23 May 2017
The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) on valuation in resolution. These draft RTS are a crucial piece of regulation for the resolution framework as they aim to provide the independent valuer with common criteria for the valuation, which will inform the decisions made by resolution authorities, thus promoting a consistent approach to such valuations across the EU.
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.
These final draft RTS specify the valuation principles that shall be followed before and after a resolution occurs.
Valuation before resolution is critical to the resolution process since it informs the resolution authority's decision as to whether the conditions for resolution are met and, if so, which resolution tools should be used. To conduct a valuation before resolution, the independent valuer is empowered to challenge the banks' management assumptions, data, methodologies and judgements on which the institutions prepare their financial statements.
The decision on which resolution tools to apply is informed by a fair, prudent and realistic valuation, based on the economic value of assets and liabilities.
Valuation after resolution is instrumental to establish whether the no-creditor-worse-off (NCWO) safeguard has been breached by the resolution action and whether any compensation has to be paid to creditors and shareholders by the resolution fund. Valuation after resolution is conducted by an independent valuer who should only rely on the information, facts and circumstances that existed and could reasonably have been known at the resolution decision date.
Legal basis and background
These final draft RTS have been developed according to Articles 36 and 74 of the BRRD, which mandate 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.
These technical standards complete the EBA regulatory activity on valuation for purposes of resolution. Earlier, the EBA developed the RTS on the independent valuer and the RTS on the valuation of derivatives for purposes of resolution, which have both been endorsed by the European Commission and entered into force in 2016.