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Final EBA Guidelines on improving resolvability published

Shifting focus to testing and operationalisation

The European Banking Authority (EBA) published its final Guidelines on resolvability testing in June 2023, which mark a shift in focus toward operationalisation of capabilities and assurance following several years of policy development and capability implementation. The Guidelines introduce a resolvability self-assessment, a requirement for complex banks to develop a Master Resolution playbook and a multi-annual testing programme.

1. Master Playbook

While these guidelines introduce new deliverables, we see the Master Playbook as an efficient and effective tool for banks to demonstrate resolvability through the Self-Assessment as well as for steering their resolvability programme in a manner that is cost-efficient and meets broader business-as-usual (BAU) objectives.

Deloitte first suggested the concept of the Master Playbook as a tool to support banks with their resolution planning since 2019 (link).

In essence, the Master Playbook is a guide for Senior Management and the Board in resolution. However, by describing how the resolution is expected to unfold, and by identifying the key decisions through the resolution timeline, it enables a clear mapping to implementation steps, capabilities and Management Information. It therefore provides the framework for identifying what is required for a resolution transaction to be credible and to thereby steer the resolvability programme over the coming years.

Banks may have developed playbooks, documentation and capabilities without an overarching structure on top. The Master Playbook helps to ensure that all capabilities and playbooks are consistent to support the resolution transaction described in the Master Playbook.

As such, while the Master Playbook is designed to be used in stress, it also:

  • Provides the framework for demonstrating to the resolution authorities that arrangements are sound and relevant;
  • Clarifies how capabilities come together in an integrated manner, across recovery and resolution, helping to achieve greater use of capabilities in BAU and the stress continuum;
  • It may help to identify areas relating to the resolution transaction and / or capability design that require further consideration prior to making significant further capability investments;
  • Supports the development of Group coordination arrangements including the interaction between Legal Entity Boards and senior management;
  • Helps to steer firms’ Recovery and Resolution Programmes (RRP) over the coming years by helping to identify key priorities in the context of the resolution transaction; and
  • Forms the basis for walkthroughs and simulations with banks’ Senior Management and Boards.

Banks may therefore consider developing a Master Playbook pro-actively to achieve greatest value from it.

2. Self-Assessment Report

The EBA has clarified that they intend to increase ownership by institutions through the development of firms’ Self-Assessment Report.

Using the Master Playbook as a basis for the Self-Assessment should help firms demonstrate how arrangements support the resolution transaction and why these are therefore assessed to be effective, going beyond an assessment of compliance with minimum requirements. This allows for more strategic engagement with Senior Management and the Board.

Firms may also find it beneficial for accountable executives to consider their BAU governance and resourcing needs to support the development of their respective assessments and validation of conclusions prior to any executive and Board governance. This will support overall sponsorship, buy-in and embedding of capabilities across the organisation. Ultimately, the Self-Assessment Report should allow for Senior Management and Board to assess their preparedness for a real potential resolution.

Senior Management and Boards, as well as regulatory authorities, will be particularly interested in how the strategic messages are articulated, including how risks to the execution of a resolution are assessed, and what further enhancements may be planned over the medium term. Consideration may be given to how medium-term enhancements to capabilities are linked to strategic programmes.

Finally, there are opportunities to consider how the Self-Assessment report also supports any other disclosures in BAU, for example fixed income presentations related to MREL and updates to the Annual Report.

3. Multi-annual Testing Programme

While the EBA Guidelines introduce a requirement on resolution authorities for the development of a multi-annual testing programme, firms may benefit from taking a pro-active approach in drawing up their testing plans through the Self-Assessment, taking into account:

  • Validation of a Master Playbook framework, for example through early Board Walkthrough exercises of the Master Playbook;
  • Testing of outcomes, e.g. testing of capabilities to develop key Management Information that would be used to support Senior Management and Board decisions;
  • Testing of the resolution governance framework, by escalating key decision points through the relevant governance fora through to the Boar;
  • Building on the above to run Senior Management / Board resolution “simulations”, where participants are given the opportunity to exercise decision making on key discussion topics based on a specific scenario; and
  • Testing the interaction between Legal Entity Boards, for example through a simulation of a conflict of interest between two Legal Entity Boards.

As part of developing a testing programme, firms might find it helpful to consider responsibilities across the first line but also second and third lines. For example, there are opportunities for second and third line to review the testing programme and take part in testing exercises led by the first line in order to input and provide independent review and challenge.

Testing exercises provide firms with an opportunity to engage Senior Management and Board in an efficient manner on resolution topics, such as for example a potential approach for restructuring a bank following resolution.

Board Level Exercises

In order to engage with Senior Management and the Board in a proportionate and meaningful manner, firms may consider an evolution of testing exercises with their Board and Senior Managements. It is expected that firms begin with educational style “Briefing” and “Walkthrough”, moving toward “Simulation-style” exercises as their RRP matures, in order to allow for increasingly realistic and complex scenarios.

Clea Evagorou
RA FSI Leader for North
South Europe

Steven Van Honacker
Deloitte Financial Services