EBA consults on valuation in recovery and resolution

The Bank Recovery and Resolution Directive (BRRD) provides a comprehensive framework of powers for resolution authorities to intervene in failing banks to protect the public interest. To ensure that authorities exercise these powers in ways which reduce the risk of costs falling on the taxpayer, preserve value where possible, and respect the property rights of affected shareholders and creditors, the BRRD requires independent valuations to be carried out to inform decisions of the authorities. These valuations are required for several distinct purposes, either prior or after the resolution.

 

Prior to resolution, valuations are required to (i) assess whether the conditions for resolution or the write-down or conversion of capital instruments are met and (ii) inform the choice on the resolution action to be adopted, the extent of any eventual write-down or conversion of capital instruments, and other decisions on the implementation of resolution tools.

 

After the resolution, a valuation is required to determine whether an entity's shareholders and/or creditors would have received better treatment if the entity had entered into normal insolvency proceedings.

 

These draft RTS do not seek to provide detailed valuation rules for particular types of asset or liability, but to specify the principles on the basis of which independent valuers must apply their own information and expertise in particular cases.

 

The different purposes these valuations serve require different approaches to valuation, as recognised in the recitals and text of the BRRD. To assess whether the conditions for resolution are met, a valuation which is consistent with the framework of accounting and prudential rules is needed, but the valuer is required to apply their independent, sceptical judgement as to how this framework has been applied. For resolution decisions, valuation needs to assess economic value in order to ensure losses are fully recognised, even if this requires departures from accounting and prudential rules. This is needed to ensure that resolved institutions are recapitalised to a prudent extent and because certain resolution actions will in fact crystallise economic values. To determine compensation, a valuation conducted on a gone-concern basis is needed.

Comments to this consultation can be sent to the EBA by clicking on the "send your comments" button on the consultation page. Please note that the deadline for the submission of comments is 6 February 2015.

 

A public hearing will then take place at the EBA premises on 16 January 2015 UK time. All contributions received will be published following the close of the consultation, unless requested otherwise.

These draft RTS have been developed according to Articles 36 and 74 of the BRRD, which mandates the EBA to set criteria on which valuations in recovery and resolution should be based as well as to develop the methodology for such valuation.