Reaching resolvability is one of the main priorities for the Single Resolution Board (SRB) and the MFSA’s Resolution Unit for Banks falling within their remit. Preparedness is the key to all crisis management situations and this is reflected in the number of priorities and obligations the Authorities are enforcing to significant institutions and less significant institutions alike.
MFSA’ Head of Resolution Christian Buttigieg and Senior Manager Mario Baldacchino recently participated in a local conference organised by EY which raised the question as to whether authorities’ expectations on reaching resolvability are in line with the plans being set out by the industry.
In the initial stages the Resolution Unit within the MFSA focused on identifying critical Units, resolution banks and on setting Minimum Requirement of Own Funds and Eligible Liabilities (MREL), the latter being subject to specific requirements and timelines set in law. However, there are other important dimensions of resolvability as outlined in the Single Resolution Board (SRB) Expectations for Banks document.
In his intervention, Mr Buttigieg explained that the MFSA collaborates with the SRB to produce guidelines for the Banking Union and to apply these guidelines to significant banks under SRB remit. On this note, Mr Buttigieg stated that the Resolution Unit also applies these guidelines to credit institutions under the direct remit of the Resolution Committee, depending on their preferred resolution strategy and resolution tool. In addition to ongoing work on some dimensions of resolvability, credit institutions need to continue improving their information systems which are essential for any decisions taken at point of failure and for the public interest assessment.
The Resolution team at the MFSA has also started applying the SRB Resolvability Heat Map to assess progress made by the credit institutions on resolvability and will use elements form this Heat Map to start the process of self-assessment by such institutions. This would allow even more collaboration between the Resolution Unit and credit institutions, as well as better alignment between regulatory expectations and the industry’s understanding of these expectations.
The need for dry-runs, which are essential to identifying gaps in crisis preparedness, is imperative and will be included in future work-plans communicated to credit institutions. MFSA’s Head of Resolution also stated that on top of the MREL, the requirement to have credit institutions fully resolvable by 1 January 2024 is very ambitious. This should not lead to less effort, but rather, more focus and energy to address the substantial number of pending resolvability issues through more collaboration between the Resolution Unit and credit institutions. Despite the challenges ahead, significant progress was made in the last two years on resolvability as the concepts and requirements of the resolution framework became embedded in the processes of credit institutions, which are also investing more resources in this area.
Participating in a panel discussion which addressed questions related to information systems and data requirements, MFSA’s Senior Manager within Resolution, Mario Baldacchino, put emphasis on the overarching expectations that Banks maintain effective governance arrangements in place, underpinning the processes for data collection and quality assurance for resolution planning purposes. The discussion highlighted the need for banks to invest more in technological infrastructures that would minimise manual interventions in the aggregation of data provided to the Resolution Unit. This would limit as much as possible the element of human error, particularly when specific data provisions are made for both the completion of fair, prudent and realistic valuations as well as for the application of a resolution action itself in a crisis situation.
While credit institutions are progressing on this resolvability element, more effort needs to be made especially when it comes to periodic testing to produce information necessary for resolution planning, valuation and for the implementation of resolution tools. Dry runs and crisis simulation exercises, also involving senior bank officials, are considered to be effective tools providing a clear gap analysis and reality check in terms of resolvability. Banks should not fail to prepare for a crisis situation - investing in such dry-runs would be a core mechanism for strengthening their crisis preparedness.