Prudential Regulation Authority Rulebook

2.1

A firm is required to carry out an assessment of its preparations for resolution under Chapter 2 of the rules. This section sets out the PRA’s expectations in relation to that Chapter.

2.2

The PRA expects a firm to undertake a forward-looking, realistic assessment of how its preparations for resolution would enable it to achieve the outcomes for resolvability as set out in the Bank’s Approach to Assessing Resolvability SoP.

2.3

The three outcomes for resolvability as set out in the Bank’s Approach to Assessing Resolvability SoP are:

1. (i) Have adequate financial resources in the context of resolution:^[2]

A firm should ensure that it has the resolution-ready financial resources available to absorb any further losses and recapitalise without exposing public funds to loss. This includes resources to meet its financial obligations in resolution. This is necessary to allow the authorities to keep the firm operating as described below. This means that a firm must: 

• meet the ‘minimum requirements for eligible liabilities’ (MREL) appropriately distributed across its business;
• be able to support a timely assessment of its capital position and recapitalisation needs; and
• be able to analyse and mobilise liquidity in resolution.

1. (ii) Be able to continue to do business through resolution and restructuring:

A firm should ensure that its activities can continue while the authorities take charge and begin to restructure the firm in such a way that the business can be reshaped, including any parts of it being sold or wound down (as appropriate). This includes ensuring that the resolution does not result in a firm’s financial and operational contracts being materially disrupted or terminated and that direct or indirect access to services delivered by financial market intermediaries is maintained. This is essential to having a continuing business that can be returned to long-term viability through restructuring. It also means building on recovery planning work so that the operational and support services needed for a viable business can be identified, separated and reorganised to support restructuring options.

1. (iii) Be able to co-ordinate and communicate effectively within the firm and with the authorities and markets so that resolution and subsequent restructuring are orderly.

2.4

This section should be read in conjunction with the Bank’s Approach to Assessing Resolvability SoP.

2.5

When undertaking its assessment, the PRA expects a firm to consider how a Bank-led resolution is likely to be executed.

2.6

A firm should:

• base its assessment on how it would be resolved by the Bank and how its preparations facilitate the Bank’s process with reference to the pre-resolution contingency period, the ‘resolution weekend’, and the post-bail in period as described in the Bank’s Approach to Assessing Resolvability SoP;
• identify any risks which could prevent the above outcomes from being achieved and detail the steps it intends to take to reduce or remove those risks. This should include an anticipated timeline for completion and any controls that exist at the firm to oversee its execution of these steps;
• identify any other actions it may need to take to facilitate orderly resolution; and
• document these considerations in its report.

2.7

The PRA expects a firm to reference a stylised resolution timeline as outlined in Annexes 1 and 2 of the Bank’s Approach to Assessing Resolvability SoP as a reference tool when developing its assessments.

2.8

The PRA expects a firm’s assessment to cover the consolidation group that the PRA is responsible for supervising on a consolidated basis. Consideration should also be given to how the firm’s preparations for resolution are consistent with the PRA’s ring-fencing requirements under the Ring-Fenced Bodies Part of the PRA Rulebook.

2.9

The PRA expects that a single assessment would be developed covering the consolidation group which the PRA is responsible for supervising on a consolidated basis. The PRA will treat this single assessment as discharging the obligations of the other firms within the consolidation group, in line with its understanding of how the firm would be resolved by the Bank, subject to the considerations outlined in paragraphs 2.8 and 5.6 of this SS. Similarly, the PRA expects firms to provide a single report and disclosure under Chapters 3 and 4 of the rules covering the consolidation group the PRA is responsible for supervising on a consolidated basis.

2.10

The PRA does not expect a firm to consider issues relating to how the UK authorities will engage with authorities in other jurisdictions.

