Banking Recovery and Resolution Matters - Newsletter Q2 - 2023

SRB Publishes its Annual Report for 2022

On 30th June, the Single Resolutions Board (SRB) published its Annual Report for 2022. The report details the work of Europe’s Single Resolution Board and highlights the progress made in making Europe’s banking sector more stable, by ensuring all of the SRB’s banks make themselves resolvable. On the resolution planning and preparedness side, the SRB focused on areas such as bank testing and crisis readiness dry-runs.

The SRB also began to publicly communicate just how resolvable SRB banks are, by publishing its first resolvability heat map (see below) in July of 2022. This will be an annual exercise to track progress and priority areas for resolvability.

The coming twelve months will see the SRB’s focus moving from the more general phases of drafting and fine-tuning of resolution plans towards ensuring that each plan and preferred resolution strategy for each bank is implementable at short notice. This means more testing and deeper analysis of existing resolution plans, as well as further developing sound quality control measures for resolution plans across the Banking Union.

EBF issues press release on Basel III

On 29th June, the European Banking Federation (EBF) issued a press release on Basel III to further strengthen resilience of the European banking sector, while maintaining its ability to finance growth. Basel III is planned to be implemented as from 1st January 2025.

““We are on track with the implementation of Basel III in Europe. The European banking system has stood firm in the face of bank crises in other countries this year, thanks to the significant level of resilience achieved during the regulatory reform. The agreement on the Banking Package implies a significant capital increase for European banks — it is important that other jurisdictions, notably the US, follow suit soon,” - EBF CEO Wim Mijs stated

Europe currently has the highest capital ratio across all global regions. The level of competitiveness in the banking sector needs to remain high in order to maintain and increase economic growth within Europe.

The Banking Package will deliver a significant number of technical mandates to the European Banking Authority (EBA) many of which will have a relevant effect on banks. Priority should be given to reporting guidelines, calculations and certain regulatory fixes. It will be essential to plan the implementation to ensure sufficient preparatory time for the banking sector to ensure IT processes and controls are adapted accordingly.

Provisional agreement reached on the implementation of Basel III reforms

On 27th June, negotiators from the Council presidency and the European Parliament reached a provisional agreement on amendments to the Capital Requirements Regulation and the Capital Requirements Directive with the aim to boost the resilience of banks operating in the Union and strengthen their supervision and risk management

Under the provisional agreement:

• Negotiators have agreed on how to implement the 'output floor' – which refers to the measure that sets a lower limit (“floor”) on the capital requirements (“output”) that banks calculate when using their internal models;
• Negotiators have agreed to make improvements to the areas of credit risk, market risk and operational risk while also taking into consideration the element of proportionality for small and non-complex institutions
• A harmonised 'fit and proper' framework for assessing the suitability of members of the institutions' management bodies and key function holders has been included;
• Rules to safeguard supervisory independence have been included (notably by providing for a minimum cooling-off period for staff and members of governance bodies of competent authorities before they can take up positions in supervised institutions, and a limit on the time in office for the members of the governance bodies.

The press release can be accessed via the following link

EBA and EIOPA publish Data Point Modelling Standard 2.0 to foster collaboration and harmonisation in the field of supervisory reporting

On 13th June, the European Banking Authority (EBA) together with the European Insurance and Occupational Pensions Authority (EIOPA) published the Data Point Modelling (DPM) Standard 2.0. This Standard aims to enhance the methodology that is at the core of the EBA and EIOPA’s reporting process, creating a fully consistent approach for modelling reporting requirements. The new DPM supports the whole reporting lifecycle, from data definition to data exploration, and aims to reap the benefits of stronger collaboration and higher harmonisation while also improving the digital processing of regulatory data required by the authorities.

In the longer term, the DPM Standard should play a key role in the construction of a single cross-sectoral dictionary for the whole financial sector.  By providing a consistent approach for modelling reporting requirements, the Standard should facilitate the future integration of concepts and definitions (semantic integration) in a common data dictionary.

