March 09, 2018

EC published the Commission Delegated Regulations (EU) 2018/344 and (EU) 2018/345 that supplement Bank Recovery and Resolution Directive, or BRRD (Directive 2014/59/EU). Regulation 2018/344 covers regulatory technical standards specifying criteria for the methodologies for valuation of difference in treatment in resolution while Regulation 2018/345 covers standards specifying the criteria for the methodology for assessing the value of assets and liabilities of institutions or entities. These regulations shall enter into force on the twentieth day following that of their publication in the Official Journal of the European Union.

Regulation 2018/344 stipulates that, to ensure that a comprehensive and credible valuation is carried out, the valuer should have access to any appropriate legal documentation, including to a list of all claims and contingent claims against the entity, classified according to their priority under normal insolvency proceedings. The valuer should be allowed to enter into arrangements to obtain specialist advice or expertise, as required by the circumstances. For determining the treatment that shareholders and creditors would have received, had the entity been put under normal insolvency proceedings, the valuer should determine the expected timing and amount of net cash flows that each shareholder and creditor would have received from the insolvency proceedings without assuming any State aid, discounted at the relevant discount rate or rates. In determining such estimate, and where available and relevant, the valuer could also refer to information on recent past experiences of insolvency of similar credit institutions. The actual treatment received by shareholders and creditors in resolution should be determined having regard to whether such shareholders and creditors have respectively received compensation in the form of equity, debt, or cash as a result of the adoption of the resolution action.

Regulation 2018/345 states that, in a resolution scenario, it is important to distinguish between, on the one hand, an initial valuation assessing whether the conditions for the write-down and conversion of capital instruments or the condition for resolution have been met, and, on the other hand, a subsequent valuation forming the basis for the decision to apply one or more resolution tools. In relation to the initial valuation, it is appropriate to ensure that when determining whether the conditions for resolution or for the write-down or conversion of capital instruments are met, a fair and realistic valuation of the entity's assets and liabilities is conducted. For the subsequent valuation informing the decision on the resolution actions, it is important to ensure that the valuation of the assets and liabilities of the entity, which determines the choice of the resolution action and the extent of any potential write-down or conversion of capital instruments at the point of non-viability, is based on fair, prudent, and realistic assumptions. The criteria laid down in Regulation 2018/345 should be exclusively set out for conducting valuations under Article 36 of BRRD.

 

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Effective Date: March 29, 2018
Keywords: Europe, EU, Banking, BRRD, CDR 2018/344, CDR 2018/345, Valuation Methodologies, EC

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