Resolvability of institutions/groups

The objective of the CNB as a resolution authority is to gradually achieve – by working together with institutions – a state of affairs in which the resolution strategies described in individual plans can be considered, in accordance with Commission Regulation (EU) 2016/1075, fully credible and effectively feasible within an appropriate time frame. If the CNB identifies serious impediments to compliance with the chosen strategy in the course of its work, it may exercise its powers under Article 23 et seq. of the Recovery and Resolution Act and impose measures on institutions that will result in the removal of the impediments to resolvability identified.

The CNB’s expectations and the Single Resolution Board’s “Expectations for Banks” as a benchmark

The CNB views the work on resolvability as an iterative process requiring coordination and cooperation between the CNB and, where relevant, other resolution authorities of European groups on one side and institutions and groups themselves on the other. For this reason, the relevant resolution authorities’ resolvability expectations are important, as they enable institutions to better understand the authorities’ assessment methods and develop the internal capabilities necessary to support effective resolution in accordance with the planned strategy.

As most of the Czech banking sector belongs to groups established within participating Member States of the Banking Union, its group resolution authority is the Single Resolution Board (SRB). Together with other resolution authorities, including the CNB, the SRB applies expectations to the parent companies of groups under its remit. In 2020 it published these expectations in its Expectations for Banks[1] (EfB) and supplemented them in some areas with further, more detailed descriptions (operational guidance). Given the consistency between the objectives and requirements of the SRB and the CNB, the aforementioned characteristics of the Czech banking sector, and the fact that many groups of which Czech institutions are members already apply the expectations to varying degrees, the CNB has decided to recommend and use the EfB as a benchmark for all institutions under its remit whose resolution plans envisage the use of resolution measures in the form of bail-in, write-down or conversion of capital instruments and intra-group eligible liabilities, or the transfer of activities to a private sector purchaser or a bridge institution, in response to a potential failure.

With this decision, the SRB’s expectations as defined in the EfB (and current or future related documents) also generally become the CNB’s expectations, and compliance with them represents the target situation where institutions and groups can be considered resolvable. In the years ahead, institutions will therefore be obliged to adjust their processes and procedures to bring them into compliance with the defined principles. They should approach the implementation of individual principles proportionately, that is, paying regard to the preferred or variant resolution strategy and the characteristics of their business models.

The CNB is progressively analysing the individual resolvability areas/principles and, where necessary, will supplement them with appropriate interpretations or specify certain expectations in more detail.[2] This will include, among other things, adjustments to the timing/implementation, which in many cases will differ from the SRB’s expectations as the SRB has made greater progress in the resolvability area.

Seven dimensions of resolvability (assessment)

Like the SRB in the EfB, the CNB defines the following seven areas for assessing institutions’ resolvability:

  1. Governance
  2. Loss absorbing and recapitalisation capacity
  3. Liquidity and funding in resolution
  4. Operational continuity in resolution and access to FMI services
  5. Information systems and data requirements
  6. Communication
  7. Separability and Restructuring

The CNB expects the process of developing resolvability to be spread over the next few years, during which the CNB and individual institutions will have to coordinate their efforts and cooperate closely. The expectations and the related generally formulated timing are part of the individual resolvability dimensions. In justified cases, however, it will be possible to adjust the timing to the individual situation of an institution or group (for example when there is a need to link to group projects and systems). From the local perspective, the CNB will focus initially on the parent banks of Czech groups or specific entities in resolution, and subsequently on their subsidiaries and other group members.

[1] https://srb.europa.eu/en/content/expectations-banks

[2] Unless the CNB states otherwise, the expectations defined by the individual principles contained in the EfB are presumed to be fully applicable to the institutions specified in this document.