The Bank of England (BoE) has released its first public assessment of the preparations of the eight major UK banks under the Resolvability Assessment Framework (RAF).
Overall, the BoE finds that the banks have made significant progress in enhancing their preparations for resolution and embedding these within their organisations. As such, they are in a fundamentally better place than they were at the start of the global financial crisis in 2007-08. Improvements were noted in relation to 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, and in the ability of banks to change their group structure in order to remain operational. However, there is still more to do.
The requirement to have adequate financial resources is paramount, and all the banks reported that they are currently meeting their end-state 2022 Minimum Requirements for own funds and Eligible Liabilities (MREL). They have also made substantial progress with respect to their valuation capabilities for resolution. However, some need to do more to increase automation of data production and enhance modelling capabilities (specifically around sensitivity analysis and flexibility). Some firms are overly reliant on existing data and modelling capabilities.
More work is required too on funding in resolution. Banks could improve their understanding of how their liquidity needs and resources may change through a resolution transaction, and they must 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.
On continuity and restructuring, the BoE does not identify any areas where material further work is required in relation to the continuity of financial contracts in resolution or to current policy on Operational Continuity in Resolution (OCIR). Banks will be assessed against the updated OCIR policy in the next Resolvability Assessment Framework (RAF) cycle. Banks do need to do more around continuity of access to financial market infrastructures (FMIs). They should continue to engage with their FMI service providers to develop and maintain their contingency plans for ongoing FMI access. They will also 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, banks should continue to refine their communications capabilities to ensure that these are sufficiently robust and well-tested for resolution. Some banks identified idiosyncratic barriers to resolution, but the BoE did not find any of these to be sector-wide issues.
The banks generally had clearly defined governance processes and accountability models to design and implement resolvability capabilities. In most, the board and senior management appeared to be suitably engaged on the adequacy of firms’ resolution capabilities. Most also had an adequate process for identifying the capabilities required to meet the barrier objectives and their resolvability outcomes. However, for some, the design of certain capabilities is heavily reliant on existing systems and processes with insufficient forethought over whether they are adequate for resolution.
The scope of the banks’ testing arrangements for individual capabilities varied. Some firms need to 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) should be refined over time, increasing in complexity and scope.
The BoE identified “shortcomings” for three firms and “areas for further enhancement” for six. The former are issues that may unnecessarily complicate the BoE’s ability to undertake a resolution. The latter relate to specific areas where continued work is needed by firms to enhance or embed capabilities in order to further reduce execution risks associated with resolution. One firm had no material issues.
In summary, 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 together with the roles of their Risk and Internal Audit functions and business subject matter experts, and 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.
Thematic findings
The requirement to have adequate financial resources is paramount, and all the banks reported that they are currently meeting their end-state 2022 Minimum Requirements for own funds and Eligible Liabilities (MREL). They have also made substantial progress with respect to their valuation capabilities for resolution. However, some need to do more to increase automation of data production and enhance modelling capabilities (specifically around sensitivity analysis and flexibility). Some firms are overly reliant on existing data and modelling capabilities.
More work is required too on funding in resolution. Banks could improve their understanding of how their liquidity needs and resources may change through a resolution transaction, and they must 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.
On continuity and restructuring, the BoE does not identify any areas where material further work is required in relation to the continuity of financial contracts in resolution or to current policy on Operational Continuity in Resolution (OCIR). Banks will be assessed against the updated OCIR policy in the next Resolvability Assessment Framework (RAF) cycle. Banks do need to do more around continuity of access to financial market infrastructures (FMIs). They should continue to engage with their FMI service providers to develop and maintain their contingency plans for ongoing FMI access. They will also 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, banks should continue to refine their communications capabilities to ensure that these are sufficiently robust and well-tested for resolution. Some banks identified idiosyncratic barriers to resolution, but the BoE did not find any of these to be sector-wide issues.
The banks generally had clearly defined governance processes and accountability models to design and implement resolvability capabilities. In most, the board and senior management appeared to be suitably engaged on the adequacy of firms’ resolution capabilities. Most also had an adequate process for identifying the capabilities required to meet the barrier objectives and their resolvability outcomes. However, for some, the design of certain capabilities is heavily reliant on existing systems and processes with insufficient forethought over whether they are adequate for resolution.
The scope of the banks’ testing arrangements for individual capabilities varied. Some firms need to 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) should be refined over time, increasing in complexity and scope.
Firm-specific findings
The BoE identified “shortcomings” for three firms and “areas for further enhancement” for six. The former are issues that may unnecessarily complicate the BoE’s ability to undertake a resolution. The latter relate to specific areas where continued work is needed by firms to enhance or embed capabilities in order to further reduce execution risks associated with resolution. One firm had no material issues.
The BoE will repeat its assessment of the major UK banks in 2024 to assess progress
In summary, 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 together with the roles of their Risk and Internal Audit functions and business subject matter experts, and 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.
