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Valuation preparedness

Valuation preparedness

The Bank of England has published a consultation paper on valuation capabilities to support resolvability.

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Senior Advisor, EMA Regulatory Centre of Excellence

KPMG in the UK

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Comments on consultation paper (PDF 693 KB) are due by 17 November. This is consistent with valuation standards developed by the EBA, and the Single Resolution Board may follow a similar route.

The Bank is concerned that systemically important banks may not have the data, systems and processes to enable the bank to be valued in a timely and robust manner to determine whether the firm should be put into resolution and the choice of resolution tools.

Summary

Banks (major UK banks, their material overseas subsidiaries, and material UK subsidiaries of foreign banks) would be expected to establish, maintain and demonstrate valuation capabilities that meet seven principles:

  1. Data and information: Underlying data and information should be complete and accurate, and relevant data and information would be readily available to a valuer. Firms should collect and hold all relevant data and information that would be reasonably considered necessary to enable timely and robust resolution valuations. These data and information need to be complete, accurate, and reliable, supported by robust processes and controls and regular verification, including reconciliation and testing.
  2. Valuation models: As necessary to meet the timeliness objective, firms should have valuation models in place that are available to be tested and used by a valuer.
  3. Valuation methodologies: Valuation models should use methodologies that are consistent with the methodologies a valuer could reasonably be expected to apply in producing valuations that met the robustness objective. Firms’ valuation models should produce valuations based on expected realisable cash-flows reflecting how a firm might be restructured in resolution, taking into account the resolution strategy for the firm.
  4. Valuation assumptions: Firms should have models and processes that use realistic valuation assumptions, and that enable a valuer to review, revise, and demonstrate sensitivity to these assumptions if necessary.
  5. Governance: Firms should apply sound governance arrangements and processes to ensure that valuation capabilities are maintained in business-as-usual and available prior to and during resolution. Firms should have clear and documented procedures in place – and incorporated into existing governance arrangements for other aspects of firms’ data and modelling capabilities - to ensure that valuation capabilities are compliant with these principles. Firms should identify a relevant individual to be responsible for monitoring compliance with these principles and ensuring steps are taken to remedy any shortcomings.
  6. Transparency: Firms should document, and be open with the Bank and the valuer about, their valuations capabilities and any associated limitations.
  7. Assurance: Firms should periodically review and evaluate their valuations capabilities with regard to these principles, and should facilitate reviews undertaken by the Bank or a third party to test compliance.

Implications

Banks may find it difficult to demonstrate that they:

  • hold sufficiently complete, accurate and readily available data and information. This failing has already been exposed by banks’ and supervisors’ assessments of whether banks meet the Basel Committee principles for risk data aggregation and reporting;
  • are capable of undertaking promptly and robustly both types of valuation required ahead of resolution – to determine whether the conditions for triggering resolution are met (based on normal accounting and prudential rules), and to inform the use of resolution tools, including the bail-in tool (based on economic values, using prudent and conservative assumptions);
  • have adequate governance, documentation and internal and external review procedures to support resolvability preparedness.

If a bank’s valuation capabilities are judged to be inadequate then the Bank of England is likely to require the bank to make the necessary improvements or to hold additional loss absorbing capacity.

Financial Services

As financial services continue to recover from the crisis and strengthen risk management, the focus remains on regulations and cost reduction.

 
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