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What is the state-of-play on resolution planning?

Daniel Mccarthy is a Head of Unit, Resolution Planning and Decisions at the Single Resolution Board. He leads the resolution teams for banks based in the Netherlands and Belgium, comprising of a portfolio of sixteen banks including EU and US GSIBs, as well as other large and domestically focussed banks. Daniel will also be giving a presentation at RiskMinds International on "Making resolvability a business as usual process"

In 2016, the SRB drafted and adopted 92 resolution plans, covering the majority of 138 banking groups under our direct remit.   This was an important starting point, defining core elements of a Resolution Plan including: determining the conditions for resolution or normal insolvency, the critical economic functions, membership of FMIs, interconnections and separability, the resolution point of entry, the preferred resolution tool(s), an indicative MREL calculation, maintaining operational continuity in resolution and a 1st resolvability assessment.

This work was achieved through the establishment of Internal Resolution Teams (IRTs) comprising the national resolution authorities in each jurisdiction a banking group had either a subsidiary or material branch in the Eurozone.  For the eight EU GSIBS and other EU banking groups with operations outside the Eurozone, CMGs and Resolution Colleges were held to discuss the Group resolution plan with the host authorities and agree priorities for 2017.

Figure 1: Overview of the Key Elements of a Resolution Plan Figure 1: Overview of the Key Elements of a Resolution Plan

Following the adoption of the plans, the IRTs have begun the detailed work alongside the banks to ensure the operational capabilities are in place to implement the plan in the event of a group’s failure. By its nature, this is a ‘front-loaded’ exercise involvement many functions within a bank to ensure a coherent and integrated plan is in place. In response, a number of banks have taken the decision to establish a dedicated Recovery and Resolution team under the Finance or Risk functions, responsible for preparing and implementing an annual resolution work programme with specialist work streams to enhance resolvability, with quarterly progress reporting to the Board. We expect other banking groups will follow a similar approach to derive the synergies from this exercise.

In practical terms, the resolvability assessment identified a number of common potential impediments facing banks: the operationalisation of the bail-in tool; maintaining operational continuity of shared services and IT processes; access to FMIs in resolution; meeting funding needs in resolution; having sufficient MREL in terms of quantity, quality and location etc. To support this work, the banks in conjunction with the IRTs are working to define a series of technical notes and playbooks identifying the steps and procedures to be followed to implement the preferred strategy.

We expect banks will continue to take advantage of strong market demand and tight spreads in the coming months.

On MREL, the SRB has calculated an informative and non-binding target for all major banking groups based on the current delegated regulation. The objective was to provide an early indication on potential new issuance volumes and an opportunity for the banks to start putting arrangements in place to meet a future requirement. In the course of the first 8 months of 2017, we have seen many EU banks go to markets, with MREL/TLAC issuance volumes of €64bn, (exceeding 2016 full year issuance). We expect banks will continue to take advantage of strong market demand and tight spreads in the coming months.

In the forthcoming round of Resolution Plans to be adopted by the SRB’s Extended Executive Board, our objective is to start developing binding MREL targets at consolidated level for all major banking groups and to address the quality of MREL within a group. We will base any policy decision on the legislation in force while we are closely following the negotiations in respect of the EC’s legislative package.

Resolution cases

Turning to actual resolution cases, on 7th June 2017 the SRB adopted its first resolution decision, triggering the sale of business tool of Banco Popular to Banco Santander. The Spanish Executive Resolution Authority FROB is responsible for the implementation of the resolution scheme. This was quickly followed on 23rd June by two small Italian banks in the Veneto region which were declared failing or likely to fail (FOLTF) by the ECB. On 4th July, the European Commission authorised the precautionary recapitalisation of Monte dei Paschi di Siena. This was the first occasion after the BRRD entered into force, where the precautionary recapitulation tool conditions were met.

Cross-border co-operation with third countries is of vital importance

While the first resolution decision – Banco Popular – has proven the effectiveness of the EU resolution framework, we also identified some areas for improvement and gained valuable experience that will influence our work and that might also have policy implications. We are still analysing the cases in detail, but some takeaways are already evident at this stage:

  1. The rapid availability of liability data and creditor hierarchy is crucial to obtain a full picture of the situation and to allow the resolution authority to take appropriate action. This will be a collective undertaking: While the SRB needs to determine data requirements, banks need to invest significantly and build the relevant IT infrastructure to provide this kind of data at the push of a button in times of crisis.
  2. The funding or liquidity in resolution remains an important issue. In particular the availability of HQLA and collateral to fund the business operations in the period  immediately following resolution will require further exploration, in particular with the ECB and national central banks. There might not always be a strong buyer, and open bank bail-in is only viable with liquidity support.
  3. Cross-border co-operation with third countries is of vital importance; even in this mainly European case we worked with the US authorities effectively to ensure that the resolution was smooth. For firms with more cross-border links, this co-operation will be all the more important.
  4. Having strong established lines of coordination and good cooperation between the bank management, resolution and supervisory authorities is vital for the smooth implementation of a resolution scheme. 
  5. There are strong advantages to a Moratorium Tool covering all liabilities to buy time if need be or to take us to the weekend in case a bank is declared FOLTF by the SSM mid-week again.

To conclude, a lot of work is underway as the resolution authorities and banks put in place the necessary arrangements to support the operationalisation of the preferred resolution strategy. These resolvability efforts will continue in the coming months in building resilience to address the severe stresses that can arise and threaten the viability of a bank.

Daniel Macarthy

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