The European Banking Authority (EBA) has published final draft regulatory technical standards (RTS) that specify valuation principles that shall be used before and after a resolution occurs.
Valuation before resolution is critical to the resolution process since it informs the resolution authority’s decision as to whether the conditions for resolution are met and, if so, which resolution tools should be used. Valuation after resolution is also important as it establishes whether the no-creditor-worse-off safeguard has been breached by the resolution action and whether any compensation has to be paid to creditors and shareholders by the resolution fund.
The final draft RTS have been developed according to Articles 36 and 74 of the Bank Recovery and Resolution Directive, which mandate the EBA to set criteria on which valuations in recovery and resolution should be based as well as to develop the methodology for such valuation.
Prior to resolution, valuations are required to:
- inform the determination of whether the conditions for resolution or the write-down or conversion of capital instruments are met; and
- inform the choice resolution action to be adopted, the extent of any eventual write-down or conversion of capital instruments and other decisions on the implementation of resolution tools.
After resolution, a valuation is required to determine whether an entity’s shareholders and/or creditors would have received better treatment if the entity had entered into normal insolvency proceedings.
The draft RTS are intended to promote the consistent application of methodologies for these valuations throughout the EU. They do not seek to provide detailed valuation rules for particular types of asset or liability, but rather further specify the principles on the basis of which the independent valuer must apply their own judgement and expertise in particular cases.
The final draft RTS complete the EBA regulatory activity on valuation for the purposes of resolution. Previously, the EBA developed RTS on the independent valuer and RTS on the valuation of derivatives for the purposes of resolution. Both of these earlier RTS have been endorsed by the European Commission and entered into force in 2016.
View EBA final draft RTS on valuation under BRRD, 24 May 2017