Resolvability framework evolves, testing crucial for stability
Ruth Smith of the Bank of England outlined the evolution of the central bank's resolvability regime, emphasizing outcomes-based assessment and robust testing. The framework aims to ensure financial stability by enabling the orderly resolution of firms.
Tailoring the resolvability framework
The Bank of England's Resolvability Assessment Framework (RAF) applies to major and mid-tier banks, designed with inherent proportionality and a risk-based approach.
Firms with assets over £25 billion are subject to resolution powers, with higher expectations for those using bail-in strategies, requiring recapitalisation and post-resolution restructuring capabilities.
Major UK firms, with £100 billion or more in retail deposits, must meet RAF reporting and disclosure requirements for public transparency.
Senior management is responsible for tailoring resolvability capabilities.
The RAF outlines three key outcomes: adequate financial resources, business continuity through resolution, and effective coordination.
This is not a box-ticking exercise; each firm must ensure readiness for orderly resolution, adapting to its specific context.
Ongoing testing is crucial as firms and markets evolve.
Evolving assessments, global cooperation
The Bank of England has completed two RAF assessments for major UK firms and two for mid-tier firms, enhancing confidence in managing bank failures.
The assessment evolved from desk-based reviews to targeted tests of financial resources and continuity capabilities, especially for mid-tier firms.
Events like the Silicon Valley Bank failure highlighted continuity's criticality.
The Bank actively engages with international authorities, notably through the Financial Stability Board's Cross-Border Crisis Management group, to ensure coordinated resolution for international firms.
This cooperation, a key lesson from past financial crises, enables swift and agile crisis responses, as seen during the failures of Silicon Valley Bank and Credit Suisse.
Testing is the true stress test
The speech underscores that true resolvability extends far beyond mere compliance, demanding realistic and dynamic testing from firms.
While the framework is maturing, the emphasis on 'exercising the muscle' of decision-making under pressure reveals persistent gaps in preparedness.
This shift towards practical application, rather than just theoretical capability, is crucial for the regime's long-term credibility and effectiveness.