Resolvability Assessment 2024: The Second Public Disclosure
Today on 6th August 2024, the Bank of England (“BoE”) alongside the eight major UK Banks and Building Societies (“firms”) published the 2024 “Resolvability Assessment of Major UK Banks”. This is the culmination of the second cycle of the BoE’s Resolvability Assessment Framework (“RAF”).
This follows the first RAF public disclosures in 2022 when the BoE and eight firms for the first time published a summary assessment of their preparations for resolution.
The findings of this second assessment show that the major UK firms have continued to make significant progress in improving their preparations for resolution, including embedding resolution preparations into their everyday business.
(Resolvability assessment of major UK banks: 2024, Bank of England)
The resolvability story so far...
The financial crisis emphasised the importance of both firms and resolution authorities being able to respond effectively to failing banks and building societies, without having to resort to taxpayers’ funds for bail-outs.
In the UK, the Banking Act 2009 was introduced to form the current resolution regime and provide the BoE with the appropriate resolution powers to deal with failing firms. The BoE made a commitment to Parliament that major UK firms would be resolvable by 2022. In July 2019, as part of that commitment, the BoE published the Resolvability Assessment Framework (RAF), which identified three outcomes that firms need to be able to achieve so that they are prepared for a resolution. The further requirement for public disclosures has the overarching objective of making resolution more transparent and understandable.
The RAF and latest round of disclosures continues to build on and evidence the extensive amount of work from both firms and resolution authorities to ensure that - should the need arise - firms can be resolved in an orderly and robust manner.
This follows recent resolution assessment publications by US authorities and the Single Resolution Board (“SRB”) who drew similar conclusions of good work to date by firms, whilst also highlighting further work expected.
Today’s findings provide further reassurance that a major UK firm could enter resolution safely if needed: remaining open and continuing to provide vital banking services, with shareholders and investors – not public funds – first in line to bear the costs of failure. This continues to address the ‘too big to fail’ problem.
(Resolvability assessment of major UK banks: 2024, Bank of England)
The resolvability journey continues...
Recent banking failures have further demonstrated the need for firms to be able to be resolved in a timely and robust manner to ensure the stability and continuity of the whole financial system. The largest and most complex firms remain just that, and there is a continued and renewed focus and appetite for further work to enhance the resilience of firms, allowing them to fail in an orderly manner should they encounter insurmountable difficulties.
As a result of the above, coupled with a more detailed review as part of the second assessment, both the BoE and firms have identified areas for further work that were not identified as part of the first assessment. This is a demonstration of the fact that the BoE will continue to evolve its approach to assessing resolvability as part of future assessments.
Resolvability is a permanent obligation and a process of continuous improvement.
(Resolvability assessment of major UK banks: 2024, Bank of England)
Alongside firm-specific findings, the BoE identified three key thematic issues for the industry to consider as part of the second RAF assessment.
Figure 1: Overview of thematic issues identified in the second RAF assessment
The resolvability road ahead…
The BoE has made clear in this assessment that resolvability is a process of continuous improvement, with firms expected to address both the thematic and firm specific-issues identified in this assessment as a priority.
The focus of the next RAF assessment will be the Continuity and Restructuring outcome, whereby there will be a more detailed focus on the Restructuring Planning and Operational Continuity in Resolution (“OCIR”). The BoE has also indicated that it will conduct a level of BoE-led assurance over these capabilities, as it did with Adequate Financial Resources as part of the first RAF assessment.
Finally, the BoE and PRA will consult on a postponement of the next RAF assessment by one year to 2026–27 rather than 2025–26. The rationale is that this allows for further work by firms, more detailed assessments, and time to remediate issues, whilst also appreciating the level of work done to date by firms on resolvability. As a result of the additional time given to firms, we would expect a higher bar for the BoE’s next assessment.
As today’s disclosures show, firms need to continue the good work to date, including embedding resolvability in their day-to-day operations, incorporating findings from this assessment and leveraging lessons learnt from recent events. The culmination should be resolution readiness which is as robust as possible.
As a leading advisor to banks and building societies on resolvability, alongside supporting firms to recover from financial distress, we are proud to have supported work on this important initiative and look forward to continuing to support firms and regulators in the future.
The team will publish a further blog in due course, focusing on how firms can address the thematic issues coming through as part of the assessment, given these priority areas are expected to drive future work for firms over the coming months and years.
