SRB’s new heat-map approach enhances resolvability assessment

Making banks resolvable remains the SRB’s key priority [1]. Banks entered the Covid-19 crisis in a much better shape than during the 2008 financial crisis, and were instrumental for financing the economy. However, the pandemic also reminded stakeholders of the need to ensure operational readiness for crisis management.

To set the direction for this, the SRB published the document Expectations for Banks early last year, which sets out the operational capabilities banks are expected to demonstrate to show they are resolvable. These expectations determine best practice and benchmarks for assessing resolvability according to common criteria across the Banking Union. The expectations are being gradually phased in until 2023, with additional operational guidance [2] to provide banks with sufficient time and support for implementation.

A more transparent assessment of resolvability is the next key milestone in the framework. That’s why we have defined a heat-map on assessing resolvability, designed as a tool to monitor, benchmark and communicate on banks’ progress towards full resolvability.

In this blog, I would like to explain its goals, how it works and how it will help foster convergence with other authorities’ resolvability monitoring.

Resolvability assessment

The SRB is responsible for producing a resolution plan for each of the banks under its remit, a kind of living will for what would happen should a bank start failing.

As part of this, our internal resolution teams must assess how resolvable each bank is, using as benchmarks the legal framework, the Expectations for Banks and the policy for setting minimum requirements for own funds and eligible liabilities (MREL). This ensures that banks maintain a minimum amount of equity and debt to support an effective resolution.

The resolvability assessment relies not least on the quality of banks’ resolvability progress reports, the supporting evidence they provide, and how they deliver on the annual priorities set for them by the SRB.

In this exercise, and particularly when identifying impediments to resolution and establishing corrective action, we aim to treat all banks consistently and proportionately. We have established harmonised horizontal criteria to:

• classify banks’ progress according to each resolvability condition and the impact the latter has on the feasibility of the resolution strategy;
• assess how material impediments are and, in this case, consider appropriate corrective action.

Impact assessment

The resolvability assessment is based on the impact of each resolvability condition on the successful execution of the preferred resolution strategy. For example, the lack of loss-absorbing capacity or insufficient preparatory work for the execution of the bail-in tool may considerably reduce the feasibility of the resolution strategy.

The assessment takes into account proportionality through considering banks’ business model characteristics and specific resolution strategies. For example, structural and operational aspects are linked to banks’ level of complexity, interconnectedness or cross-border activities; by the same token, separability and restructuring capabilities are mainly linked to resolution strategies which plan to use transfer tools.

Progress assessment

Horizontal progress levels are set consistently with the phase-in of the Expectations for Banks and the MREL transition periods, allowing appropriate time for banks to develop adequate capabilities in each area.

Identification of impediments and of corrective action

The combined assessment of progress and impact levels will:

• show, in a consistent way, whether banks have made sufficient progress in the areas that are most critical for the successful execution of their resolution strategy;
• help to identify impediments to resolvability and to take corrective action, where needed, in a consistent way.

Significant progress achieved by banks may point to the emergence of good practice and future benchmarks. In addition, meaningful progress towards resolvability is a criterion considered when calibrating MREL. By contrast, if progress is slow, the assessment identifies impediments to resolution, which will need to be remedied.

Depending on how significant the impediments are, the SRB will ask banks to address them either through dedicated corrective actions, under close monitoring by the SRB’s internal resolution teams during the following 12-month period, or by starting the formal procedure for addressing substantive impediments to resolvability.

The need to trigger the substantive impediments procedure will result from a holistic assessment. It will consider:

• the measures [3] available to the SRB to address them and the circumstances in which each measure may be applied in accordance with the European Banking Authority guidance [4].
• bank measures, as set out in their (multi-) annual work programmes, that are reasonably expected to adequately reduce or remove the impediment within a short timeframe.

Where the SRB, after consulting the competent authorities, including the European Central Bank, determines that there are substantive impediments to the resolvability of the bank, it shall notify this determination to the bank and make a recommendation on the appropriate measures to address those impediments.

Benchmarking and peer review

The heat-map will also allow benchmarking across banks, peer groups and resolution strategies to foster a level playing field in the Banking Union. An anonymised version of the heat-map according to various dimensions will be made public closer to the end of the phasing-in period of the Expectations for Banks.

The heat-map approach not only promotes convergence and comparability in monitoring resolvability across Banking Union banks [5], but should also allow to draw holistic comparisons with the resolution frameworks outside the Banking Union. Indeed, the approach is in line with those taken the Bank of England [6] (BOE) and the Swiss Financial Markets Authority [7], and is consistent with the Financial Stability Board’s resolvability monitoring.

With this framework, the SRB has taken another important step towards enhancing resolvability, with a view to minimise the potential negative impact of banks’ failures on financial stability and the real economy.