SRB publishes its Operational Guidance on Liquidity in Resolution

On 16th June, the SRB published its Operational Guidance for Banks on the measurement and reporting of the liquidity situation in resolution.

This new guidance builds on the previously issued Expectations for Banks (EfB), aiming at enhancing banks’ resolvability and preparedness for a potential resolution as well as targeting banks capacity to measure and report liquidity in resolution. Banks are expected to build EfB capabilities for a steady state of resolution planning by 31 December 2023.

The guidance focuses on the second principle ‘Measurement and reporting of the liquidity situation in resolution’ of the liquidity dimension of the EfB aiming at enhancing banks’ resolvability and preparedness for a potential resolution.

The Guidance focuses on three objectives/expectations for Banks:

1. Internal frameworks, governance and management information systems are set up to meet the data expectations set out in the guidance
2. The capabilities to report a predefined set of data points on their liquidity situation have been sufficiently developed
3. Remedial actions to mitigate any deficiencies in their capabilities to provide these data points at the requested level of consolidation and at a high level of frequency are in place.

A copy of this guidance may be accessed through this link.

EBA published its Final Resolvability Testing Guidelines

On 13th June, the EBA published its Guidelines addressed to institutions and resolution authorities on resolvability testing.

These Guidelines for institutions and resolution authorities focus on improving resolvability and aim to implement existing international standards on resolvability and take stock of the best practices so far developed by EU resolution authorities on resolvability topics. In particular, these Guidelines set out requirements to improve resolvability in the areas of Operational Continuity in Resolution (OCIR), Access to FMIs, Funding and liquidity in resolution, bail-in execution, business reorganisation and communication.

​Resolution authorities and banks are now moving to resolvability testing following several years of policy development by authorities and policy implementation by institutions. Banks and resolution authorities now need to ensure that the arrangements put in place to support the execution of the respective resolution strategy are adequate and that credit institutions will be ready to use those in the run-up to and upon entry into resolution.

The Guidelines require institutions to submit a resolvability self-assessment at least every two years, to set out how they meet the resolvability and transferability capabilities and how they have gained assurance of their adequacy. The first self-assessment is expected by year-end 2024. Based on this self-assessment, the Guidelines require resolution authorities to develop testing programs to gain assurance of firms’ resolvability, covering three years. This will provide banks with sufficient visibility. The first multi-annual testing program is expected by year-end 2025. Additionally, the Guidelines require the most complex banks to develop a master playbook to ensure a holistic approach to resolution planning. The first master playbook should be submitted by year-end 2025.

EBA Annual Report - key achievements in 2022

On 12th June, the EBA published its 2022 Annual Report that sets out the activities and achievements in 2022 and provides an overview of the key priorities for 2023.

​In 2022, the EBA operated in a challenging and uncertain environment mainly triggered by the Russian invasion of Ukraine. Other disruptive factors included the lingering effects of the COVID-19 pandemic, the inflationary pressures and increasing supply chain concerns, the interest rate volatility, and the fallout from Brexit.

​Looking ahead to 2023, the EBA plans to focus on delivering the below objectives:

      i.        ​The implementation of the Basel III framework to ensure resilience of the EU banking sector;

     ii.        ​Financial innovation and digital transformation, specifically the Digital Operational Resilience Act (DORA) and the Markets in Crypto-Assets Regulation (MiCAR);

     iii.        ​A sound regulatory and supervisory framework to support the transition towards a more sustainable economy, while ensuring that the banking sector remains resilient;

    iv.        ​Making the most of banking and financial data to produce an evidence-based rulebook, perform impact assessments and risk analyses, and develop a harmonised and proportionate supervisory reporting system for banks and other financial entities.

     v.        Enhancing capacity to fight money laundering and the financing of terrorism in the EU

    vi.        Executing the Environmental, Social and Governance (ESG) roadmap.

