a liability owed by the bank includes a reference to modifying the terms (or the effect of the terms) of a contract under which the bank has a liability.

• C. The reference to changing the form of a liability owed by the bank includes, for example—

  (i)

  converting an instrument under which the bank owed a liability from one form or class to another,

  (ii)

  replacing such an instrument with another instrument of a different form or class, or

  (iii)

  creating a new security (of any form or class) in connection with the modification of such an instrument.

(5) Provision made by virtue of subsection (3) may include—

(a) provision for securities issued by a specified bank to be transferred to a resolution administrator (see section 62B) or another person;

(b) where a previous mandatory reduction instrument (“the original instrument) has contained provision under paragraph (a), provision for the transfer of—

(i) securities which were transferred by the original instrument, or

(ii) securities which were issued by the bank after the original instrument was made.

(6) Provision made in accordance with subsection (5) may relate to—

(a) specified securities, or

(b) securities of a specified description.

(7) Where the Bank of England has exercised the power in subsection (5)(a) to transfer securities to a resolution administrator, the Bank must exercise its functions under this Part with a view to ensuring that any securities held by that person in the capacity of resolution administrator are so held only for so long as is, in the Bank of England’s opinion, appropriate having regard to the special resolution objectives.

(8) Where Case 1 in section 6A applies, the Bank must comply with subsection (1) before or at the same time as exercising the stabilisation power.

(9) Where Case 3 in section 6A applies, the principal amount of a relevant capital instrument issued by the bank must not be reduced under this section to a greater extent, or converted on worse terms, than equally ranked capital instruments at the level of any parent undertaking of the bank which are reduced, or converted

[F13 (a) pursuant to this section as it applies in relation to a banking group company by virtue of section 81AA, or

(b) in the course of applying the bail-in option provided for by section 12A or section 81BA.]

(10) In this section “parent undertaking” has the meaning given by Article 4.1(15)(a) of the capital requirements regulation.

Textual Amendments

F7 Words in s. 6B heading inserted (28.12.2020) by The Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/1350), regs. 1(2), 6

F8 Word in s. 6B(2)(b) omitted (28.12.2020) by virtue of The Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/1350), regs. 1(2), 7(a)(i)

F9 Words in s. 6B(2)(c) inserted (28.12.2020) by The Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/1350), regs. 1(2), 7(a)(ii)

F10 S. 6B(2)(d) and word inserted (28.12.2020) by The Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/1350), regs. 1(2), 7(a)(iii)

F11 Words in s. 6B(3)(b) substituted (28.12.2020) by The Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/1350), regs. 1(2), 7(b)(i)

F12 Words in s. 6B(3)(c) inserted (28.12.2020) by The Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/1350), regs. 1(2), 7(b)(ii)

F13 Words in s. 6B(9) substituted (31.12.2020) by The Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 (S.I. 2018/1394), reg. 1(2), Sch. 1 para. 9; 2020 c. 1, Sch. 5 para. 1(1)

6C. Mandatory reduction instruments: implementation of requirements of section 6B U.K.

(1) Where the principal amount of a relevant capital instrument [F14 or a relevant internal liability] is reduced under section 6B—

(a) the reduction must be permanent, subject to any provision made by virtue of section 48Y(1)(a);

(b) no liability to the holder of the relevant capital instrument [F15 or the relevant internal liability] remains under, or in connection with, so much of the amount of the instrument [F16 or relevant internal liability] as constitutes the reduction, except for—

(i) any liability already accrued in a case where the principal amount of the instrument [F16 or the relevant internal liability] is not reduced or converted (or both) to the full extent of its capacity, and

(ii) any liability for damages that may arise as a result of any challenge to the legality of the exercise of the power of reduction;

(c) no compensation is to be paid to any holder of the relevant capital instrument [F17 or the relevant internal liability] other than in accordance with subsection (4).

(2) Nothing in subsection (1)(b) prevents the provision of Common Equity Tier 1 instruments to a holder of relevant capital instruments [F18 or relevant internal liabilities] in accordance with subsection (4).

(3) In order to effect a conversion of relevant capital instruments [F19 or relevant internal liabilities] under section 6B, the Bank of England may require the bank, or a UK parent undertaking, to issue Common Equity Tier 1 instruments to the holders of the relevant capital instruments [F19 or relevant internal liabilities].

(4) The relevant capital instruments [F20 or relevant internal liabilities] may only be so converted if—

(a) the Common Equity Tier 1 instruments are issued by the bank, or by a [F21 UK parent] undertaking of the bank with the agreement of the [F22 Bank of England],

(b) the Common Equity Tier 1 instruments are issued prior to the issue of any shares by the bank, or by a parent undertaking of the bank, for the purposes of provision of own funds by the [F23 Treasury],

(c) the Common Equity Tier 1 instruments are awarded and transferred without delay following the exercise of the conversion power, and

(d) the conversion rate that determines the number of Common Equity Tier 1 instruments that are provided in respect of each relevant capital instrument [F24 or relevant internal liability] [F25 represents appropriate compensation to the affected creditor for any loss incurred in consequence of the conversion of that instrument or liability.]

