• Recovery and Resolution Plans

Recovery and Resolution Plans

 

Since the global 2008 financial crisis, legislative and regulatory authorities have been developing systems and controls to avoid spending taxpayer money for bank bailouts. New regulatory standards were introduced to make banks more robust and reduce the risk of failure in the future.

A key component of the new regulations is the requirement for banks to prepare and implement recovery and resolution plans (RRPs). Such RRPs require significant commitment as they prove to be complex, addressing multiple business implications and operational changes that may need to be made to ensure a pragmatic resolution according to anticipated procedures. Overall, resolvability of a bank may have an influence on its operating models.

In the European Union, the Single Resolution Board (SRB) started its work on developing resolution plans for banks from 2015 and became fully operational in 2016, with a complete set of resolution powers. In 2017, the European Banking Authority (EBA) issued Regulatory Technical Standards (RTS) on valuations in the context of resolution. These standards define three different types of valuation in the context of a resolution:

  • Valuation 1 to inform a decision on whether to put a bank into resolution (based on normal accounting and prudential rules)
  • Valuation 2 to inform the choice of resolution tools and the extent of any bail-in of liabilities (potentially departing from accounting and prudential rules, because potential losses should be assessed using economic values based on the present value of future cash flows)
  • Valuation 3 to determine whether any creditors would have been better off had the bank gone into insolvency (the “No Creditor Worse Off” test, undertaken on a “gone concern” basis, estimating the discounted value of cash flows that could reasonably have been expected to arise under the relevant national insolvency procedures)

BDO’s Corporate Finance practices assist both resolution authorities and banks, encompassing services around:

  • Preparation of recovery and resolution plans (RRPs)
  • Valuation advice to supranational and national resolution authorities (individual or framework agreement)
  • Stakeholder monitoring (independent reviews) in relation to banks and portfolios under resolution as well as asset management vehicles (“bad banks”)
  • Business and portfolio sale processes, portfolio advisory, distressed assets
  • Programme management, project office support
  • Advice in relation to State Aid (including “Private Investor Tests”)

 

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