Finance, risk and regulatory reporting technology vendor Wolters Kluwer has published a paper suggesting that banks need to start preparing their IT systems for The Single Resolution Mechanism.
The Single Resolution Mechanism is one of the three pillars that are the key elements of the European Banking Union. Notably, the Union brings together all Eurozone banking entities under a single supervisor (The European Central Bank), a single resolution body (Single Resolution Board), with a single resolution fund. These three pillars are overlaid with a single CRR/CRD4 rulebook that applies to all EU member states.
The resolution mechanism became fully operational in January 2016. “Although The European Central Bank (ECB) has responsibility for day to day prudential supervision of the Eurozone banking sector, it is the Single Resolution Board (SRB) that makes the decision about when an institution has reached the point that it will need to be resolved,” notes Selwyn Blair-Ford, London-based Head of Global Regulatory Policy at Wolters Kluwer and author of the paper. “The SRB includes representatives from the ECB, the European Commission and the more than 18 national regulatory authorities (NRAs).”
The SRB takes direct responsibility over cross-border and significant (asset greater than €30 billion) banks. Other institutions are supervised through their NRAs. A decision to resolve an institution will be made by the SRB, but NRAs will be still involved.
The reporting requirements relating to the Banking Recovery and Resolution Directive (BRRD) was issued through the European Banking Authority (EBA) in July 2015 and went live on 31st December 15. These reporting requirements include the information a resolution body will need in the event a bank will needing to be resolved. These include information about legal entities, critical functions, interconnectedness and others.
Meanwhile, the SRB has also set its own Minimum Requirement for Own Funds and Eligible Liabilities (MREL), designed to ensure European institutions have a minimum amount of loss absorbing and recapitalisation capacity available at all times. The MREL will include regulatory capital and capital available to be drawn down without negatively affecting its creditors. The MREL will generally be the sum of both pillar 1 and pillar 2 capital requirements, the capital buffers and an allowance for any pillar 2 stress testing requirements.
As a result banks will now be required to build and maintain a system and management process to complete the MREL reporting on an ad-hoc basis. “This will include the verifiable results of pillar 1, pillar 2 additional requirements including any additional capital charges imposed, details of any additional regulatory capital buffers, the results of the leverage ratio calculation, and any SRB specific imposed capital adjustments,” Blair-Ford notes. “On a detailed level firms are expected to be able to reconcile security positions, deposits and other liabilities on a position basis, and to track the top 50 exposures to each.”
Wolters Kluwer also warns that there may be additional reporting required by the national regulatory authorities. Firms can expect to be tested on this ability over time by their auditors and regulators and, as a result of this requirement, they will need a single process that combines pillar 1, pillar2 and resolution plans data.
“Firms really need to understand the EBA/SRB reporting and how the changing requirement will affect them,” Blair-Ford says. “In fact, the work required to build a suitable and enhanced reporting infrastructure, given the wide breadth of information required, should not be underestimated. They will also need to include resolution metrics as part of their internal regular management reporting.”
The challenge for firms, Wolters Kluwer suggests, will be to simultaneously ensure that their information repositories can and will store all the required data and calculation results in an effective format, and to include the resolution planning metrics as part of the business as usual monitoring process.
Corporate Vision magazine recently awarded Wolters Kluwer’s OneSumX suite of solutions its Best International Financial Services Software accolade for 2016 as part of its annual Technology Innovator Awards. Recent client wins for the firm include Banco Santander, Taiwan Business Bank, Bank BGŻ BNP Paribas and Sberbank.
More information on the Wolters Kluwer Single Resolution Mechanism paper, including a detailed view on the regulatory obligations, is available here (http://www.wolterskluwerfs.com/onesumx/commentary/single-resolution-board-up-running-and-new-returns.aspx)