Banking

A decade on since the start of the financial crisis, the Bank of England (BoE) has signalled a step up in efforts to make banks resolvable. The overall message is clear – despite the progress made so far, and the January 2019 deadline for UK retail ring-fencing being just around the corner, more work is needed. There is going to be no let-up for banks. It is not just more of the same; there are new requirements for banks to tackle, which may necessitate new skills and governance arrangements within their resolution teams, and with deadlines over the next four years already set.

At the start of June the Independent Evaluation Office (IEO) published the findings of its assessment of the BoE’s resolution arrangements. Together with the BoE’s response to the report, and a speech by Sir Jon Cunliffe that coincided with the report’s publication, it sheds light on the next stages of work to remove impediments to resolution.

The report makes a number of recommendations designed to ensure the BoE is able to meet its commitment to make the UK resolution framework fully operational by 2022, which will now shape the BoE’s agenda for banks.  Banks will need to deal with requirements for reporting and assurance and will be asked to conduct resolvability self-assessments.  They also need to continue with existing projects to remove impediments to resolvability, and should expect increasing scrutiny of their activities and a growing reluctance by the authorities to accept any slippage of project deadlines, however complex the issues that need to be solved. At the same time, banks will be faced with greater public scrutiny of their resolution arrangements as a result of the BoE’s commitment to publicly disclose its assessment of major UK banks’ resolution plans by 2019.

Although unlikely to yield immediate tangible changes, the BoE will also re-examine how its assessment of resolvability is taken into account when it sets going-concern supervisory priorities and overall capital requirements.  As banks become resolvable, this holds out the possibility that there will be some quid pro quo for banks from the significant investment they are making.

Achieving a fully operational resolution framework by 2022

The BoE’s 2022 deadline for achieving a fully operational resolution framework – a commitment to Parliament – leaves banks without much time to tackle the most complex and difficult changes that need to be made. The report highlights that the major UK banks still have a number of impediments to resolvability to remove, and that progress tackling different impediments has been uneven.

The report also notes that the BoE has yet to set out policies for the removal of all the barriers at the national and international levels, and that the incomplete policy framework creates uncertainty for banks as they progress work on removing impediments.  The IEO found that there remains a lack of clarity around what “good” looks like with respect to policies that have already been published and recommended that the BoE address this. This lack of clarity is particularly acute for policies that put an onus on banks to develop their own solutions, such as the BoE’s expectations for operational continuity in resolution.

Addressing valuation capability as a barrier to resolvability is also highlighted as a significant task. The BoE also this month published its policy on valuation capabilities to support resolvability. It expects to send an information request soon to in-scope firms, to enable them to carry out a more detailed gap analysis of their capabilities and a plan for compliance.

New requirements for reporting, assurance, and self-assessments

The BoE will consult on a new reporting and assurance framework by end-2019. The framework will seek to ensure that banks have the necessary systems, documentation, assurance and controls necessary to support their resolvability. It will include a requirement for banks to conduct resolvability self-assessments, measured against both UK and international standards. Banks will need to submit the first round of self-assessments in 2020 – after the UK’s departure from the EU and the deadline for implementation of ring-fencing.  The self-assessments introduce an additional burden for banks and in order to achieve sufficient confidence in the assessment process banks will need to review their governance and internal reporting structures. 

Operational resilience

The report and the BoE’s response both emphasise the link between operational resilience (going-concern) and resolvability (gone-concern). The IEO in particular calls for attention to be given to the integration of gone-concern supervision into the going-concern regime. At the same time, we expect the BoE to publish further guidance shortly on their expectations for operational resilience including enhanced requirements for testing and requirement to examine ‘fast-death’ scenarios, as trailed in a recent speech on resilience and continuity. Banks will therefore need to bring programmes tackling these issues closer together.

Focus on transparency

In 2017 the BoE made a commitment to the Treasury Committee to publicly report on major UK banks’ resolution plans and to give its own assessment of the resolvability of major UK banks from 2019. This commitment is in line with the BoE’s belief that greater transparency on the progress towards removing barriers to resolvability will incentivise banks to take action. There is precedent for this transparency from the US, where banks have had to publish a public section of their resolution plans and authorities have published their assessments and recommendations. In addition to its own reporting, the BoE may require that components of banks’ resolvability self-assessments are made public, to facilitate greater transparency on bank-specific progress. These requirements for public disclosure represent a significant shift in the way in which progress is disclosed. Banks will need to be mindful of the implications that public disclosure could potentially have, e.g. on the reaction of counterparties and ratings agencies, as they move forward with their programmes to remove impediments to resolvability.

 

David

David Strachan – Partner, Head of EMEA Centre for Regulatory Strategy

David is Head of Deloitte’s EMEA Centre for Regulatory Strategy. He focuses on the impact of regulatory changes - both individual and in aggregate - on the strategies and business/ operating models of financial services firms. David joined Deloitte after 12 years at the FSA, where in his last role, Director of Financial Stability, he worked on the division of the FSA into the PRA and the FCA.

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Alastair Morley - Partner, Banking and Capital Markets Prudential Regulation

Alastair is a Partner within Deloitte’s Banking & Capital Markets practice in London with over 13 years experience in the retail and investment banking industry. He is also a member of our Regulatory Assurance and Structural Reform leadership teams, and leads a number of our financial rules and regulatory assurance engagements.

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Simon


Simon Brennan – Director, Centre for Regulatory Strategy, Deloitte

Simon specialises in prudential regulation for banks. Simon joined Deloitte after 11 years at the Bank of England, where he worked in a number of areas covering macro and micro prudential policy, and financial institution risk assessment.
 

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Katelyn Geraghty - Senior Associate, Centre for Regulatory Strategy, Deloitte

Katelyn is a Senior Associate in the Centre for Regulatory Strategy, where she focuses on bank structural reform and supervision in the Banking Union. Prior to joining Deloitte she worked in the UK Parliament, where she focused on economic policy.
 

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