The Pre-Resolution Phase in Core Bail-In Processes

In the complex landscape of banking and finance, the core bail-in processes are critical for ensuring stability and protecting the broader economy in times of financial distress. A pivotal part of this process is the Pre-Resolution Phase. This phase sets the stage for potential resolution events, where a bank, although experiencing financial distress, has not yet been declared “failing or likely to fail” (FOLTF).

What is the Pre-Resolution Phase?

The Pre-Resolution Phase refers to the period leading up to a potential resolution event. During this time, the bank undertakes various recovery measures and engages in intensive interactions with resolution authorities and other stakeholders. These interactions primarily focus on providing essential information that will aid in making informed decisions if a resolution becomes necessary. The Financial Market Infrastructures (FMIs) Contingency Plan Handbook provides additional guidelines and action plans for this critical period.

Key Components of the Pre-Resolution Phase

1. Governance of the Pre-Resolution Phase

Effective governance is crucial during the Pre-Resolution Phase. This involves establishing clear governance arrangements that dictate how the bank will operate and make decisions during this period. These arrangements ensure that all actions are coordinated and that there is a clear line of communication between the bank’s management, its board, and the resolution authorities.

2. Workflow for the Pre-Resolution Phase

A well-defined workflow is essential for managing the Pre-Resolution Phase. This workflow outlines the operational sequences that need to be executed to prepare for the adoption of the bail-in tool. Key elements of this workflow include:

• Confidentiality Risk Mitigation Process: To minimize the risk of information leaks, a tactical procedure is put in place. This ensures that sensitive information is handled appropriately and only shared with authorized parties.
• Information for Valuation: The bank must have the capability to provide relevant information for valuation in resolution. This includes detailed insights into the bank’s assets, liabilities, and overall financial health. This information is critical for the resolution authorities to make accurate valuations.
• Information for Bail-In: Similar to valuation information, the bank needs to provide detailed information regarding the instruments that might be affected by the bail-in mechanism. This ensures that the resolution authorities have a comprehensive understanding of the potential impacts of a bail-in.
• Channels for Information Sharing: Identifying and selecting appropriate channels for information sharing is crucial. These channels must be secure and efficient to facilitate smooth communication between the bank, the resolution authorities, and other relevant third parties.
• Review of the Bail-In Playbook: The bank’s bail-in playbook, which outlines the procedures and steps to be followed during a bail-in, must be regularly reviewed and updated. This ensures that the playbook is current and effective in guiding the bank through a potential resolution.

Importance of the Pre-Resolution Phase

This Phase is critical because it allows a bank to take proactive measures to address its financial distress. By implementing recovery measures and engaging closely with resolution authorities, the bank can improve its chances of stabilization and avoid a full-blown resolution. Moreover, this phase ensures that if a resolution becomes inevitable, the process can be executed smoothly and efficiently, minimizing disruptions to the financial system.

The Pre-Resolution Phase is a fundamental aspect of the core bail-in processes. It involves meticulous planning, stringent governance, and robust information sharing protocols. By understanding and effectively managing this phase, banks can navigate financial distress more effectively, ensuring stability and continuity for themselves and the broader economy.