Restructuring is a fundamental part of bank resolution. While bail-in can recapitalise a failing firm, restructuring will be required to address the matters that resulted in failure, and to restore long-term financial viability. Coming up with a timely, credible and actionable restructuring plan will be crucial to avoid prolonged uncertainty over the firm’s future, to finalise the valuation analysis (notably valuations 2 and 3) and to enable the authorities to finalise the resolution. However, delivering this restructuring plan will be far from straightforward, particularly given the unpredictable nature of severe stress scenarios.
The Bank of England has recognised these challenges, and has sought to address these by issuing a Statement of Policy (SoP) on Restructuring Planning as part of the Resolvability Assessment Framework (RAF) it published last year. The SoP sets out the high-level capabilities and objectives that relevant firms will need to meet by the start of 2022. However, it is far from prescriptive on how firms should go about doing this.
This blog provides thoughts for firms on how to navigate these policy requirements in an effective but pragmatic way. In absence of further guidance from the BoE, the onus will be on firms to interpret what specifically is needed to enhance their resolvability. This presents challenges for firms, but it also presents opportunities to define and implement an approach that makes sense in the context of their business and building on existing capabilities.
What does restructuring planning in resolution look like?
When starting to think about restructuring planning, it helps to begin with understanding what this process would look like in practice.
In the lead-up to resolution, it is likely that a firm will be thinking about the recovery actions they may take to avoid resolution. This will draw heavily on the firm’s recovery plan, though the firm will likely need to develop a “live” version of the recovery plan setting out how they intend to respond to the particular situation at hand (e.g. a scenario response plan, solvent wind-down plan or suchlike).
The restructuring planning required in resolution is likely to be a natural continuation of this pre-resolution recovery planning. In resolution, the focus will continue to be on restoring the firm’s financial viability and many recovery options may still be available. However, there are a few key difference between the planning done prior to and during resolution:
- Events that lead to the firm’s failure. For example, plans may need revisiting to reflect a further deterioration in the firm’s financial position or the failure of one or more recovery options.
- Consideration of other restructuring options. This could include options ruled out (or not contemplated) in recovery because they would take too long to implement or would fundamentally change the firm’s business or ownership.
- Relevance of broader public policy objectives. This includes the need to restore long-term viability, protect financial stability, and maintaining critical functions in the UK.
- Specific legal requirements around the timeframe and contents of a Business Reorganisation plan (BRP). Firms will generally be required to submit a BRP to the BoE within one month of entry into resolution and must contain all the elements set out in the relevant EBA RTS (as on-shored). This will form a basis for a credible and actionable restructuring plan that the Bank of England wants to be available within 3-6 months of entry into resolution.
- Governance arrangements. A bail-in administrator (BIA) will oversee the planning process, and the authorities, will ultimately be the ones approving the BRP.
Note that overseas-based firms in scope of the SoP would face different requirements. Instead of developing a UK-specific BRP, they would need to contribute to the restructuring planning required under their home resolution regime. However, under the SoP, they will still need to think through how they would ensure that this planning would set out credible measures to restructure the UK business as needed. For trading and investment banking operations, this could include solvent wind-down as part of a co-ordinated group-wide plan, which would draw on (though not necessarily replicate) work done as part of PRA exercises.
What is required from firms?
The SoP builds on recovery planning, and focuses on the capabilities needed to develop a restructuring plan in light of the key differences listed above. It does not require firms to maintain restructuring plans in BAU, as has been the case for Title 1 planning in the US. It also stops short of explicitly requiring firms to take structural steps to remove any impediments to restructuring, as is the case under the EU Single Resolution Board’s Expectations for Banks. However, when thinking about achieving the overarching RAF resolvability outcomes, firms may need to consider what would be needed to achieve effective restructuring (as well as restructuring planning), which may include structural and operational preparations.
More precisely, the SoP focusses on the capabilities needed to identify, evaluate and describe restructuring options as part of a timely, credible and actionable plan. Given the limited timeframes, firms will need to think through in advance what a plan could look like, and how this would be developed. This should draw heavily upon what is already available through recovery plans, and other initiatives such as OCIR, Valuations in Resolution and trading book SWD.
How to deliver policy compliance?
The diagram below sets out a three-step process for defining a target end-state for the capabilities required.
The first step involves thinking about where restructuring options might go beyond those included as part of the recovery plan. This is a key driver of how much work will be required to go from a recovery plan to a restructuring plan in resolution – though it is not the only driver. In the first instance, firms should use this exercise as an opportunity to validate the scope and executability of options in their recovery plans, to help ensure these are operational and minimise the incremental work required for restructuring planning in resolution.
The second step involves thinking through the restructuring planning process in resolution from a practical perspective. This involves considering the needs of the board (and where relevant a BIA) in forming a view on the options available, whether or not they are viable, and how they might come together in practice to form a coherent plan that delivers a sustainable business model.
To decide on the target end-state, it will be necessary to consider what planning could be left to a resolution event versus what would require further preparations ex-ante. In theory, ex-ante planning is only needed to the extent there would not be enough time in resolution. However, given the uncertainty and complexity around this process, it would be prudent to lean on the side of preparedness where possible.
Figure 1: The journey to end-state restructuring planning capabilities
Once this has been done, firms can carry out a gap analysis of existing capabilities and planning against the target end-state. This gap analysis can in turn be used to form the basis of an implementation plan setting out the various steps needed to address the gaps identified (e.g. development of a new documented process, increased systems functionality, expansion of recovery planning).
How to demonstrate compliance?
Documentation and testing will be key to demonstrating compliance to the BoE. Indeed, the BoE has itself emphasised these point in Principle 4 of the SoP.
As with other barriers to resolvability, a playbook is a key document to help demonstrate compliance and support the practical readiness of the firm. The restructuring planning playbook would focus on the overall planning process, particularly how other capabilities will be drawn upon, and how the restructuring planning process as a whole will be co-ordinated. Integration and consistency with the master playbook, and individual barrier playbooks (e.g. OCIR, valuations, management and governance) will be important here.
A key question for firms will be whether or not additional restructuring options need to be documented in BAU. In the first instance, firms should carefully consider whether these options could in fact be recovery options, taking into account the fact that recovery options are not limited to those options that are easily implemented. For other restructuring options, an assessment of likely timeframes will be needed to determine the extent to which detailed planning can be left until resolution.
Testing is vital to demonstrating compliance and ensuring the effectiveness of these capabilities. Where possible, testing for this barrier should leverage assurance gained through other tests, such as those carried out for recovery planning, valuations, and OCIR. However, it will be essential to separately assess how effectively various capabilities come together to deliver a restructuring plan.
As with other barriers, successful implementation is not just about convincing the regulator, also boards and even external stakeholders will need confidence that successful restructuring strategy could be implemented. For barriers such as restructuring planning, the recent announcement by the BoE to delay for RAF report by one year significantly heightens the need to get this right at the first time of asking.