From 2016, new regulation and a new resolution authority – the Single Resolution Board (SRB) – stand to reshape resolution planning in the Banking Union.

Resolvability is a centrepiece of the new banking regulatory framework, both within the EU and globally. By ensuring that banks can fail in an orderly manner, the expectation is that there will be better alignment between risk-taking and losses, and banks and regulators will be able to prevent systemic crises.

From January 2016, the SRB will be the resolution authority for banks in the Eurozone, taking responsibility just as a number of new tools come into effect (introduced by the EU's Bank Recovery and Resolution Directive – BRRD). In its work plan for the coming year, the SRB makes clear that its main objective will be to "progress towards full resolution planning capacity". This will include drafting resolution plans for the banks within its remit, and developing the resolvability assessments for those Global Systemically Important Banks (G-SIBs) of its own and also for a further group of entities.

The SRB is unlikely to make big changes immediately. This is especially true given the state of play across the region remains very uneven. The first year is instead likely to be principally about bringing all countries up to a foundation level.

What then will change?

Ultimately, resolvability could have a significant influence on banks' operating models across a number of dimensions, including how services are provided, how products are booked and how a group funds itself. Resolution planning will cut across business lines and requires assessment from many angles.

Banks would have faced resolution planning requirements even in the absence of the SRB. But whilst the largest banking groups in the Eurozone have been engaged in it for several years, resolution planning is now coming to a wider set of firms (the SRB's remit extends to around 150 banking groups, including the Eurozone operations of several non-Eurozone banks). The SRB will also form its own views on existing impediments to resolvability and on the course of action a bank should take, introducing the possibility it could make choices at odds with decisions that have been taken in the past. Moreover, the existence of a single institution taking decisions for banking groups across the Eurozone should deliver a greater degree of consistency across the region.

Resolution authorities have a number of different areas to consider in assessing resolvability, but the SRB is likely to focus on governance structures; suitability of liability structures for bail-in; data capabilities; booking practices; critical economic functions and operational continuity; and legal entity structures. Indeed, in her foreword to the SRB's 2016 work plan, Elke König, Chair of the SRB, notes that "the process for setting MREL for individual banks requires a great degree of analysis and it will constitute a crucial part of the SRB's tasks during 2016." (MREL, ' Minimum Requirement for Own Funds and Eligible Liabilities' is a requirement introduced in the EU by the BRRD for banks to main a minimum level of loss-absorbing capacity so that resolution tools, including the bail-in tool, can be applied effectively.)

Getting on the front foot

The pursuit of resolvability could ultimately fundamentally reshape some banking groups. The potential for far-reaching consequences underlines the importance of banks anticipating the scrutiny their business will be subject to and taking early action. Steps that banks could take include resolvability self-assessments or operational continuity assessments, solvent wind-down planning or testing and internal governance.

Taking these steps should give resolution authorities confidence that they can be reliably resolved in the event of the crisis. Moreover, the activities that banks can carry out in the near term will not only help with preparation for resolvability assessments, but will also contribute to a better understanding of their own operations, throwing a light on complexity and by extension potential operational inefficiencies.

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