Fig. 1 – Breakdown of the Bank of England and Prudential Regulation Authority consultation paper requirements
The RAF, which was first trailed by Sir Jon Cunliffe in a speech last June, sets out how the largest firms are expected to conduct assessments of their own resolvability, how the Bank will conduct its own resolvability assessments of firms more generally, and how those assessments will be published. In addition, the PRA expects to consult in due course on changes to the Senior Managers and Certification Regime (SM&CR) to incorporate responsibility for carrying out resolvability self-assessments.
Ten years on from the creation of the UK resolution regime, the introduction of the RAF marks a shift in the UK authorities’ approach to resolvability to one that is comparable to US requirements under Title I of Dodd Frank for living wills. There is a new emphasis on putting responsibility on firms for their resolvability assessment, on qualitative standards, and on defining the end-state capabilities firms need to have, to be resolvable and remain operational, combined with disclosure of the results, to make them publicly accountable. Barrier by barrier, the standards themselves follow those agreed by the Financial Stability Board (FSB).
The comprehensive statement of end-state resolvability in the RAF provides a steady basis for firms to plan the work they need to do over the next few years, aiming to avoid additional resource requirements for capital or liquidity and allows them instead to tailor the development of capabilities to their own business models and structures. Firms will require a clear plan of action – building in analysis, implementation, and assurance activities – with senior ownership and engagement over the next year and a half to deliver a high quality first RAF submission in September 2020. But firms need to be mindful that if in the Bank’s view their plans do not measure up this will be disclosed to the public and they could be subject to direction from the Bank and the PRA to hold additional resources or make structural changes to remove impediments to resolvability.
The RAF for UK firms
Ten years on from the financial crisis, UK firms will be familiar with many of the component activities in the RAF that they themselves and resolution authorities have undertaken to make them resolvable – such as setting MREL requirements, enhancing valuation capabilities, and planning for operational continuity. However, the RAF proposals impose deadlines that may cause some firms to need to accelerate progress as well as new requirements that require design and implementation.
The Bank has identified three key outcomes that firms will need to achieve in order to be considered resolvable. Firms must be able to overcome the eight barriers (at least) to resolvability in order to be able to achieve these outcomes. The list is not exhaustive and barriers should not be considered a ‘check-list’ that, if met, would result in a firm being considered resolvable. Firms need to consider their specific business model and whether there are any additional barriers that are relevant.
For a number of these barriers, the Bank already has existing policy requirements. The new expectations that firms will need to address are largely around funding and continuity of access to FMIs as well as further detail on restructuring and management, governance and communication in resolution. With respect to funding in resolution, firms will be expected to have the capability for liquidity analysis for all material entities and currencies on a T+1 basis. The RAF also introduces the FSB’s expectation that firms are able to maintain continuity of access to FMIs in resolution, including mapping FMI relationships.
Fig. 2 – The outcomes firms will need to need to achieve in order to be considered resolvable, and the barriers they are expected to be able to overcome in order to achieve these outcomes
More significant in the RAF proposals is the shift in responsibility for achieving and demonstrating resolvability from authorities to firms themselves. From May 2021, major UK firms with deposits ≥ £50 bn on an individual or consolidated basis will be required to disclose self-assessments of their own resolvability, alongside an assessment from the Bank. While UK firms will welcome the relatively long lead time they have before the disclosure deadline (in contrast to their US counterparts, which had a shorter notice period before the Federal Reserve began similar disclosures), they should expect little patience from the authorities, the market or the wider public with respect to any shortcomings. The Bank has set itself a deadline of 2022 to make all major UK firms fully resolvable, meaning firms will need to be very close to this milestone by the time of their first disclosure. Firms will need to be able to demonstrate progress towards this goal throughout the next few years.
Firms should expect to develop master playbooks linking the management of stress, recovery and resolution from a financial and resource perspective, along with adequate governance and control. Firms will further need to demonstrate that these playbooks are realistic, embedded and properly owned. The planned changes to the PRA’s SM&CR to bring resolution on par with other elements of the regime will further drive home the need for ownership at the Board and senior level.
Implications for overseas firms
While material subsidiaries of overseas firms will be assessed by the Bank under the new RAF, they will not be required to publish self-assessments. Instead, the Bank has said that it will rely on the home country approach to providing assurance on resolvability where this is broadly comparable. This should reduce the risk for firms of meeting duplicative or inconsistent UK standards for resolvability and hold out the prospect of moving to global approaches to internal distribution of TLAC and funding, operational continuity and solvent wind-down planning.
With the threat of public naming on the horizon, firms need to be able to demonstrate a credible path to achieving resolvability by the Bank of England’s 2022 deadline.
They should begin by conducting a stock-take to determine where they are with respect to the RAF, and identify any shortcomings they will need to rectify prior to 2020. Part of this stock-take should include testing against a bail-in timeline, which will serve as both a diagnostic of current shortcomings and as a way for senior management and the Board to better understand any gaps. Firms should look to ensure that this testing is independent and objective.
The Bank anticipates that firms will make steady progress over time and expects firms not to backload development of their capabilities into 2021 and 2022. There is a lot of work still to be done and firms should act now.
Fig. 3 – The Bank of England’s stylised resolution timeline
Firms should further be mindful that they will need to comply with the Bank’s policy on valuation capabilities to support resolvability by January 2021. If they have not yet done so, firms should look to conduct a gap analysis of compliance with the policy as part of their wider preparations for the introduction of the RAF.
Beyond the finalisation of the valuation policy, the Bank is expected to release additional policy on solvent wind-down, MREL voluntary disclosure, guidance for FMIs on continuity of access, a review of OCIR, and the possibility of extending the scope of disclosure requirements beyond the major UK firms. Firms should ensure that they consider these forthcoming developments when developing their approach to RAF preparations.