The Bank of England (BoE) has published a consultation paper which sets out the BoE’s proposed policy for the capabilities firms should have in place to ensure that an inability to produce timely and robust resolution valuations does not impede resolvability. Under the proposed policy, firms would be expected to have capabilities in place to support the objective that valuations are sufficiently timely and robust not to impede the effectiveness of their preferred resolution strategy.
For the purposes of the consultation paper, references to “firms” should in general be taken to include:
- banks, building societies and certain investment firms that are authorised by the PRA or FCA and are incorporated in, or formed under the law of any part of, the United Kingdom;
- parent companies of such institutions that are financial holding companies or mixed financial holding companies and are established in, or formed under the law of any part of, the UK; and
- subsidiaries of such institutions or such parent companies that are financial institutions authorised by the PRA or FCA, and are established in, or formed under the law of any part of, the UK.
The consultation paper is structured as follows:
- section 1 sets out the purpose of the consultation paper and provides a high level summary of the BoE’s proposals;
- section 2 explains the role of valuations in resolution and the potential for valuation capabilities to constitute a barrier to resolvability;
- section 3 sets out the BoE’s thinking around how requirements for valuation capabilities would be applied;
- section 4 sets out the BoE’s views on the scope of firms and valuations to which the proposed policy would apply;
- section 5 sets out the BoE’s proposed objectives for resolution valuation capabilities, and summarises the rationale behind these;
- section 6 sets out the BoE’s proposed principles for resolution valuation capabilities and summarises the rationale behind these;
- section 7 provides a preliminary qualitative assessment of the costs and benefits of the BoE’s proposed valuations policy; and
- section 8 sets out discussion questions and details on how to respond to this consultation paper.
The proposed policy sets out the BoE’s principles-based expectations for firms’ valuation capabilities. Firms are expected to develop, enhance, and maintain their capabilities to meet the required standard. Where they do not, the BoE would consider using its resolvability power of direction to ensure that the necessary improvements were made.
The FCA intends the proposed policy to apply to all firms where resolution-specific valuations are expected to be needed. This includes:
- firms whose preferred resolution strategy involves the use of statutory stabilisation tools in the UK, as determined by the BoE in accordance with a indicative thresholds set out in the BoE’s “Statement of Policy on the BoE’s approach to setting a minimum requirement for own funds and eligible liabilities (MREL)” and communicated to firms on an individual basis. In these cases, the firm will need capabilities to support the valuations required under the Banking Act, Bank Recovery and Resolution directive, and associated regulatory technical standards; and
- firms that are material UK subsidiaries of an overseas-based banking group, as reflected in a judgement by the BoE to hold internal MREL in addition to regulatory capital requirements. In these cases, the firm will need capabilities to support valuations to adequately inform the BoE’s decisions around the conversion of internal MREL. Firms should also look to the technical specifications of valuations required in their home jurisdictions (where these exist).
Under the proposed policy, these firms would be expected to have capabilities in place to support the objective that valuations are sufficiently timely and robust not to impede the effectiveness of their preferred resolution strategy. Under the proposed policy, firms would be expected to establish, maintain and demonstrate valuation capabilities that meet the following principles:
- data and information: firms should ensure that the underlying data and information are complete and accurate, and that relevant data and information would be readily available to a valuer;
- valuation models: as necessary to meet the timeliness objective, firms should have valuation models in place that are available to be tested and used by a valuer;
- valuation methodologies: valuation models should use methodologies that are consistent with the methodologies a valuer could reasonably be expected to apply in producing valuations that met the robustness objective;
- valuation assumptions: firms should have models and processes that use realistic valuation assumptions, and that enable a valuer to review, revise, and demonstrate sensitivity to these assumptions if necessary;
- governance: firms should apply sound governance arrangements and processes to ensure that valuation capabilities are maintained in business-as-usual and available prior to and during resolution;
- transparency: firms should document, and be open with the BoE and the valuer about, their valuations capabilities and any associated limitations; and
- assurance: firms should periodically review and evaluate their valuations capabilities with regard to these principles, and should facilitate reviews undertaken by the BoE or a third party to test compliance.
The deadline for responses on the consultation paper is 17 November 2017. The BoE intends to develop a policy statement on resolution valuation capabilities based on the proposed policy set out in the consultation paper.
View BoE consults on policy on valuation cap[abilities to support resolvability, 17 August 2017