Andrew Gracie: Making resolution work in Europe and beyond – the case for gone concern loss absorbing capacity Speech given by Mr Andrew Gracie, Executive Director of Resolution, Bank of England, at the Bruegel breakfast panel event, Brussels, 17 July 2014. *  *  *  Introduction It is nearly three years since the FSB published its Key Attributes of Effective Resolution Regimes (KAs) and, as we look forward to the G20 summit in Brisbane in November, it is worth taking stock of the progress that has been made to end Too Big to Fail. In Europe we now have the Bank Recovery and Resolution Directive (BRRD) 1. Broadly speaking this maps to the FSB Key Attributes: the BRRD establishes a comprehensive set of legal powers and articulates the process through which recovery and resolution planning will take place to ensure that firms develop and maintain effective recovery plans, and that the necessary actions are taken to ensure that they are resolvable. And the objective is in line with the Key Attributes: both view resolution in terms of ensuring the continuity of critical functions without recourse to public funds. So it will be a real step forward for us here in Europe when the BRRD is implemented. The 1 January 2015 deadline for doing so is fast approaching and all Member States are working hard to revise their national laws and bank resolution frameworks by then.
But the principle is clear that liabilities will be written down and converted according to the creditor hierarchy and, within a given class, all affected creditors will be treated equally. Moreover, there is an explicit safeguard that creditors shall be left no worse off following the application of the bail-in tool than they would have been in insolvency. This enables resolution authorities to act with sufficient speed and flexibility, whilst providing shareholders and creditors with an appropriate degree of certainty as to how they will be treated. •  Valuation: Determining the amount of write-down and conversion of debt required to recapitalise a failed bank and calculating the counterfactual insolvency valuation for the no creditor worse off test are at the heart of the bail-in. A series of valuations are therefore required in the course of a resolution transaction, as the BRRD sets out in some detail 5. First, a “going concern” valuation of the firm’s assets and liabilities will be used to the gauge the size of any bail-in that is required. A core purpose of this valuation is to quantify expected future losses and so the recapitalisation need at the point of resolution. Second, an equity valuation is needed to inform the terms of the exchange and the allocation of the net asset value generated via the bail-in to the liability holders that have been written down or converted.