Solvent exit planning for non-systemic banks (CP10/23)
Overview
On 28 June 2023, the Prudential Regulation Authority (PRA) published a Consultation Paper 10/23 (CP10/23) proposing a requirement to prepare for a ‘solvent exit’ – regardless of how remote one may seem – and, if needed, to be able to execute one. The primary objective is to increase confidence that firms can exit the market with minimal disruption, in an orderly way.
Solvent exit means the process through which a firm ceases to carry on its PRA regulated activities while remaining solvent.
This CP outlines overall requirements in two segments:
planning for a solvent exit as part of business-as-usual (BaU) activities; and
execution and monitoring of a solvent exit plan.
Note that presently there is already a similar requirement in the form of a Solvent Wind Down Plan (SWDP), which is relevant for new or growing firms since they are more exposed to business failure during the early stages of their development, and also for firms who have been instructed by the PRA to prepare one. In SS3/21 (April 2021), the PRA proposed that:
“…new and growing banks should have board-approved solvent wind-down (SWD) plans in place at the point of authorisation, and should maintain these plans, regularly updating them to ensure they remain appropriate as the business develops.”
However, the requirements outlined in CP10/23 are relevant for all UK-incorporated non-systemic firms as noted below.
Scope and Applicability
This CP would apply to all UK-incorporated banks and building societies which are:
not subject to the Operational Continuity Part* of the PRA Rulebook; or,
not a global systemically important institution (G-SII) or an other systemically important institution (O-SII).
The requirements are not relevant to branches of third-country groups.
*Section 1.1, A firm that receives critical services supporting critical functions if it meets any of these conditions: total assets > £10bn, safe custody assets > £10bn, or sight deposits > £350m.
Timelines
The consultation closes on 27 October 2023 and the proposed implementation date for these requirements would be Q3 2025; however, with various regulatory developments on the horizon, including Basel 3.1 reforms, firms might find it beneficial to begin their internal solvent exit analysis early to ease the transition into the new regime.
Requirements
A high-level summary of the requirements is outlined below:
More information on each component is given below:
1. Planning for a solvent exit as part of business-as-usual activities: expectations of the proposed rules are that firms must prepare for a solvent exit and document those preparations in a Solvent Exit Analysis (SEA) Document.
Solvent exit analysis means a document setting out a firm’s preparations for a solvent exit – to be reviewed at least once every 3-years, or whenever material changes occur.
This analysis could be a separate document or form part of the firm’s Recovery Plan document.
Solvent exit analysis should be carried out considering both stressed and non-stressed circumstances as the hierarchy of actions, timelines, haircuts etc. would be vastly different in the event of a stressed exit.
Key action items:
Preparation of a Solvent Exit Analysis (SEA) Document
1) Identify all the action items relating to solvent exit.
2) Consider dependencies and time required to initiate and complete each action item.
3) Identify indicators and define triggers to initiate solvent exit (both qualitative and quantitative).
4) Identify potential barriers and challenges for a solvent exit (firm-specific and market-wide).
5) Perform an assessment of the requirement of resources (financial and non-financial).
6) Define a clear and detailed communication plan (for all stakeholders, including the PRA).
7) Define governance arrangements (ownership, review, approval, monitoring, escalation etc.).
8) Obtain internal/external assurance of the solvent exit analysis.
2. Execution and monitoring of solvent exit plan: these expectations would apply only if solvent exit became a reasonable prospect for a firm. Underlying rules provide direction on how firms should: (i) prepare a detailed Solvent Exit Execution Plan (SEEP), and (ii) monitor and manage a solvent exit.
Key action items:
Preparation of a Solvent Exit Execution Plan (SEEP)
1) Use the SEA Document as a starting point.
2) Review identified action items, dependencies, timelines and ownership.
3) Prepare an MI template to monitor the solvent exit process.
4) Determine mitigations for identified barriers/challenges and identify emerging challenges, if any.
5) Re-assess resource requirements and the cost involved.
6) Document the rationale for each assumption.
7) Re-assess communication strategy and assign ownership.
8) Establish governance arrangements around the initiation and monitoring of the solvent exit plan.
9) Organisational structure and appropriate participants for the solvent exit.
During the execution of a solvent exit
1) Proactively communicate with all stakeholders, including the PRA.
2) Continually monitor the SEEP using MI.
3) Apply for removal of Part 4A permissions.
Conclusion
Firms are expected to ensure that the entire exercise is appropriate for their business model, structure, operations, risk strategy, and circumstances. The rationale for all assumptions made during the analysis and preparation of both the SEA Document and SEEP should be documented and should follow appropriate governance processes.
Preparation of SEA analysis can be challenging, in particular, because it requires input from across the firm as individual departments have an in-depth understanding of their unique processes, dependencies and resources. Collating these inputs into a coherent and logical analysis should not be underestimated.
Solvent exit-related documents are likely to receive increased regulatory focus in particular due to the number of new banks obtaining and seeking authorisation, as well as following a number of recent examples of solvent wind-down processes taking place in the UK market (a few examples being Raphaels Bank, Bank&Clients, Wyelands Bank, and Bank North).