SRB publishes its assessment of bank resolvability

SRB’s Resolvability Assessment shows that banks have made significant progress on fulfilling the Expectations for Banks.

Banks have made significant progress on fulfilling the Expectations for Banks

On July 13th, 2022 the Single Resolution Board (SRB) published its Resolvability Assessment and Heat-map for the first time. In the future an updated Resolvability Assessment and Heat-map will be published annually. This year’s assessment shows that banks have made significant progress with respect to the SRB’s priority areas. However, the SRB also notes that there are several areas with room for improvement such as the parts of the Expectations for Banks (EfB) that have been earmarked for implementation during the 2022 and 2023 Resolution Planning Cycle (RPS).

The SRB expects banks to achieve full resolvability by the end of the transition period in 2023. Consequently, by that time, institutions are required to meet the final MREL targets and to have all operational capabilities in place to support the execution of the Preferred Resolution Strategy (PRS). Currently, the SRB is of the opinion that banks are on track to achieve those requirements on time.

Institutions with substantial shortcoming in achieving resolvability will be asked by the SRB to take necessary remedial actions within the upcoming twelve months. The monitoring frequency of the SRB to determine any substantive impediments to resolvability will increase in the near future through the use of more testing and deep dive exercises in order to improve resolution-readiness. The SRB further announces to conduct On-Site Inspections (OSIs), which were previously only known to be conducted by the Joint Supervisory Team (JST).

Achieving resolvability is a continuous and iterative process that requires an active dialogue between the SRB, the Internal Resolution Team (IRT) and the institutions under its remit. Thus, even after the phase-in period of the EfB by end-2023 the SRB will continue its work in order to protect financial stability, taxpayers and public funds. Going forward, banks must be able to provide evidence that they are keeping their resolvability capabilities operational at any time to support resolution.

The overall results of the SRB’s Resolvability Assessment are summarised in a heat-map. This heat-map defines harmonized criteria for two dimensions:

  • Assessing banks’ progress on resolvability conditions that have already been implemented (progress levels ranging from insufficient to best practice), and
  • Assessing the impact of each resolvability condition on the feasibility of the PRS

The combination of the four progress levels of the two assessment criteria progress and impact enables the SRB to determine whether institutions have made sufficient progress in the areas that are most critical to achieving resolvability and also to identify potential impediments where corrective actions are required.

The heat-map shows that there is a divergence in the progress made among banks, depending on the size of the institutions. However, the greatest progress, irrespective of the size, is yet to be achieved in the areas Playbooks for bail-in execution, including internal loss transfer mechanisms, continuity of access to FMIs and operational continuity.

Details on the dimensions of the SRB heat-map and other priority areas

Loss absorption and recapitalisation capacity of institutions under the remit of the SRB

The BRRD 2 has set out the intermediary Minimum Requirements for Own Fund and Eligible Liabilities (MREL) targets to be met by 01.01.2022 and the final MREL target to be met at the end of the transition period, on 01.01.2024, in order to ensure the successful execution of the bail-in. Most banks already meet the final MREL target whereas nearly all banks comply with their binding intermediate targets. The SRB has also set individual MREL targets for most of the banking groups’ subsidiaries and is in the process of completing the enlargement of the scope to non-resolution entities.

SRB’s Resolvability Assessment outlines that banks have significantly improved their ability to absorb losses and recapitalise as a consequence of the steady build-up of MREL. The aggregated MREL shortfall in EUR decreased by more than half since end-2019.

For more details on MREL we recommend visiting the SRB website and the quarterly MREL dashboard.

Loss absorption and recapitalisation capacity of less significant institutions under the remit of National Resolution Authorities (NRAs)

With respect to LSIs, the SRB identified that in several Member States, CET1 was the only source of MREL-eligible instruments, whereas in others the breakdown was more diversified due to issuances of senior and subordinated bonds.

