Rules introduced by the Prudential Regulation Authority (PRA) in supervisory statement SS2/24 require mid-market banks and building societies to have a solvent exit analysis (SEA) prepared by 1 October, 2025. See our overview of the regulations for further detail and advice on what an SEA should include.
Firms will be at different stages of their preparation. For some, there may still be a lot of work to do. Recently, we hosted a symposium for CFOs and those in risk management to discuss how mid-market banks and building societies can prepare. This also included some useful tips and common pitfalls we see in firms’ solvent exit planning.
Five SEA tips for firms
The following pointers may be helpful for management preparing their SEA:
1 Solvent exit planning requires a different mindset
This is about exiting the regulated business, but also needs to consider how any remaining ‘rump’ of the business is resolved, and bringing your balance sheet to zero. Management must focus on the reality of what it would mean to wind your business down across its multiple functions and groups.
2 Cashflow forecasting is a key part of the SEA
Our prior experience of wind-down scenarios shows that, in general, things take longer than expected – and cost more than expected. This should be built into your contingency. The solvent exit analysis also needs to show solvency across the entirety of the solvent exit period, not just at the end. In a wind-down scenario where cashflows can become ‘lumpy’ and reliant on events, this may become more challenging. You should therefore ensure that there's sufficient headroom throughout the process.
3 Consider the use of an entity priority model where your group has multiple connected entities
An entity priority model (EPM) helps determines stakeholder claims and respective recoveries at each entity within a group, identifying legal rights, ranking and characteristics for each claim. It can be invaluable when understanding the practicalities of a wind-down. This is particularly relevant for firms with large, complex structures, where there may be intercompany loans and cross-shareholdings.
4 Your SEA should consider synergies with existing regulations, drawing from existing recovery or wind down plans
This will make the most of available resources and also maintain alignment on an ongoing basis. Firms may include decision trees and maps of various options to follow, depending on why they have triggered a solvent exit.
5 Engage widely within your institution
This is to ensure that a broad spectrum of thought and input goes into the planning and development of the SEA. It also ensures that the plan has built in the opportunity to identify potential pitfalls and challenges that could challenge it.
Ultimately, the devil is in the detail. Solvent exit planning is about demonstrating you have a thoughtful and well considered plan that is practical and robust enough to see the business through a solvent exit, thereby winning the confidence of the regulator.
How to set solvent exit triggers
One of the more challenging areas for firms to navigate is the calibration of triggers for a solvent exit. How should triggers for solvent exit planning differ from those set in recovery or resolution planning? While the answer will depend on different business models and risk profiles, in general, solvent exit planning triggers should sit somewhere between those in your recovery plan, and the regulatory minimum.
By doing the granular modelling behind key indicators – such as liquidity, capital and non-quantitative metrics – management will be able to ascertain where the barrier lies between a non-stressed versus stressed exit, or solvent versus insolvent scenario. It's important to ensure there's enough buffer with your solvent exit triggers to allow a firm to still exit in a solvent manner.
Firms will need to make assumptions when setting these triggers. But there should be thoughtful rationale behind those assumptions, and management should be prepared to justify the decisions to the regulator. While it may be easiest to consider a non-stressed exit scenario, consideration needs to be given to the stressed triggers which may alter the strategy that is followed.
Common pitfalls in wind-down or solvent exit planning
Based on our experience, the following areas are often not considered in enough detail by firms:
1 Wind-down specific funding considerations
Firms will need to consider things they might not have done before. For example, retention payments to incentivise key members of staff to stay over the exit or wind-down period – certain directors or authorised individuals will be required to remain until the end of the wind-down process. There can also be redundancy payments and professional adviser costs.
2 Intra-group relationships
Contractual dynamics and restrictions across the group must be fully considered. We often see firms assume that a parent company will supply necessary funding in a solvent exit scenario, despite there being no guarantee. What if parent company funding is not available? Considering your tax position is also essential, for example if there are intragroup waivers, will there be tax consequences for the waiving entity?
3 Lack of detail or contingency in the cash flow forecast for the wind down period
It's common to see no consideration of timing of key events and when cash may be repatriated to investors. Firms must remain solvent all the way through a solvent exit process – not just at the end.
4 Third-party providers
These can often not be robustly identified – especially in the case of long-term agreements, which might not feature in your day-to-day business – and the impact of your wind-down on their business may not considered. Inadequate analysis of vendor and contractual issues involved in a wind-down are also common. For example, notice periods may affect your timeline or damages clauses could lead to stranded costs.
5 Plans not demonstrating sufficient governance
There should be evidence of leadership commitment including, for example, working groups and board meeting agenda and minutes.
6 Regulatory requirements
The possibility of application delays – which can happen – and the impact on the timeline are often not considered.
Assurance is a key element of SS2/24
Firms should work with second line risk functions to perform a review within the team and provide assurance work as the documentation evolves. A full review of the SEA documentation, calculations and testing with a gap analysis against the supervisory statement SS2/24 should be completed. The PRA doesn't specify whether the assurance element of SS2/24 must be done by 1 October 2025, but some firms are taking the opportunity to do this.
Assurance activities can be performed internally or externally, as the firm considers appropriate. SS2/24 requires that an SEA needs to be reviewed and updated whenever a material change has taken place, and at least once every three years.
Regular 'fire drills' will check that these plans are realistic and detailed enough to inform a solvent exit. Firms must also review any findings from the tests, and feed lessons learned back into the plan for continuous improvement. It's also likely that the regulator will provide thematic feedback on solvent exit planning at some point.
How we can help
Knowing what ‘good’ looks like can be hard for firms. We can help you prepare your SEA, and provide the full range of assurance services.
We tailor our support to your needs. Examples may include advising what realistic timelines are and some of the hurdles that you may face, together with a better idea of the associated cost of a solvent exit for your firm. Or providing support for fire drills on how a solvent exit would be delivered, working the learnings from any fire drill into your SEA.
An external adviser with hands-on experience of solvent exits, as well as restructuring or insolvency procedures for banks and financial services firms, can help challenge your assumptions and offer evidence from real-life scenarios.
For information and advice, contact our experts.
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