BoE publishes first Resolvability Assessment

The Bank of England (BoE) has released its first public assessment (PDF 938 KB) of the resolvability preparations of the eight major UK banks under the Resolvability Assessment Framework (RAF).

The assessment considers whether the banks (Barclays, HSBC, Lloyds Banking Group, Nationwide, NatWest, Santander UK, Standard Chartered and Virgin Money UK) have taken the necessary steps to ensure that the BoE could undertake an orderly resolution that minimises disruption to depositors, businesses and the economy, with recapitalisation costs falling to investors and shareholders rather than taxpayers. It does not reflect the likelihood of any firm to enter resolution, or the capability of firms to respond to and recover from stress on a going concern basis.

The BoE finds that the banks have made significant progress in enhancing their preparations for resolution and embedding these within their organisations. They are in a fundamentally better place than they were at the start of the global financial crisis in 2007-08. Areas of improvement include:

• Holding more loss absorbing capacity
• Being able to monitor liquidity needs and mobilise liquid resources throughout resolution
• “Resolution-proofing” contracts and critical service arrangements to enable continuity through resolution
• Changes to group structure to keep banks open and operating in a resolution
• The ability to plan at speed for further restructuring changes to return the firm to long term viability
• Greater planning for communications in a resolution to ensure public confidence is maintained

However, there is room for improvement.

• All of the major UK firms reported that they are currently meeting their end-state 2022 MREL requirements.
• Firms have made substantial progress with respect to their valuation capabilities for resolution. However, some firms need to do more work to increase automation of data production and enhance modelling capabilities (in particular, sensitivity analysis and flexibility). Some firms are overly reliant on existing data and modelling capabilities.
• While progress has been made, relatively more work is required on funding in resolution across the sector than on other barriers. In particular, firms need to do more to understand how their liquidity needs and resources may change through a resolution transaction, and to ensure their capabilities are sufficiently flexible to provide timely and granular analysis. Firms' ability to identify and forecast collateral available to support funding in a resolution was an area of particular weakness.

The BoE does not identify any areas where material further work is required in relation to the continuity of financial contracts in resolution or in relation to the current OCIR policy — banks will be assessed against the updated OCIR policy (May 2021) in the next RAF cycle.

• More work is required on continuity of access to FMIs — in some cases information requested from FMIs was delayed or was not sufficiently comprehensive. Firms should continue to engage with their FMI service providers as necessary to continue to develop and maintain their contingency plans for ongoing FMI access.
• More work is required on restructuring planning than on other barriers — this will need to be a key area of focus for firms. Firms need to do more to assure themselves of the effectiveness of their restructuring planning capabilities, including how they produce an overall business reorganisation plan under time pressure and analyse the impacts of combining multiple restructuring options.

• The BoE has not identified any areas where material further work is required in relation to management, governance and communications in resolution. However, firms should continue to refine their communications capabilities to ensure that these are sufficiently robust and well-tested for resolution.
• Some firms identified idiosyncratic barriers to resolution but the BoE did not find any of these to be sector-wide issues.

• Firms generally had clearly defined governance processes and accountability models to design and implement resolvability capabilities.
• In most of the firms, the board and senior management appeared to be suitably engaged on the adequacy of firms' resolution capabilities.
• Most firms had an adequate process for identifying the capabilities required to meet the barrier objectives and three resolvability outcomes. However, for some, the design of some capabilities is heavily reliant on existing systems and processes with insufficient forethought over whether they are adequate for resolution.

The scope of firms' testing of individual capabilities varied.

• Firms should focus on more extensive testing of whether capabilities would likely work as intended in a resolution, taking into account their resolution strategies and the BoE's stylised resolution timeline.
• Testing of resolvability capabilities (including resolution scenario-based testing) is expected to be refined over time, increasing in complexity and scope.

• The BoE identified “shortcomings” for three firms — these are issues that may unnecessarily complicate the BoE's ability to undertake a resolution.
• It also found “areas for further enhancement” for six firms — i.e. specific areas where continued work is needed by firms to enhance or embed capabilities in order to further reduce execution risks associated with resolution.
• No material issues were identified for one of the firms.

Firms need to continue to embed resolvability in their governance processes. They should consider further testing of their resolvability capabilities conducted under time and resource constraints. They should also consider the roles of their Risk and Internal Audit functions, and business subject matter experts as well as third parties when conducting testing.

The BoE will repeat its assessment of the major UK banks in 2024, and every two years thereafter, to assess the progress they have made in addressing today's findings and enhancing their preparations for resolution. In the meantime, the BoE will continue to engage with firms on the issues raised.