Austria has the second highest average final MREL TREA-based target with 22%, only surpassed by Belgium with 23%. Other member states have an average final MREL TREA-based target between 19% and 21%.

Playbooks for bail-in execution, including internal loss transfer mechanisms

Banks have taken significant actions to be able to execute the bail-in at short notice during the resolution weekend.

The Bail-in Playbooks that were submitted to the SRB are currently being evaluated which is why the progress in this area will be reflected in the 2022 Resolvability Assessment and Heat-map. One of the main areas yet to be integrated into the Bail-in Playbook is the internal loss transfer mechanism. In addition, institutions are required to report the results of the dry-runs, which test the operational capabilities set out in the Bail-in Playbook. The SRB’s expectations on those two topics is described in more detail in the updated Operational Guidance on Bail-in Playbooks.

For more details we recommend reading our article on that topic: 

SRB updates its guidance on Bail-in Playbooks, data requirements and MREL

Details on preferred resolution strategies and tools

82% of the institutions are earmarked for resolution (accounting for 97% of the total risk exposure amount (TREA)) whereas only 18% are foreseen for liquidity (accounting for 3% of TREA).

80% of the institutions have the Single Point of Entry (SPE) strategy and the bail-in as their PRS. The other 20% are institutions under the Multiple Point of Entry (MPE) strategy. The Sale of Business (SOB) represent the second most prominent PRS.

For the majority of LSIs, the preferred strategy in case of failure is liquidation under normal insolvency proceeding in which case the MREL requirements are set equal to the supervisory requirements. Only for 64 LSIs, representing 14% of the total assets of all LSIs considered in this analysis, are earmarked for resolution.

Of those institutions in which resolution was envisaged as the PRS, the bail-in was adopted by 57%. On the other hand, the SOB was adopted by 41% and the Bridge Institution Strategy by 2%.

Operational continuity and continuity of access to Financial Market Intermediaries (FMIs)

Overall institutions have enhanced their capabilities to maintain the continuity of critical functions in resolution. For example, critical services contracts were made more resolution-resilient so that they will not be terminated ahead or in the middle of the resolution weekend.

Liquidity and funding in resolution

At the time of producing the SRB heat-map, most banks had already identified Key Liquidity Drivers (KLDs) as well as the Key Liquidity Entities (KLEs) in resolution. The estimation and quantification of liquidity and funding needs in resolution was submitted to the SRB by the end of 2021. Progress completed in this area will thus be included in the 2022 heat-map assessment. During the 2022 RPC banks are expected to perform work on collateral management in resolution. Thus, the respective results will be reflected in the 2023 heat-map assessment.

Management Information Systems (MIS) capabilities

The SRB notes that institutions have vastly advanced their MIS capabilities to swiftly assess, project and report liquidity needs and sources of liquidity in case of resolution, whereas this work is still ongoing for most banks.

The results of the MIS self-assessment on the dataset for bail-in execution and the valuation dataset will be reflected in the 2022 heat-map as only slightly more than half of the banks had delivered their self-assessment when the Resolvability Assessment was conducted. Other banks delivered the results at the end of 2021.

During the upcoming RPC, the SRB will closely monitor how the identified MIS capability shortcoming that were identified in the MIS self-assessments as well as the dry-runs conducted in 2022 are addressed. In due course, the SRB will start a dialogue with banks to further broaden the scope of testing MIS capabilities.

Structure, separability and reorganisation

By the end of 2022, all banks with the bail-in as the PRS are requested to demonstrate their restructuring and re-organisation capabilities during the stabilization phase following the resolution weekend. All banks with the SOB as the PRS are expected to demonstrate the feasibility to separate portfolio considered for a transfer and to deliver a transfer playbook, respectively. The ongoing work on separability analysis that has been started in previous years will be deepened until the end of the phase-in period.

Overall, the SRB states that banks with significant trading book activities already took adequate measures in order to ensure that trading activities can be wound down in case of resolution without impairing resolvability.