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Valuation for the purpose of resolution

Valuation for the purpose of resolution

The SRB and EBA set their expectations for valuation preparedness.

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Eric Cloutier

Head of Regulatory Banking

KPMG in Ireland

Contact

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The Single Resolution Board (SRB) and the European Banking Authority (EBA) have published their latest work on the topic of valuation in the context of resolution, following a similar route as the Bank of England in setting their expectations for banks´ valuation preparedness to support resolvability for UK banks.

In a background of growing regulatory pressure for banks to be valued in a timely and robust manner independent valuers and banks need to be able to demonstrate that they are able to meet this challenge.

Summary

Independent valuers, resolution authorities - directly, and banks - indirectly, would be expected to deal with these new expectations and guidances, when entering the valuation process and conducting the valuation to effectively inform the resolution decision. In more details:

  • The Framework for Valuation published by the SRB on 19 February 2019 sets out the SRB expectations for independent valuers and the general public on the principles and methodologies for producing valuation reports in the context of resolution. 
  • The Handbook on valuation for purposes of resolution published by the EBA on 22 February 2019 complements the SRB Framework by providing concrete guidance on the practical steps on the valuation process to bridge the gap between the resolution regulatory approach and the valuation practices. 

These publications are the result of extensive work and close collaboration between the SRB and the EBA. This work is part of their respective 2019 priorities in this area, namely fostering a robust resolution framework in Europe and enhancing the overall robustness and consistency of resolution-planning work.

In addition to providing guidance to independent valuers, these publications specify the resolution preparedness requirements from banks to allow such valuations to be performed. Banks are expecting to receive further guidance in 2019, focusing on how to enhance banks´ valuation preparedness and to adjust Management Information Systems (including specific information reporting requirements, data template and information requests). 

Already, we have observed further activities being implemented by resolution authorities to enhance the preparedness of European banks. For example, banks across European jurisdictions have been requested to develop bail-in playbooks and to provide data for the purpose of valuation in resolution (i.e. some banks have received data templates for asset and liabilities in the AQR style). 

While not all banks are subject to these new requirements, we notice a rapidly increasing number of such requests. Banks are therefore advised to anticipate and include in the business as usual what such additional requirements will entail for them and their potential implications.

Implications

Banks may find it difficult to demonstrate the following:

  • How they will meet the valuation expectations and what this means for banks´ operational frameworks, management information systems, financial reporting processes, and management assumptions for business as usual and resolution valuations of both banking and trading book assets.
  • Whether they hold sufficiently complete, accurate and readily available data and information.
  • If they are capable of undertaking both types of valuation promptly and robustly ahead of resolution, to determine whether the conditions for triggering resolution are met (based on normal accounting and prudential rules) and to inform the use of resolution tools, including the bail-in tool (based on economic values, using prudent and conservative assumptions).
  • Whether they have adequate governance, documentation and internal and external review procedures to support resolvability preparedness, including communication with the resolution authorities.

If a bank's valuation preparedness and capabilities are judged to be inadequate, the SRB is likely to follow a similar route as the Bank of England, requiring the bank to make the necessary improvements or to hold additional loss absorbing capacity.

A complementary view: SRB Framework & EBA Handbook

  SRB Framework

EBA Handbook

Basis of the document
  • Expectations for independent valuers and general public
  • “Comply-or-Explain approach” for independent valuers
     
  • Recommendation to resolution authorities in Europe
  • Concrete guidance on the practical steps of the valuation process
Addresses of the document
- primary addresses
- secondary addresses
  1. Independent valuers and general public
  2. Banks under SRB remit (for valuation preparedness)
  1. National and EU resolution authorities
  2. Independent valuers
Purposes
  • Provide independent valuers and the general public with an indication of the SRB’s expectations regarding the principles and methodologies for valuation reports as set out in the legal framework.
  • Set SRB expectations regarding the principles and methodologies for Valuation 2 and Valuation 3
  • Foster the convergence of best practices in the implementation of the valuation process (i.e. to bridge the resolution regulatory approach with the valuation practices)
  • Provide concrete guidance on the practical steps of the valuation process and on the specific valuation criteria applicable to the various resolution tools
  • Support the resolution decision (which immediately impacts shareholders and creditors).
Scope of the valuation in resolution Valuation 2 and Valuation 3 Valuation 1, Valuation 2 and Valuation 3
# of pages 57 96

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Contact

Eric Cloutier
Head of Regulatory Banking
KPMG in Ireland
+353 1 410 1839

Dr. Alessio Venturino
Senior Manager, KPMG ECB office
KPMG in Germany
+49 69 9587 2883

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