Making good progress on resolvability
There is no doubt that 2020 was a milestone year in many people’s lives. At the SRB, 2020 also saw us hit two major milestones from a resolution planning perspective.
The first of these was the introduction of a new resolution planning cycle (RPC) based on a 12-month period. The ‘construction’ phase of the SRM is now largely complete, with elements such as fully-fledged resolution plans for all SRB banks now firmly in place for the first time. It also includes the transition to a steady-state procedure aligning the regular updates and changes to each bank’s resolution plan to a uniform timeline, running from 1 April to 31 March.
Despite the pandemic, our resolution teams, in cooperation with national resolution authorities (NRAs) and banks, have kept the 2020 cycle on track and successfully implemented the planning and preparatory work of the previous year.
In the 2020 cycle, the Internal Resolution Teams (IRTs) – made up of SRB and NRA staff – prepared 106 resolution plans that have already been through the quality assurance phase and consultation of external stakeholders, in particular the European Central Bank. The subsequent approval phase – including a “right to be heard” process with banks on MREL and, where needed, a joint decision between the SRB and relevant member states not participating in the Banking Union in a “resolution college” – has been completed for more than three-quarters of SRB banks. For these cases, banks already received a notification letter summarising the main elements of the plan. For the few remaining banks, the approval phase is still ongoing but will be closed in the coming weeks based on the final decision of the SRB Extended Executive Session. This session is composed of the Chair of the SRB and the four full-time SRB Board Members, as well as the Board Member of the relevant NRA for each specific SRB bank.
The second major milestone in 2020 saw the start of the gradual phase-in of the Expectations for Banks, published by the SRB in April 2020. This document provides clear guidance to banks on what they must be able to show by the end of 2023 – namely that they have built up their capabilities on all aspects of resolvability.
We understand that progressing on resolvability requires, amongst other efforts, adjustments of banks’ infrastructure and the completion of internal projects, all of which takes time. In addition, the impact of the pandemic might delay some of these projects. However, banks should establish the required processes and infrastructure enabling them to provide evidence on their resolvability to the IRTs.
Resolution planning is a continuous process. A resolution plan provides a point-in-time picture of preparedness and includes, for instance, the assessment of the bank’s MREL capacity and the decision on MREL. It also reflects the SRB’s agreement with external stakeholders on planned actions in case of a bank’s failure.
To structure the resolution-planning process, the annual SRB priority letter to banks’ CEOs defines clear work objectives for the implementation of the expectations for each bank. It is a cross between a report card and a list of priorities for that bank for the year ahead when it comes to resolution planning. One of the main points for banks to work on in 2021 is to strengthen bail-in readiness, since all SRB banks have to provide full bail-in playbooks by the end of this year. By the end of 2022, banks have to establish the management information systems capabilities to deliver the liability data for bail-in at short notice. This capability will be tested.
Close resolvability monitoring is a central part of this process. IRTs base their monitoring, amongst others, on a target/performance comparison of banks’ multi-annual resolvability work programme and annual resolvability progress reports with the Expectations for Banks and the annual priority letter.
Visibility of banks’ progress on resolvability will be further enhanced by the resolvability assessment that is part of the resolution plan. The purpose of this assessment is to identify and address any impediments to the resolution of the bank and to set its MREL. The SRB will benchmark banks’ resolvability progress based on a dedicated tool, designed as a “heatmap”. This multiannual approach gives banks the opportunity to carry out the required work in a structured manner.
However, the framework also enables IRTs to identify banks that are not on track and to intervene. If required, the SRB will initiate the legal procedure to remove substantive impediments. In the SRB priority letter to bank CEOs, we already identified pending issues that banks will have to address in 2021.
Of course, the current pandemic necessitates a reasonable approach within the bounds of the EU’s resolution legislation. In 2020, the SRB provided certain relief measures to banks and, when necessary, updated the MREL targets according to guidance developed by the SRB based on June 2020 data.
These temporary relief measures have been chosen in a way that will not jeopardise the SRB’s objective to ensure that banks become fully resolvable on all the dimensions by the year-end 2023. Now, more than ever, it is vital all our banks are resolvable.
Achieving resolvability is a step-by-step process, with many milestones along the way. I think we can say that in a few short years, we have come a very long way on the road to ensuring every bank is resolvable and are moving ahead fast. We have a resolution plan for each and every SRB bank. Now, the challenge is to ensure that these plans are realistic, fit for purpose and up-to-date should they be required at short notice. Our expectations are very clear and it is up to banks to make themselves resolvable.
While we are generally satisfied with the progress to date, there are some banks that lag behind. The SRB will continue to monitor each bank and will not hesitate to intervene, should it be required.
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About the author
Mr Boštjan Jazbec became a Board Member of the SRB in March 2018 and was the Director of Resolution Planning and Decisions. He was responsible for the banks under the direct remit of the SRB in 6 EU Member States and for 2 GSIBs as well as for a number of resolution teams involved in resolution planning. He is also Chair of the Cross-Border Crisis Management (CBCM) Group for banks at the Financial Stability Board...