In this speech made at the Risk Minds Conference, Amsterdam on 4 December, Bank of England’s Andrew Gracie, executive director in the Resolution Directorate, looks at Resolution since G20 Leaders put together the post-crisis financial reform agenda in 2009. He reviews where we are on the journey as well as what has been done and what is left to do.
Excerpt:
Perhaps the most notable effort has been FSB’s work with industry to agree a protocol to International Swaps and Derivatives Association (ISDA) and other master netting agreements that addresses close-out risk in over-the-counter (OTC), derivative and repo transactions. Agreement in 2014 of the universal protocol amongst G-SIBs, and subsequently of jurisdictional modular protocols for individual jurisdictions to bring in buy-side and non-G-SIB counterparties, is another major landmark in ensuring big international firms are resolvable.
The protocol is built around the premise that entry into resolution should not be classed as an event of default as long as a firm continues to perform. This underscores the importance of funding to making resolution credible. FSB set out principles on funding in resolution in 2016 and just last week published for consultation guidance for use in CMGs (crisis management groups) on the liquid resources and liquidity management capabilities firms require to be adequately resolvable and how liquidity in firms might be bolstered in adverse cases by public backstops.
CMGs will use the guidance to draw up resolution funding plans setting out how, in order to achieve resolvability, liquidity and collateral should be held in a group across legal entities, currencies and locations. We have made good progress in regulating these various FSB standards in the UK, either through Bank of England Policy statements or Prudential Regulation Authority (PRA) rules. UK banks have been given indicative MREL (minimum requirements for eligible liabilities) requirement to meet by 2020; they will have operational continuity arrangements in place in 2019 (alongside the implementation of ring-fencing); and they are already trading on protocol terms with buy-side firms as well as other G-SIBs.
To the point that resolvability is progressive, the major UK banks on average now have total loss absorbency of 23% measured against risk-weighted assets (RWAs) compared to an average end-state requirement of 28% (including buffers). There is more to do in some of these areas, but increasingly the emphasis is on implementation and, with it, assurance – how we supervise firms against these regulatory requirements and hold them to account that identified barriers to resolvability are removed and stay removed.