What it is

Valuation in resolution is the framework of valuations that underpin decisions before, during and after a resolution action. Because resolution tools reallocate losses and restructure a balance sheet in a compressed timeframe, they must rest on a credible assessment of the institution's assets and liabilities. The framework distinguishes valuations by purpose, generally referred to as Valuation 1, Valuation 2 and Valuation 3.

Valuation 1 informs the determination of whether the institution is failing or likely to fail and whether the conditions for resolution are met. Valuation 2 informs the choice of resolution tools and the extent of any write-down or conversion, estimating the economic value of assets and liabilities to size the action. Valuation 3, carried out after resolution, assesses whether creditors and shareholders received less than they would have in normal insolvency proceedings.

How it works

Valuations 1 and 2 must, as a rule, be performed by a person independent of any public authority and the institution. Where the urgency of the situation prevents a full independent valuation, the authority may carry out a provisional valuation, which is later followed by a definitive independent valuation. The provisional valuation includes a buffer for additional losses so that the initial action does not understate the required write-down.

Valuation 3 is the no-creditor-worse-off valuation. It compares the actual treatment of each class of creditor and shareholder in resolution against the counterfactual treatment they would have received had the institution been wound up under normal insolvency proceedings at the moment resolution was triggered. If a creditor fared worse, the difference is payable as compensation, funded from resolution financing arrangements.

The valuation framework is set out in the BRRD, which governs the valuation for the purposes of resolution and the separate valuation of difference in treatment, and in the corresponding provisions of the SRMR. Valuation 3 is tied directly to the no-creditor-worse-off safeguard and the compensation mechanism in the BRRD.

Relevance for banks and investors

For banks, robust valuation depends on data and systems that allow assets and liabilities to be valued at short notice; resolvability work includes ensuring valuation capabilities are in place. For resolution authorities, the valuations discipline the use of the tools and support their legal defensibility.

For investors, Valuation 3 is the practical expression of the no-creditor-worse-off protection: it sets the floor on losses by guaranteeing that no creditor ends up worse than in liquidation. Understanding how independent valuers estimate the insolvency counterfactual is central to assessing the downside on bailinable instruments.