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    SRB Issues Resolvability Assessment and Bail-in Implementation Guide

    July 14, 2022

    The Single Resolution Board (SRB) published its resolvability assessment and "heat map" for 2021, updated the operational guidance on implementation of bail-in tool, and issued the annual report for 2021. Additionally, SRB announced that it has signed a cooperation agreement with the South Korean Deposit Insurance Corporation (KDIC) to facilitate closer cooperation and learning on resolution planning.

    Resolvability assessment and “heat-map.” The results of the assessment highlight that most of the SRB’s banks have been earmarked for resolution, accounting for 97% of total exposure to risk. In contrast, liquidation is foreseen for 18% of the banks, which account for 3% of total exposure to risk, mostly made of public development banks and smaller banks with a specific business model. Large banks are the most advanced category, demonstrating sound progress on the resolution capabilities that SRB has prioritized in 2020-2021. Banks have significantly improved their ability to absorb losses and recapitalize in the case of failure. Most banks already meet the final minimum requirement for own funds and eligible liabilities (MREL) target to be complied with at the end of the transition period, on January 01, 2024, and the shortfall has more than halved in two years. The results also highlight that progress has been observed in the areas of governance, loss absorption and bail-in execution, operational continuity, access to financial market infrastructures, and communication planning. However, the resolvability assessment mentions areas with room for improvement. Progress is needed by all banks on the swift mobilization of liquidity and collateral in resolution, the further automation of the management information systems for the purposes of valuation and resolution, and the further operationalization of restructuring and separation capabilities post-resolution. Going forward, banks will need to provide evidence that they keep their resolvability capabilities operational at all times to effectively support resolution action, if need be. To this end, banks will be requested to take a holistic view for testing their resolvability conditions every year, according to a multi-annual work program. SRB intends to publish the updated resolvability assessment annually.

    Operational guidance on bail-in implementation. SRB published a set of documents as part of its updated operational guidance on the implementation of the bail-in tool, which enables the write-down or conversion of debt owed by a bank to creditors in resolution. The set of documents adds operational guidance to the SRB “Expectations for Banks,” which outlines the responsibilities of banks in making themselves resolvable. These documents include updated guidance on bail-in playbooks, bail-in data set instructions, and an explanatory note on the latter. This guidance compiles the main elements that banks are expected to consider for enhancing their bail-in playbooks and the operationalization of the bail-in tool in resolution. Compared to the guidance published in August 2020, the documents add more detail to the expectations related to intra-group loss transfer and recapitalization mechanisms between the resolution entity and its subsidiaries as well as the required Management Information Systems (MIS) capabilities. It further introduces a dedicated section on the testing of bail-in playbooks and MIS capabilities by banks and includes targeted amendments based on the SRB experience in this area since August 2020.

    Annual report for 2021. The report details the work of Europe’s Single Resolution Board and highlights the progress toward financial stability of the banking sector in Europe, by ensuring all of the banks under SRB remit are resolvable. SRB focused on areas such as implementing the revised Bank Recovery and Resolution Directive (BRRD2), continuing to build the Single Resolution Fund, and the continued monitoring of banks, given the context of the pandemic. SRB also worked on crisis readiness and fine-tuning existing resolution plans. In 2022, SRB plans to continue to ensure full resolvability of banks under its remit by the end of 2023. In this context, SRB will prioritize operationalization of the “Single Point of Entry strategy,” to make sure that capital can be down-streamed and losses up streamed cross-border. It will also work on separability of assets and liabilities and Management Information Systems to operationalize any “transfer strategies.”

     

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    Keywords: Europe, EU, Banking, Resolvability Assessment, Resolution Framework, Heatmap, Bail-in, Annual Report, BRRD 2, Single Resolution Fund, MREL, Basel, Resolution Planning, KDIC, Korea, SRB

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