SRB Brexit position paper to ensure resolvability

The Single Resolution Board (SRB) pointed out in a position paper[1]  that banks have to be compliant with essential regulatory requirements (e.g. for MREL, continuity concepts, staffing) irrespective of the upcoming Brexit. After Brexit the European Bank Recovery and Resolution Directive (BRRD) will lose its binding effect for institutions domiciled in Great Britain.[2]  The SRB therefore formulates its regulatory expectations for banks that a) relocate their operations to one of the EU27 countries (incoming banks) or b) have their head office in the EU27 and establish or expand their activities in Great Britain or a third country (outgoing banks).

 

The SRB’s expectations concern the following six areas.

  1. Compliance with MREL[3] New issuance under UK law or under that of any other third country, which should be eligible for MREL, must contain a clause ensuring holders recognize a write-off or conversion can take place, banks have to make sure that any decision by a resolution authority relating to the liability is effective. In addition, existing issuance governed under UK law may have problems of eligibility or there might be cases where a significant number of such liabilities could affect resolvability. The SRB will carry out case-by-case assessments and, if necessary, the maximum four-year transitional period[4] may be extended for banks having MREL shortfalls as a consequence of the ineligibility.
  2. Internal interconnections with respect to capital and liquidity Capital can be downstreamed to the subsidiaries, losses can be upstreamed to the parent company. The group structure should not be excessively complex. The management based in the banking union should be familiar with the group-wide methodology for the validation and calculation of capital and liquidity in resolution and be able to apply it in the event of a crisis.
  3. Operational continuity arrangement The SRB requests a concept to identify critical functions. It sets specific requirements for the analysis of critical services in critical functions, core business areas, operational assets, employees from critical functions and local subsidiaries. The SRB may expect a corresponding risk mitigation under certain circumstances.
  4. Continuity of access to financial market infrastructures (FMIs) The SRB asks for a local continuity concept to ensure the provision of FMI services by group subsidiaries outside the EU27, e.g. it should be possible that FMI services are provided by third-party service providers in the resolution event. The dependence on subsidiaries outside the EU27 for services related to payment flows, clearing and settlement systems has to be minimized; unavoidable dependencies are to be secured by contracts. Institutions should have contractual arrangements with third-party service providers within the EU27 that provide FMI services to EU27 subsidiaries.
  5. Governance arrangements The management of the parent company and subsidiary within the EU27 must be informed about the group management strategy, decision-making processes and crisis management procedures.  Furthermore, when making business decisions, the management must keep the resolvability of the local subsidiaries in mind. The SRB also expects qualified staff dedicated to resolution planning at local level; they should also be involved in group resolution planning.
  6. Data information systems and local capabilities Banks must grant access and availability of management information systems with relevant information for resolution authorities at local level. The SRB expects staff in the relevant subsidiaries to have sufficient expertise to ensure independent valuation and ad-hoc provision of information (e.g. on liquidity).

    What consequences do these SRB requirements have for institutions?

    By the repeated publication of the position paper, the SRB clearly states which requirements it places on banks post Brexit. Banking institutions should analyze whether and to what extent they are affected by the requirements. Subsequently, they should analyze the exact requirements from the BRRD and estimate the concrete need for implementation. Of particular urgency for some banks will be that they may no longer meet MREL. Affected institutions should review their liabilities for MREL eligibility and enter into discussions with the SRB and their local resolution authority to request an extension of the transitional period if necessary.  EU27 subsidiaries should include clauses in their contracts with third-party service providers outside the EU27 to ensure continuity of business even in the event of resolution. Banks should train their staff at local level on resolution topics. Continuity concepts for systems and structures, also at the local level, should be in the drawer of every institution. In the medium term, the SRB will also ask for the expected system implementation for group data so that supervisors have access to relevant information in real time. Presumably these requirements will also be reflected in the individual letters from the Crisis Management Group Feedback and decisions on the Group Resolution Plan.

     

     

[1] The position paper was first published in November 2018. The position paper is available at: https://srb.europa.eu/en/node/743

[2] Source: https://www.gov.uk/government/publications/draft-bank-recovery-and-resolution-and-miscellaneous-provisions-amendment-eu-exit-regulations-2018/the-bank-recovery-and-resolution-and-miscellaneous-provisions-amendment-eu-exit-regulations-2018-explanatory-information Note: The BRRD has been implemented as a directive with the German Sanierungs- und Abwicklungsgesetz (SAG).

[3] Minimum Requirement for own funds and eligible liabilities.

[4] A transition period of a maximum of four years until the MREL quota is complied with has been agreed with the supervisory authorities at individual level. Source: https://srb.europa.eu/sites/srbsite/files/item_1_-_public_version_mrel_policy_-_annex_i_-_plenary_session.pdf

 

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