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BoE consults on resolution

Bank of England consults on resolution

February 2019

The Bank of England (BoE) is consulting on the resolvability assessment framework and the Prudential Regulation Authority (PRA) is consulting on the resolution assessment and public disclosure by firms. Both consultations run until 5 April.

The draft BoE Guidelines and proposed PRA requirements set out requirements for banks to demonstrate (both to the BoE and publicly) their preparedness for resolution and that they have identified and addressed the potential barriers to a successful resolution. Banks would have to publish the key aspects of their own resolvability assessment and the BoE would make a public statement on its view of their resolvability.

The draft Guidelines form part of a wider picture which reflects a focus both here in the UK and in Europe more widely for banks to address impediments to resolution and for the authorities to put in place a comprehensive statutory resolution regime with clear resolution objectives.

Implications for firms

Banks have been working over the last few years to reduce impediments to resolution, not least in response to a series of regulatory initiatives such as Operational Continuity in Resolution (OCIR) requirements, exercises to analyse the speed at which Non-Ring Fenced Banks (NFRB) could be wound down under Solvent Wind-Down conditions (SWD), and exercises to ensure that restructuring can be conducted rapidly in resolution utilising a defined list of a bank’s internal businesses and service offerings.

The proposed framework brings together these previous standalone activities under a single public disclosure requirement, ultimately requiring approval from a bank’s Board. An additional implication of the proposed framework for firms is that there is a shift of focus to maintaining all of a bank’s business in the initial stages of resolution, rather than just its critical functions.

The BoE has identified a 2022 timeframe by which it would expect firms to meet the proposed Guidelines, with the first round of resolvability assessments under these Guidelines being expected to start in 2020. While banks will have had experience of regulatory expectations for individual aspects of the framework, the external disclosure requirements give an added incentive to ensure that an accurate picture is communicated (given the knock-on impact in terms of increased investor scrutiny and an enhanced link between resolvability and investor profile).

Banks will need to identify to what extent they can leverage existing regulatory reform programmes or project teams. There are likely to be similarities to the introduction of ICAAPs and more recently ILAAPs, where documentation required by the regulator and firms’ own control arrangements have evolved over time.

Given the demands on senior management time relating to Brexit and the knock-on impact for legal entities based in the UK, it is clear that banks will need to manage carefully their compliance efforts with respect to the resolution framework. There will need to be a continuing reliance on substantive governance arrangements such as a Resolvability Steering Committee and / or assurance programmes (with the associated time implications) in order to provide the Board with assurance on the quality of the output, during a period of continuing upheaval for many banks.

The draft guidelines

The BoE has previously published various guidelines on a number of constituent parts of the resolution framework including MREL, Valuation in Resolution and OCIR. However, it is clear from the proposed Guidelines that the resolution framework is now viewed as having a wider remit, in order to improve the likelihood of delivering a smoothly managed resolution.

The draft Guidelines cover:

Financial Resources

  • Minimum requirements for own funds and eligible liabilities (MREL)
  • Valuations (Valuation in resolution)
  • Funding in resolution

Continuity

  • Continuity of financial contracts
  • Operational Continuity In Resolution (OCIR)
  • Continuity of access to Financial Market Infrastructure (FMIs)
  • Restructuring

Coordination and communication

  • Management, governance and communication

There is little change in some areas of the guidelines such as MREL and Valuations, whereas Funding in resolution and Restructuring bring in additional requirements.

 

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