[F26 (4A) Where different conversion rates are applied to different classes of instrument or liability, a lower conversion rate must be applied to subordinated debt than is applied to debts ranking higher in the hierarchy of claims in normal insolvency proceedings.]

(5) For the purposes of the provision of Common Equity Tier 1 instruments in accordance with subsections (2), (3) and (4), the Bank of England may require the bank or a UK parent undertaking of the bank to maintain at all times the necessary prior authorisation to issue the relevant number of Common Equity Tier 1 instruments.

(6) Before making a mandatory reduction instrument, the Bank must consult—

(a) the PRA,

(b) the FCA, and

(c) the Treasury.

(7) In this section—

• “parent undertaking” has the meaning given by Article 4.1(15)(a) of the capital requirements regulation,

• F27 ...

• “UK parent undertaking” means a parent undertaking that is incorporated in, or formed under the law of, any part of the United Kingdom.

Textual Amendments

F14 Words in s. 6C(1) inserted (28.12.2020) by The Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/1350), regs. 1(2), 8(a)

F15 Words in s. 6C(1)(b) inserted (28.12.2020) by The Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/1350), regs. 1(2), 8(b)

F16 Words in s. 6C(1)(b) inserted (28.12.2020) by The Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/1350), regs. 1(2), 8(c)

F17 Words in s. 6C(1)(c) inserted (28.12.2020) by The Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/1350), regs. 1(2), 8(b)

F18 Words in s. 6C(2) inserted (28.12.2020) by The Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/1350), regs. 1(2), 8(d)

F19 Words in s. 6C(3) inserted (28.12.2020) by The Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/1350), regs. 1(2), 8(e)

F20 Words in s. 6C(4) inserted (28.12.2020) by The Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/1350), regs. 1(2), 8(f)

F21 Words in s. 6C(4)(a) substituted (31.12.2020) by The Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 (S.I. 2018/1394), reg. 1(2), Sch. 1 para. 10(2)(a); 2020 c. 1, Sch. 5 para. 1(1)

F22 Words in s. 6C(4)(a) substituted (31.12.2020) by The Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 (S.I. 2018/1394), reg. 1(2), Sch. 1 para. 10(2)(b); 2020 c. 1, Sch. 5 para. 1(1)

F23 Word in s. 6C(4)(b) substituted (31.12.2020) by The Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 (S.I. 2018/1394), reg. 1(2), Sch. 1 para. 10(3); 2020 c. 1, Sch. 5 para. 1(1)

F24 Words in s. 6C(4)(d) inserted (28.12.2020) by The Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/1350), regs. 1(2), 8(g)

F25 Words in s. 6C(4)(d) substituted (31.12.2020) by The Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 (S.I. 2018/1394), reg. 1(2), Sch. 1 para. 10(4) (as amended by S.I. 2020/1350, regs. 1(2), 76(2)(a)); 2020 c. 1, Sch. 5 para. 1(1)

F26 S. 6C(4A) inserted (31.12.2020) by The Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 (S.I. 2018/1394), reg. 1(2), Sch. 1 para. 10(5) (as amended by S.I. 2020/1350, regs. 1(2), 76(2)(b)); 2020 c. 1, Sch. 5 para. 1(1)

F27 Words in s. 6C(7) omitted (31.12.2020) by virtue of The Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 (S.I. 2018/1394), reg. 1(2), Sch. 1 para. 10(6); 2020 c. 1, Sch. 5 para. 1(1)

6D. Mandatory reduction instruments: supplementary matters U.K.

(1) The following provisions apply in relation to a mandatory reduction instrument as they apply to a resolution instrument—

(a) section 48L(3) and (5) (powers relating to securities issued by the bank),

(b) section 48O (power to direct directors of the bank),

(c) section 48Q (continuity),

(d) section 48R (execution and registration of instruments etc),

(e) section 48S (general matters), and

(f) section 48T (procedure).

(2) Where the Bank of England makes one or more mandatory reduction instruments in respect of a bank, the Bank must, on request by the Treasury, report to the Chancellor of the Exchequer about—

(a) the exercise of the power to make a mandatory reduction instrument,

(b) the activities of the bank, and

(c) any other matters in relation to the bank that the Treasury may specify.

(3) In relation to the matters in subsection (2)(a) and (b), the report must comply with any requirements that the Treasury may specify.

(4) The Chancellor of the Exchequer must lay a copy of each report under subsection (2) before Parliament.]