UK banks ordered to draw up 'living wills'

Banks were yesterday told they could be forced to tear up their bonus plans and conduct fire sales of assets if they run into the sort of difficulties faced by many during the financial crisis in future.

The City watchdog said these are some of the measures they will have to set out in the so-called "living wills" – Recovery and Resolution Plans – which regulators hope will enable banks to return to health in the event of a fresh crisis. Failing that, the plans must spell out how a bank will secure an orderly wind-up.

Other measures suggested by the Financial Services Authority include emergency cash calls and the elimination of dividends, or putting the entire business of a bank up for sale. Bondholders have also been warned they will have to share in the pain.

Banks have been warned that they will be expected to outline "a sufficient number of credible options" such as these to ensure they can recover from a crisis, even if they are the sort of things that would prove unpalatable to senior executives or shareholders and would not normally be considered.

The plans will have to be regularly updated and approved by the new Prudential Regulatory Authority, being set up as part of the Coalition Government's plans to shake up the system of financial oversight.

The watchdog said that if banks had such plans in place prior to the advent of the crisis, "they might well have been able to cope better with the stresses that developed and failures might have been avoided".

However, critics argue that such living wills are little more than sticking plasters and might not prevent the sort of catastrophe that followed the failure of mega-banks such as Lehman Brothers.