In October, the Bank of England will run the second Resolvability Assessment Framework (RAF) review, looking at the eight major UK firms’ resolution capabilities. In its recent Dear CFO letter, the Bank highlights areas of focus for the next three reviews and draws on previous findings to clarify technical elements of the framework. The letter also gives thematic feedback on the recent Operational Continuity in Resolution (OCIR) implementation review, which is integral to effective resolution planning.
While the review itself only applies to the eight major UK firms, lessons learned apply to all firms falling in scope of the RAF. As such, it’s important to stay up to date with the Bank’s feedback to develop good practices and maintain compliance.
Tackling the Resolvability Assessment Framework
Meeting the three resolvability outcomes
The Resolvability Assessment Framework helps firms fail safely by boosting accountability for resolution planning and reducing the risk of a bail-out. To achieve this, the framework breaks down regulatory siloes to deliver a more cohesive approach for an orderly resolution.
Regardless of size, all in-scope firms banks must meet three resolvability outcomes:
- Adequate resources and liquidity to get through the resolution period
- Ability to continue business as usual through resolution and restructuring, drawing on OCIR processes
- Deliver effective communication to all internal and external stakeholders
Firms must test, maintain, and continually improve these capabilities, with sufficient governance processes in place. This includes oversight for valuation in resolution, which is an integral element of the RAF, and firms need to be able to value their assets at short notice, with adequate data and metrics in place.
The Bank expects Board’s resolution assessments, to demonstrate good oversight and assurance over these plans.
Basel 3.1: getting started with the PRA’s plan
Driving more detailed assessments
Ahead of this year’s review, firms should remediate any outstanding issues from the previous RAF assessment. Over the next three reviews, the Bank will take a more detailed approach to firms’ resolution planning, looking at each outcome in turn:
- This year’s review will look at financial resources, and the Bank expects to see data, documentation or demonstrations of resolution plans
- The 2025-26 review will focus on the continuity and restructuring outcome
- The 2027-28 review will assess the co-ordination and communications outcome
The Bank will publish the results of the second review in June 2024, including any outstanding remedial actions. Firms will also receive private feedback and should factor this into their resolvability disclosures, as per SS4/19.
Funding in Resolution (FiR)
Drawing on lessons learned and feedback from its first RAF review, the Bank also clarifies some technical elements around funding in resolution.
Domestic liquidity sub-groups
Firms must monitor the liquidity of all their material entities. In the initial RAF review, most firms had outsourced liquidity analysis and reporting to one entity within in their Domestic Liquidity Sub-Group (DoLSubs). As this was not explicit in the funding in resolution (FiR) statement of policy, the Bank has clarified that intra-group outsourcing, to another entity, is acceptable as long as it doesn’t negatively affect resolvability outcomes. Resolution assessment reports should detail these arrangements, how they support funding in resolution objectives, and demonstrate appropriate assurance measures.
Liquidity reporting timeframes
Liquidity reports must be available a day in arrears, or less if necessary. This is to ensure that management and external stakeholders, have the right information, at the right time, to make informed decisions. Information needs to be accurate and granular, and firms must prioritise immediate funding needs over long-term ones.
Liquidity reporting approach
Firms need to be able to estimate their funding needs for at least 180 days. This is 90 days (minimum) from the start of the resolution period, and 90 days for pre-resolution contingency planning if the firm is in a period of prolonged stress. Firms should be able to move into the resolution period sooner than 90 days if it helps firms meet their financial obligations.
Granularity of forecasts
The first week after the resolution weekend is crucial to help the Bank, third-party funding providers and internal management identify liquidity support requirements. Liquidity forecasts must be granular enough to determine how much support the firm needs and when.
As such, reporting granularity must be daily for the first 90 days, in-line with PRA 110 reporting requirements. This is irrespective of when the resolution event happens and applies even if the firm enters resolution before 90 days. For 90-180 days, reports should be weekly to support timely decision-making, but the Bank can allow a longer period in some instances. Firms can also use monthly granularities for long-term forecasting beyond 180 days.
The Bank also clarifies specific technical items within RAF-related statements of policy:
Continuity of financial contracts in resolution
Firms should be able to provide information on their financial contracts and counterparties, including contract values, as per the RAF statement of policy. Ideally, within 24-48 hours of the Bank requesting it, and no longer than 72 hours where risks may be greater.
Continuity of access to FMIs
Central bank Financial Market Infrastructure firms (FMIs) are in scope of the Continuity of Access to FMI statement of policy.
Management, governance, and communications
Firms shouldn't assume regulatory relief for requirements covering management, governance and communications, and should plan for their ongoing application throughout resolution. This includes the Senior Managers and Certification Regime and remuneration policies. Communication plans should consider the use of social media, both as a means of communicating with stakeholders and as a channel for monitoring throughout resolution.
Thematic feedback on OCIR
Following its recent OCIR implementation review, the Bank didn’t flag any significant concerns but highlighted two areas of focus to improve operational continuity and support restructuring goals.
Critical supplier contract remediation
Some firms had outstanding critical supplier contracts for review, which need specific resolution-resilient clauses for ongoing service provision throughout stress and resolution. If suppliers don’t agree to these changes, firms could either pursue negotiations with the hopes of agreement in time or assess the risk of non-inclusion. The latter may require alternative solutions or further mitigating controls.
Calibration of OCIR liquidity resources
The revised OCIR policy asks firms to hold liquidity resources for two months of intra-group service costs, down from six months of annual fixed overheads in the initial iteration. Despite the shorter timeframe, the Bank expects firms to hold resources for longer, if necessary, to make sure in-group service providers can remain financially resilient throughout resolution. Firms should support this with severe, yet plausible, scenario analysis to test the operational continuity of critical service providers.
Improving resolvability outcomes
Effective resolution planning is complex and draws on a broad range of regulations to ensure firms can fail safely. This requires effective governance, scenario planning and flexibility to make sure firms can put plans into action, regardless of the causal factors. Building on lessons learned from the Bank’s RAF assessment, including policy clarifications, and feedback on OCIR implementation, will help all in-scope firms improve their resolvability and offer the Bank greater oversight.
For more insight and guidance, get in touch with Paul Young.