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The financial crisis that occurred between 2007 and 2008 highlighted the need for post-financial crisis regulatory reforms. The objective of these regulatory reforms is to prepare measures intended to enable systemically important banks to be resolved in a more orderly manner and without cost to taxpayers in the case of a bank failing. One of the lessons learnt from the financial crisis is the need to extend the options available for dealing with a failing (or failed) bank, beyond putting the bank into liquidation or providing government support to truly minimize the impact on society. In 2014, the Bank Recovery and Resolution Directive (BRRD) was adopted with the objective to provide authorities with comprehensive and effective arrangements to deal with failing banks at a national level and achieve cooperation arrangements to tackle cross-border banking failures.

Based on the BRRD, banks are required to prepare Recovery Plans to overcome financial distress. Furthermore, this directive grants national authorities’ (Rahoitusvakausvirasto, RVV in Finland) powers to ensure an orderly resolution of failing banks with minimal costs for taxpayers. [1]

The Single Resolution Boards (SRB) and the National Resolution authorities (NRAs) form together the Single Resolution Mechanism (SRM) and have the mandate to enhance resolvability of the European banks and thereby avoid the potential negative impacts of a bank failure on the economy and financial stability. [2] [3]

Therefore, the SRB published on 1 April 2020 its ‘Expectations for Banks’ (EfB). This publication clarifies the SRB’s and banks’ role relating to resolvability, outlining best practices on key aspects, and detailing the next steps to ensure resolvability of banks. Since its publication, the ‘Expectations for Banks’ have been introduced gradually and it is expected that banks will have constantly improved their capabilities in all areas by the end of 2023.

In addition to these overarching requirements, more specific instructions are also given yearly separately by the SRB and the NRAs. The SRB is mainly responsible for providing the specific guidance on the yearly working priorities for the Significant Institutions (SI’s) in the European Banking Union, meanwhile the National Resolution Authorities (NRA’s), set the working priorities for the LSI’s (Less Significant Institutions) in each country. In Finland in particular, however, it has been shown that the requirements for LSI’s in the context of resolution planning are very much based on the requirements of SI’s. Accordingly, the LSI’s are also required to address the stated dimensions from the ‘Expectations for Banks’.

[1] see European Commission: Bank recovery and resolution | European Commission (europa.eu) (28.06.2022)
[2] see Single Resolution Board: Our organisation | Single Resolution Board (europa.eu) (28.06.2022)
[3] see Single Resolution Board: 2022 RPC Booklet_final.pdf (europa.eu) (20.04.2022)

Which regulatory requirements characterize Resolution Planning?

As mentioned earlier, the SRB’s ‘Expectations for Banks’ sets out the key expectations for a banks resolvability. The Expectations for Banks are structured along the following seven dimensions in order for the banks to be able to assess their resolvability: 

 Dimensions of Resolvability

Figure 1: SRB's Expectations for Banks - 7 Dimensions of Resolvability

In addition to the Expectations for Banks, banks receive an annual priority letter, which listed the common priorities and bank-specific work objectives for the year ahead and requests a Resolvability Progress Report. The so-called priority letter specifies a bank’s annual work priorities structured along the seven dimensions of the Expectations for Bank. The Resolvability Progress Report is also to be designed along the different dimensions. Within the Resolvability Progress Report, the banks are required to self-assess their resolvability based on the seven dimensions of resolvability and to specify the authorities to what extent they comply with the requirements and to what extent gaps must be closed.

The key requirements for improving the banks resolvability, which are outlined by the Expectations for Banks, are continuously further specified by new and the revision of existing operational guidances. 

What are the current challenges of SI’s in Finland?

For the Resolution Planning Cycle 2022, the SRB focuses for the banks under its remit on the following three common priorities: (i) Liquidity and Funding in Resolution (mobilization of collateral in and after resolution), (ii) Separability and Reorganization and (iii) Information Systems and MIS (Management Information Systems) Capabilities for Bail-in and Valuation Data. [1]

The key goal of liquidity and funding in resolution is to assess and enhance the bank’s ability to identify and mobilize assets that could be used as collateral in resolution. Sometimes however different sources of liquidity and funding can be set in various locations in the bank and in different forms: banks face challenges in assessing how these collaterals could be moved and amended in a way that they would be accepted by the receiving party during resolution and best serve the resolution strategy of the bank.  