SRB publishes MREL dashboard for Q4 2022

On 15th May, the SRB published its  Minimum Requirement for Own Funds and Eligible Liabilities (MREL) dashboard for Quarter 4 of 2022.

The SRB has decided to maintain its policy on the calibration of MREL with minimal changes this year.

The SRB aims to provide a stable regulatory environment in a phase where some banks are still building up their MREL stock ahead of the upcoming deadline on 1 January 2024. As part of the SRB’s ongoing strategic review, the SRB plans to launch a public consultation on MREL for the 2024 cycle and beyond in the second half of this year.

The SRB reduced the size threshold for credit institutions considered as Relevant Legal Entities from EUR 10bn to EUR 5bn.

The MREL dashboard presents the evolution of MREL targets and shortfalls for resolution (external MREL) and non-resolution entities (internal MREL) as well as the level and composition of resources of resolution entities in that quarter. In addition, it highlights recent developments in the cost of funding and provides an overview of gross issuances of MREL-eligible instruments in Q4.2022.

Key findings:

      i.        The average MREL final target (including the Combined Buffer Requirement (CBR)) for resolution entities was equal to 27% of the Total Risk Exposure Amount (TREA), showing an increase compared to Q3.2022.

     ii.        In aggregate terms, the total MREL shortfall (including the CBR) both for external and internal final targets reduced significantly over the last quarter of 2022, respectively amounting to EUR 21.5 bn and EUR 12.4 bn. For external MREL targets, in particular, this represented about 0.3% TREA of the banks under the SRB remit, concentrated in 15 countries and 30 banks.

     iii.        Banks under the SRB remit kept their Q4 2022 issuances (EUR 72.5 bn) broadly at the same level as in the previous quarter, showing the continuous efforts to meet their final targets.

    iv.        With the end of the transition period approaching (1 January 2024), the SRB will continue monitoring the closing of the shortfall and the MREL funding conditions.

SRB publishes report on MREL

On 13 February 2023, the EBA published its final Guidelines to resolution authorities on the publication of the write-down and conversion and bail-in exchange mechanic. Transparency and predictability are key both to the credibility of the resolution framework and to the safeguard of investors’ protection. These Guidelines aim at ensuring that a minimum level of harmonised information on how authorities would effectively execute the write down and conversion of capital instruments and the use of the bail-in tool (“exchange mechanic”) is made public.

Bail-in is the main tool available to authorities to avoid using tax-payers’ money in case of failure of a large bank. It is a complex and largely untested tool. To ensure that authorites’ approach is credible and that institutions have the necessary information to prepare, the EBA is asking authorities that have not yet done so to start publishing, from January 2024, a high-level document setting out the key aspects of their favoured approach. In particular, they are asked to specify if they intend to make use of interim instruments and to set out a timeline of the bail-in process. Those authorities that have already published information are expected to check if that publication complies with these Guidelines.​ 

Following input from the consultation, the document to be published by authorities will also include (i) clear description of potential interim instrument, (ii) further details for the timeline and (iii) where available, indicative templates or the main features of the legal instruments to be used to formally implement bail-in. 

The Guidance to resolution authorities on the publication of the write-down and conversion and bail-in exchange mechanic may be accessed through this link.

      i.        Resolution reports should be submitted in line with the published guidance, with validation checks performed by the bank ensuring reconciliation with its FINREP and COREP regulatory reports (where applicable).

     ii.        Ensure that they have the necessary and sufficient IT processes in place to facilitate a timely, controlled and robust reporting process generating consistent and reliable results.

Data quality and availability on time are key items to consider within the resolvability assessment. In this context, the SRB can consider the failure to comply with the information requirements as an impediment to resolvability, potentially significant. It is therefore important that the quality of and deadlines for the resolution reporting submissions are respected.

SRB publishes its Resolution Planning Cycle Booklet for 2023