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Valuation in resolution

Valuation in resolution

The Bank of England has finalised its policy (PDF 667 KB)on banks' preparedness for valuation to support resolution.

The main changes from the earlier consultation paper in August 2017 are that:

  1. The principles will not come into force until January 2021, with a provision for setting earlier or later bank-specific compliance dates in certain cases;
  2. Banks will be required to document how their valuation capabilities would be used in a resolution;
  3. Smaller banks may not need to have valuation models in place during business as usual operations; and
  4. Banks will not be required to maintain a business as usual virtual data room, although in that case they would be required to demonstrate their ability to provide a third party valuer with sufficiently rapid and reliable access to relevant data and information through other measures.

Implications for firms

Banks within the scope of the valuation preparedness principles will need to assess how well they meet the final version of the principles and what this means for their operational frameworks, systems, financial reporting processes, cash flow data and management assumptions for business as usual and resolution valuations of both banking and trading book assets.

This cannot wait until the run-up to 2021. The Bank of England will send an information request to all in-scope firms within the next few weeks requiring them to undertake a gap analysis of existing capabilities and provide plans for compliance by the 2021 deadline. By the end of 2018 the Bank of England is planning to undertake a thematic resolution planning review (including valuation in resolution) and will provide public feedback on their assessment of the effectiveness of these plans.

If the Bank of England identifies a bank as having a poor resolution framework the bank may find itself subject to an accelerated timeframe for compliance with the principles.

Background

As discussed in Chapter 6 (PDF 1.72 MB) of our paper on Resolution in November 2017, the Bank of England is adopting a principles-based approach to valuation preparedness, with a particular focus on a bank's data and information, valuation models and methodologies, valuation assumptions, governance, transparency and assurance.

The principles apply only to UK-based banks subject to a resolution strategy that includes potential use of the bail-in power, and to material UK subsidiaries of overseas-based banking groups. These banks will need to demonstrate their compliance with the principles as part of the Bank of England's resolvability assessments. 

The principles are consistent with, and amplify, the sections on valuation preparedness in the Financial Stability Board's June 2018 guidance on bail-in execution. They also fit under the European Banking Authority's (EBA) May 2017 technical standards (as adopted by the European Commission in November 2017) on the three broad types of valuation necessary to support resolution, namely (i) to determine whether the conditions for triggering resolution are met; (ii) to inform the choice of resolution tools, including the extent of any bail-in of liabilities, and to determine (where relevant) the rate at which non-equity liabilities should be converted into new equity; and to determine whether any creditor should be compensated under the `no creditor worse off than under liquidation' principle.

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