Resolvability is now the SRB’s key focus

With the economic repercussions of the Covid-19 crisis yet to be fully assessed, a robust resolution framework is essential to ensure the stability of the banking system. While the banks were given leave to postpone the reporting of some less urgent information in spring 2020, the Single Resolution Board (SRB) has reiterated the importance of achieving resolvability by the banks under its jurisdiction, but also by less significant institutions, in its multi-annual 2021-2023 work programme.

On 1 April 2020, the SRB published the final version of its guidelines entitled Expectations for Banks (EfB). The objective is to provide a general list of good practices and principles on the basis of which institutions can assess the resolvability of banks based on a resolution planning cycle (RPC). The SRB’s expectations focus on seven essential dimensions, with a timeframe from 2021 to 2023 for implementation.

These seven dimensions include banks having clear and precise governance for resolution activities; an appropriate MREL, in conjunction with the 2022 and 2024 transitional phases of the MREL, and eligible instruments of significant quality; having the capability to estimate funding needs fully during a resolution event; the capacity to conduct a robust operational continuity risk assessment; adequate Management Information Systems (MIS) to produce the data required in respect of resolution; a clear and precise communication plan for informing the different stakeholders of the implementation of resolution. Finally, the capacity to restructure the bank and reorganisation measures with identification of the structure, complexity and interdependencies of the bank’s activities.

The SRB Valuation Dataset provides guidelines

Before taking resolution measures or exercising its powers to impair or convert the instruments, the resolution authority ensures that a valuation of the institution has been conducted, estimating the values of its assets and liabilities. Following the publication of a framework for valuation in February 2019,  the SRB published a new document in December 2020 setting out all the valuation data that the bank must be able to  provide for clear and accurate valuation. The document establishes the minimum data that banks must have the capacity to provide to the resolution authority and the independent valuer. In practice, banks must therefore upgrade their information systems (IS) if necessary. However, the SRB Data Set does not impose any reporting obligations; it is rather a tool that defines the SRB’s expectations concerning information necessary to perform an independent valuation.

The SRB also issued an explanatory note to make banks aware of the need to strengthen their IS and provide guidance on the capability of these systems to produce information that is as up-to-date, accurate and complete as possible to carry out the ‘fair, prudent and realistic’ valuation required by the resolution authority. It also describes the implementation of these expectations on the basis of the institution’s structure. For example, for groups with the parent and subsidiaries in different member states with a single point of entry strategy: the parent entity needs to provide information and data sets for the parent and for each of its subsidiaries. In this note, the SRB also explains that banks will need to perform a self-assessment, in particular to assess the availability of these data, their source and the frequency with which they are updated.

How must banks respond to new expectations?

The SRB has set a 2023 deadline for banks to become fully resolvable. Several banking functions will be affected by the SRB’s expectations. Because of  the revised minimum requirements for capital and eligible liabilities (MREL) following the transposition of the Resolution Directive (BRRD2) and the strengthened subordination requirements, Treasury departments will have to review the timeframe and product structure of their existing financing plans. And all this coincides with background uncertainties due to market changes as a consequence of the pandemic, which could complicate the prospects for the issuance of debt eligible under MREL requirements.

In terms of information systems and data management, banks must adopt an approach which is consistent within banking groups, and clarify the functions responsible for the valuation system. Updating information systems is essential: the reliability of a valuation depends on the robustness of a bank’s IS in order to guarantee a fair valuation, with data of a certain quality and availability. Indeed, a fair and accurate valuation will contribute significantly to the effectiveness of the implementation of resolution measures, if necessary.

Finally, the EfB document presents a very wide range of preconditions for bank resolution to be deployed. From one RPC to the next, the banks must therefore converge towards a target, via a multi-annual plan for the application of these principles.

This article was written by Jian Shen, Senior Risk Management Consultant at Mazars.