Letter from Mel Beaman on firms’ preparations for the second Resolvability Assessment Framework (RAF) assessment

In view of the upcoming second assessment of banks‘ and building societies‘ „preparations for resolution under the Resolvability Assessment Framework (RAF), Executive Director Mrs. Melanie Beaman of the Bank of England has published an open letter addressed at Chief Financial Officers of supervised institutions. The letter aims to reiterate the Bank’s expectations in this context, provide guidance to institutions as regards certain provisions of the Policy Statement: The Bank of England’s approach to assessing resolvability, and assist firms in their understanding of SS4/21 – The Bank’s Supervisory Statement: Ensuring operational continuity in resolution.
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To recall, in August 2019, the Bank of England’s Prudential Regulation Authority (PRA) finalized the so-called Resolvability Assessment Framework (RAF). Based upon the experience from the financial crisis in 2008/2009 in which governments used taxpayer money to bail out banks and their losses, the framework establishes the capabilities firms (banks) should have and the outcomes they must achieve to be resolvable. The framework is designed to make sure financial institutions are accountable for their own resolvability without relying on a bail-in from the UK government – if a resolution is unavoidable. The framework includes:
(1) the Bank of England’s assessments of an institution’s resolvability including the assurance of
– having adequate financial resources for resolution,
– being able to continue to do business through resolution and restructuring, and
– being able to communicate and coordinate within the firm and with authorities during resolution or restructuring.
(2) the Bank of England’s assessment of an institution’s compliance with PRA Rulebook resolution requirements: major UK banks, with £50bn or more in retail deposits, must assess their preparations for resolution, submit reports of their assessment to the PRA and publicly disclose a summary of their report.
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The Letter now specifically describes how banks and building societies are expected to comply with the following requirements set out in above noted Policy Statement, among others:
– level of liquidity analysis: institutions must ensure to be capable of performing „liquidity analysis at the level of material entities“ and to be able to monitor the liquidity position of each material entity (this principle applies to large group entities);
– timing of the liquidity analysis: institutions must ensure to perform timely liquidity analysis to ensure that management has all the information needed to make informed decisions about the institution’s further steps in resolution / restructuring (expected is T+1 in this context);
– forecasting liquidity needs: institutions must ensure to predict their liquidity needs for at least 90 days following the initiation of a resolution, or even 180 days following prolonged stress situations prior to entry into resolution or restructuring;
– level of granularity of liquidity needs: the granular reports on liquidity needs are expected to be prepared daily following the initiation of a resolution (restructuring). Thereafter, weekly reports would be sufficient.
– disclosing counterparties and financial contracts: financial institutions are expected to provide key information on their counterparties and financial contracts within 24 – 48 hours following the initiation of a resolution (restructuring).
– communication with stakeholders: institutions shall ensure to establish communication ways that foster the prompt and effective disclosure of information to their clients in case of resolution (restructuring). In this context, the Bank advises firms to „consider social media communication channels as part of their development of capabilities for communication in resolution“.
Additionally, the Letter briefly outlines the Bank’s expectations as regards financial institutions‘ contracts with critical service providers and as regards their own capital assessments and needs to ensure operational continuity in liquidation.