Separability and reorganization are wide concepts but at the same time very important, because it is relevant to all resolution strategies. It includes several aspects that are in a key position for resolution planning as well as business reorganization plans (included in the bail-in implementation). Separability can be defined as the bank’s ability to transfer or implement legal entities, business lines or portfolios of assets and liabilities at a short notice to a third party. The business reorganization plan (BRP) sets out the measures aiming to restore long term viability of the bank based on realistic assumptions within a reasonable timescale after an open bank bail-in.

The information systems and MIS capabilities for bail-in and valuation data highlight the importance of testing the bank’s capabilities for operationalizing the implementation of the bail-in tool. One of the goals is to assess the bank’s MIS and their capability to provide accurate and timely information which is crucial for the resolution scheme and if necessary, the implementation of the bail-in tool.

[1] see Single Resolution Board: 2022 RPC Booklet_final.pdf (europa.eu) (20.04.2022)

timeline

What are the prioritized topics for Finnish LSI’s?

In spring 2022, for the first time the RVV (Rahoitusvakausvirasto) (or in English known as Financial Stability Authority), has sent the Finnish LSI’s the working priorities for the 2022 resolution planning cycle. The Finnish authority RVV sets out the expectations and working priorities for certain Finnish banks, other credit institutions, investment firms and the central securities depository regarding resolution planning. The expectations are sent as per targeted for all institutions but based on the development of each separate institution, the expectations might also involve institution specific expectations and guidance.

The RVV in Finland expects the LSI’s to put emphasis on liquidity and funding in resolution, similarly as the SI’s. Among other things, banks should develop a methodology that helps them to estimate liquidity positions in resolution as well as be able to measure and report the situation of liquidity in resolutions e.g. based on SRB’s Guidance on liquidity and funding in resolution.

LSI’s are also expected to improve their Operational Continuity in Resolution (OCIR) and access to FMI services, i.e. banks are expected to provide a self-assessment of operational continuity in resolution and improve their readiness for resolution. It is also important that LSI’s identify, map out and assess their dependencies on FMI service providers and understand the requirements for continued access as well as provide an FMI contingency plan, including the measures to ensure continuity in access to FMI services.

Similarly, to the SI’s, LSI’s are also expected to put effort information systems and data requirements, particularly MIS capabilities to provide information necessary for the preparation and update of resolutions plans (self-assessment of valuation data and development plan). They should also ensure that the MIS capabilities provide the necessary information for a realistic valuation and an effective application of resolution actions. 

timeline

What is the challenge post by resolution planning?

Resolution planning is a widely complex topic that take up a lot of resources from the financial institutions involved including documentation reaching hundreds of pages with different modeling scenarios for liquidity, funding, and datasets. Resolution planning is a process that takes a lot of time, starting from evaluating possible scenarios resolution and evaluating the approaches for the resolution strategy that is set with the authorities. Once possible strategies have been chosen, the operationalization and dry-runs of these scenarios can begin, during which possible issues are raised and the need for amendments are planned. All in all, resolution planning is a dynamic process constantly changing and needs careful consideration from the bank, especially in answering the everchanging expectations from the authorities. 

How can we help?

Our resolution planning team has wide knowledge in different themes of resolution planning, and we have successfully carried out several projects relating to resolution planning. We can help you with achieving the most efficient way of understanding and addressing the expectations of authorities and we can team up with your own resolution team in helping them to find the right ways to tackle possible issues hindering your resolvability.

We have for instance provided the necessary information for the preparation of a resolution plan, implemented technical solutions to ensure data availability and establishing a resolution governance to the general governance framework of the bank. We have also helped with the conception, preparation and operationalization of the complete bail-in playbooks, implementation of initial separability analysis and developing a proven concept for a business reorganization plan after the open bank bail-in.

We have a proven track record of the implementation of the SRB’s criteria for resolvability. We can for instance help you with the following topics: 

— Trying and testing approach using tools and templates

— Identifying all the relevant legal and regulatory requirements

— Best practice through market experience and the KPMG international network

— Stringent conceptual designing and documentation of the tasks

— Efficient implementation in line with the requirements

— Long-standing communication with the authorities

— Operationalization of resolution strategies (esp. preparation of playbooks)

— Dry-runs

We also benefit from our global network of recovery and resolution professionals to combine the best possible team based on the expectations and needs of each client. Get in touch with us to find out how we can help you. 

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