Bank of England's New Bail-In Tool Reduces US Legal Friction for Bondholders

Bondholders based in the United States will no longer face the same legal friction when their debt is converted to equity during a UK bank rescue. The Bank of England has updated its operational guidance on managing bank failures, introducing a a new alternative bail-in mechanism. Under this new approach, affected creditors receive non-transferable contingent beneficial interests, known as PROPPs, instead of immediate shares in the rescued bank.

This mechanism addresses a specific legal hurdle: US securities law applies to any bondholder based in the United States, regardless of where the bank is headquartered. The Bank of England sought and received a "no-action" letter from the SEC, providing assurance that the not recommend enforcement action if a UK bank exchanges US bail-in securities for PROPPs. SEC Chair Paul Atkins said he plans to introduce a rule to exempt banks from the registration requirements that would otherwise apply to the sale of securities during such an emergency resolution.

The update reflects lessons from the 2023 failures of Credit Suisse and Silicon Valley Bank, where legal uncertainty over instruments issued under US rules constrained resolution options. The resolution regime is designed to allow a firm to fail without interrupting critical functions like payments and access to deposits, and without calling on public money. The Bank of England's updated guidance now serves as an operational tool for the resolution of UK banks and building societies.