RiskTech Forum

Wolters Kluwer: Single Resolution Board – Up, Running and New Returns

Posted: 3 October 2016  |  Source: Wolters Kluwer

The Single Resolution Mechanism is one of the three pillars that are the key elements of the European Banking Union. The Union brings together all Eurozone banking entities under a single supervisor (The European Central Bank), a single resolution body (Single Resolution Board), with a single resolution fund. These three pillars are overlaid with a single CRR/CRD4 rulebook that applies to all EU member states.

The resolution mechanism was proposed in 2013 and came into force on 19th August 2014 and fully operational from January 2016. It includes pooled funding arrangements in cases of an institutions resolution. These funding arrangements explicitly exclude support from the EU taxpayer.

The European Central Bank (ECB) has responsibility for day to day prudential supervision of the Eurozone banking sector. However, the Single Resolution Board (SRB) makes the decision about when an institution has reached the point that it will need to be resolved. The SRB includes representatives from the ECB, the European Commission and the more than 18 national regulatory authorities (NRAs).

The SRB takes direct responsibility over cross-border and significant (asset greater than €30 billion) banks. Other institutions are supervised through their NRAs. A decision to resolve an institution will be made by the SRB, but NRAs will be still involved.

The reporting requirements relating to the Banking Recovery and Resolution Directive (BRRD) was issued through the European Banking Authority (EBA) in July 2015 and went live on 31st December 15. These reporting requirements include the information a resolution body will need in the event a bank will needing to be resolved. These include information about legal entities, critical functions, interconnectedness and others.

What is the reporting?
The EBA templates consists of 12 schedules.

For 2016 schedules IV), v) and VI) were replaced by SRB defined schedules for 2016. These 3 schedules have been replaced by 8 new schedules.

In addition to these schedules the SRB have also set their own Minimum Requirement for Own Funds and Eligible Liabilities (MREL).  This is designed to ensure European institutions have a minimum amount of loss absorbing and recapitalisation capacity available at all times.

The MREL will include regulatory capital and capital available to be drawn down without negatively affecting its creditors.  The MREL will generally be the sum of both pillar 1 and pillar 2 capital requirements, the capital buffers and an allowance for any pillar 2 stress testing requirements. Please see the diagram below.

The SRB will set the MREL at a level generally not less than 8% of total assets. The MREL will be the amount agreed by the firm with its regulator on a case-by-case basis.

The agreement of the MREL is part of the resolution-plan-approval-process. The resolution plan and the MREL will be reviewed annually. The MREL effectively introduces a new capital requirement that firms need to adhere to on a consistent basis.

The first set of MREL are due to be set in the 3rd and 4th quarter of 2016. With on-going requirement to be able to report and adhere to the MREL starting as of 2017. The requirement will be that firms must be able to produce MREL reporting on an ad-hoc basis from that date.

Submitting of SRB reports for 2015 will occur from May to July for the respective quarters of 2016.

What is required from firms now?
Firms will be required to build and maintain a system and management process to complete the MREL reporting on an ad-hoc basis. This will include the verifiable results of pillar 1, pillar 2 additional requirements including any additional capital charges imposed, details of any additional regulatory capital buffers, the results of the leverage ratio calculation, and any SRB specific imposed capital adjustments. On a detailed level firms are expected to be able to reconcile security positions, deposits and other liabilities on a position basis, and to track the top 50 exposures to each.

There may also be additional reporting required by the national regulatory authorities. Firms can expect to be tested on this ability over time by their auditors and regulators. As a result of this requirement, firms will need a single process that combines pillar 1, pillar2 and resolution plans data.

From 2017 and beyond, there is an increased likelihood that there will be additional regular reporting related to resolution planning beyond and above the annual reporting.

For now, Firms need to understand the EBA/SRB reporting and how the changing requirement will affect them. Efforts required to build an enhanced reporting infrastructure given the wide breadth of information required should not be underestimated.  Firms will also need to include resolution metrics as part of their internal regular management reporting. The challenge for firms will be to simultaneously ensure that their information repositories can and will store all the required data and calculation results in an effective format, and to include the resolution planning metrics as part of the business as usual monitoring process.

The SRB and associated reporting represents a new challenge for firms, and increases the demands on already busy resources.  Effective implementation and business benefits can only be gained from having the correct planning and understanding of the requirement together with the right reporting infrastructure. The best outcome will come to those best prepared.