5 Orderly exit: recovery, solvent exit and resolution
5.1 The PRA’s approach to new and growing bank supervision aims to facilitate competition, in support of its secondary competition objective. Competitive markets involve firms being able to enter and exit. The PRA’s aim is not to avoid all instances of failure, but instead to work with firms and the Bank as resolution authority to make sure that banks progress from being a new and growing bank to becoming an established bank that would be able, if necessary, to exit in an orderly manner. This means without disruption to the financial system, interruption to the provision of critical functions or exposing public funds to loss. The orderly failure of a new or growing bank at an early stage of its life is likely to have no or minimal impact on financial stability, and is a natural part of a competitive economy.
5.2The likelihood of failure is higher during the early years of a bank’s development [This is common across industries, see for example P.A. Geroski, What do we know about entry?, International Journal of Industrial Organization 13 (1995) 421-441, or Kücher et al, Firm age dynamics and causes of corporate bankruptcy: age dependent explanations for business failure, Review of Managerial Science (2020) 14:633-661.]. Factors which may lead new and growing banks to fail include failure to obtain the required loss absorbing capacity or an inability to realise their business model. Many new and growing banks operate in highly competitive markets and many have novel and untested business plans; this facilitates innovation and competition but not all may prove to be viable. Coupled with this, new and growing banks may have fewer recovery options available to them than established banks, meaning it is crucial they make preparations to exit the market in an orderly way, if required.