EBA issues finalized Guidelines on improving bank resolvability, requiring enhancements to banks’ resolvability capabilities by 1 January 2024

During the past decade, significant improvements have been made to prevent uncontrolled bank failures, which historically have often required tax-payer bailouts. The layers of frameworks aiming to achieve this goal can on high-level be split into the following three stages of bank failure-cycle:

  1. Business as usual – banks need to plan their activities in a viable manner in terms of e.g. capital, liquidity and funding plans. Banks’ business plans need to be met with adequate financial resources even under stress. Even if there’s a low risk of a bank failing, the regular planning is required, in form of e.g. ICAAP and ILAAP.
  2. Approaching failure – banks need to have pre-defined recovery plans in place so that they are prepared to restore their viability in a timely manner, even under serious financial stress. When a pre-defined recovery threshold of a given indicator is surpassed, the bank must consider implementing recovery actions, which are aimed at restoring the viability of the bank without any tax-payer bailout.
  3. Failing or likely to fail – when the authorities have determined that a bank is failing or likely to fail, the bank can either be wound up using normal insolvency procedures or be subject to resolution. When subject to resolution, the authorities may deem certain parts of the bank unviable and subject to normal insolvency procedures, but other parts to be continued or restored using some of the different resolution tools available.

The decision on whether the bank will be resolved or wound up, and what are the tools for resolving the bank, will be decided by the authorities – in EU, by either SRB (Single Resolution Board) or national resolution authorities (such as Rahoitusvakausvirasto in Finland).

What happens financially, contractually, and operationally when a resolution process is initiated encompasses a wide array of bank-specific information and necessary actions needed to be assessed. For example, has the bank contractual clauses concerning resolution with its 3rd party suppliers, which trigger certain changes in the services provided? Are there any changes into the bank’s margin requirements with its derivative counterparties? How can the bank’s 3rd party suppliers be made sure that the critical services they provide to the bank will be compensated? Does the bank have legal and operational capabilities in place to ensure that all intra-group legal entities have sufficient liquidity positions, even when the group is set into resolution? What bank-specific challenges does the banking group’s legal structure pose, for example amalgamation structure in Finland?

The answers to these questions surely differ from bank to bank, and what makes answering these questions difficult is that the answers are subject to constant change. If a bank is set into resolution today, the search for answers to these types of complex questions cannot start tomorrow – instead a resolution plan should be prepared in advance, giving a holistic overview, and kept up to date.

For a resolution to be likely to succeed, the bank must be resolvable. The authorities cannot ask all possible questions every day from every bank that are subject to resolution, but instead they require banks to be able to have up-to-date answers to questions impacting the resolution process – hence the EBA resolvability Guidelines which set requirements on both the resolution authorities and the banks subject to resolution.

The guidelines, broadly speaking, set requirements on banks to be able to have holistic and up-to-date view of their contractual landscape, operational continuity, financial position, and access to financial market infrastructure. The guidelines further specify the banks’ resolution planning governance setup, preparedness for the re-organization of business considering certain resolution tools, and systems which are used for following up the different resolvability aspects.

Even though the individual requirements in the Guidelines don’t necessarily require huge amounts of new information, what makes the Guidelines challenging from implementation perspective is the need for a holistic view and significant intra-bank coordination. Managing the bank’s contract repository can be made easier with the use of existing systems catering for the bank’s outsourcing management needs (such as Oasys). Ensuring that the requirements for liquidity and funding preparedness are met should be built on existing measurement systems. The overarching responsibility for the bank’s resolvability coordination doesn’t necessarily sit perfectly in any of the existing responsibility areas of the bank, and just understanding the starting point requires collecting and processing of a lot of unstructured data – not to mention how to ensure the data are kept up to date going forward.

Banks need to comply with the resolvability guidelines by 1 January 2024, and path to full compliance isn’t a straight road without bumps. An efficient way to get started is to ask experts within the GRC area, such as FCG, to

  • Evaluate your starting point and current gaps,
  • Identify ways to close the gaps, and
  • Assess how Reg&Tech solutions such as Oasys can make managing your contract repository more efficient.

Read the EBA publication here

Pekka Pykäri
Partner & Head of FCG Finland

Ivar Storvik
Director & Head of Risk & Capital Management

Let's connect

EBA issues finalized Guidelines on improving bank resolvability, requiring enhancements to banks’ resolvability capabilities by 1 January 2024 EBA issues finalized Guidelines on improving bank resolvability, requiring enhancements to banks’ resolvability capabilities by 1 January 2024
I want an FCG expert to contact me about:
EBA issues finalized Guidelines on improving bank resolvability, requiring enhancements to banks’ resolvability capabilities by 1 January 2024

By submitting, you consent to our privacy policy

Thank you for connecting with us

An error occurred, please try again later