2.11

In conducting its assessment, the PRA expects a firm to assess its preparations for resolution by reference to the objectives of the barriers to resolvability identified by the Bank in the Bank’s Approach to Assessing Resolvability SoP. A firm should also consider its specific business model and whether there are any additional barriers that are relevant. The PRA also expects a firm to assess whether there are any other factors that may prevent its orderly resolution. A firm should assess whether it has the capabilities, resources, and arrangements to achieve the following objectives:

• Minimum requirement for own funds and eligible liabilities (‘MREL’): A firm should maintain a sufficient amount of resources, as determined by the Bank, that can credibly and feasibly be used to absorb losses and recapitalise the firm to a level that enables it to continue to comply with the conditions for regulatory authorisation and sustains market confidence.^[3]
• Valuations: A firm’s valuation capabilities should enable a valuer to carry out sufficiently timely and robust valuations to support effective resolution.
• Funding in resolution: In order to ensure it continues to meet its obligations as they fall due, a firm should be able to estimate, anticipate, and monitor its potential liquidity resources and needs and mobilise liquidity resources in the approach to and throughout resolution.
• Early termination of financial contracts (stays): A firm should suitably address the risk of early termination of financial contracts upon entry into resolution, to limit any impact on its stability and the wider financial system (e.g. market contagion) that may otherwise occur as a result of resolution.
• Operational continuity in resolution (‘OCIR’): A firm’s operational continuity arrangements should ensure continuity at the point of entry into resolution and permit any post-stabilisation restructuring, to ensure the continuity of banking services and critical functions. For the avoidance of doubt, for assessments conducted prior to Saturday 1 January 2022, firms should focus on capabilities developed to comply with the PRA OCIR policy that is in force at the time of that assessment.
• Continuity of access to financial market infrastructure: A firm should be able to take all reasonable steps available to facilitate continued access to clearing, payment, settlement, and custody services in order to keep functioning in resolution (recognising that providers of these services may retain a degree of discretion over their ability to terminate a firm’s membership).
• Restructuring planning: A firm should be able to plan and execute restructuring effectively and on a timely basis in the event of resolution, taking into account the objectives applicable to that firm's preferred resolution strategy. 
• Management, governance and communications: A firm should be able to – during the execution of a resolution – ensure that their key roles are suitably staffed and incentivised, that their governance arrangements provide effective oversight and timely decision making, and that they deliver timely and effective communications to staff, authorities and other external stakeholders. 

2.12

The PRA does not consider the capabilities set out in the Bank’s Approach to Assessing Resolvability SoP to be exhaustive. A firm should also consider its specific business model and whether there are any additional barriers that are relevant. The PRA expects these additional barriers and/or factors to be taken into account in a firm’s assessment.

2.13

The PRA recognises that it may be necessary for a firm to make a number of assumptions around the actions and/or decisions of different parties involved in resolving a firm, for example by regulators and advisors, to determine whether its preparations for resolution are realistic. The stylised resolution timeline as set out in Annexes 1 and 2 of the Bank’s Approach to Assessing Resolvability SoP provides an indication of the assumptions a firm may need to make.

2.14

The PRA expects a firm to undertake testing of its preparations for resolution to substantiate its assessment, to identify any risks to its resolution, and to assist in the development of steps it needs to take to remove or reduce those risks. Any testing and review should assess a firm’s capabilities, resources and arrangements against the objectives outlined above in paragraph 2.11 should be designed with regard to the stylised resolution timeline as outlined in Annexes 1 and 2 the Bank’s Approach to Assessing Resolvability SoP.

2.15

A firm should undertake testing and review of its preparations at a suitable frequency to ensure that its assessment remains up-to-date and accurate.

2.16

A firm should appropriately allocate roles and responsibilities for its testing. The PRA expects any testing to involve an appropriate level of senior management engagement, to provide oversight and to reflect how the firm’s preparations function in practice. Reviews should be carried out by individuals of a suitable level of expertise and a suitable level of independence to ensure the review is robust.

2.17

Where the Bank has set a preferred resolution strategy as MPE bail-in, a firm should consider as part of its assessment how resolution groups in other jurisdictions would be resolved, assess interdependencies between the UK resolution group and resolution groups in other jurisdictions, and address any resulting barriers to the resolution process. In particular, an MPE firm should consider the degree of financial and operational separability of its UK resolution group, for instance related to booking and risk-management practices or access to critical FMIs, and relevant structural issues, for instance arising from inter-resolution group exposures.

2.18

In addition, an MPE firm headquartered in the UK should consider the extent to which coordination across multiple resolution groups is necessary to execute its group-wide resolution strategy. As such, a firm should consider relevant factors including governance and operational arrangements, and capabilities that may be relevant for the firm as a whole.

2.19

The PRA does not expect a firm to provide detail on how resolution groups headquartered in other jurisdictions comply with policies set in those jurisdictions.