The final brick in the wall – the Bank of England and the PRA publish consultations on the Resolvability Assessment Framework

Ten years on from the collapse of the Lehman Group, authorities around the globe are steadily implementing bank resolution and recovery measures to ensure that in the future banks can fail in an orderly manner with losses borne by investors rather than tax payers and with minimal disruption to the financial system.

The Bank of England ("BoE") has made a commitment to Parliament that major UK banks will be fully resolvable by 2022.  In a significant step towards satisfying that commitment, this morning, the BoE and the Prudential Regulation Authority ("PRA") have each published consultation papers regarding the UK's bank resolution regime as it applies to financial institutions whose failure would have a significant impact on the UK financial system ("in-scope institutions").  Designed to ensure that such in-scope institutions are – and are seen to be – resolvable, the BoE's consultation paper sets out how it will assess the resolvability of UK financial institutions  whose resolution strategy is bail-in or partial transfer and of UK subsidiaries of international financial institutions where the Bank would support a cross-border resolution, while the PRA's consultation paper sets out a proposal for new PRA Rules containing requirements for in-scope institutions to assess their preparations for resolution.  Together, the consultations form the basis of the Resolvability Assessment Framework, or RAF. 

The assessment and disclosure framework under the RAF would operate on a two year cycle, beginning in 2020 and involving the following steps:

  • In-scope institutions would assess their preparations for resolvability and submit a report of that assessment to the PRA;
  • The assessment would be reviewed by the BoE and the PRA.  To be considered resolvable, an in-scope institution must, as a minimum, satisfy the following conditions:
    • Have adequate financial resources in the context of resolution;
    • Be able to continue to do business through resolution and restructuring;
    • Be able to co-ordinate and communicate effectively within the firm and with the authorities and markets so that resolution and subsequent restructuring are orderly
  • Finally, the in-scope institution will disclose a summary of their report to the public and at the same time the BoE will make a public statement concerning that institution's resolvability.

Elements of the new requirements should already be familiar to in-scope financial institutions.  The Bank Recovery and Resolution Directive (2014/59/EU) was implemented in the UK through a mixture of legislative provisions, largely contained in the Banking Act 2009, and new rules in the FCA Handbook and PRA Rulebook. In particular, the PRA has introduced a new Operational Continuity Part to its Rulebook which will come into force on 1 January 2019. Banks have submitted their recovery plans to the PRA, and been working on them throughout 2018, and go live with them in the New Year.

Today's consultation papers come off the back of (a) the joint discussion paper published by the BoE, PRA and Financial Conduct Authority regarding operational resilience and (b) the PRA's updated approach to banking supervision which introduced a new section on operational resilience, and builds on the BoE’s publication in October 2017 of its overall ‘Approach to Resolution’.

The scaffolding for the bank resolution and recovery framework in the UK is in place. Banks are now grappling with the legal and practical difficulties of ensuring they are compliant with the various requirements by the different implementation dates.  One thing is certain – the recovery and resolution of financial institutions will be on the agenda for many years to come.

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