Navigating the next phase: The SRB's strategic vision

May 2024

The Single Resolution Mechanism (SRM) is at an important inflexion point in its evolution, with significant implications for banks. By the end of 2023, the Single Resolution Board’s first phase of operations had achieved:

• Attaining the target value of €78bn in the Single Resolution Fund (SRF)
• Confirming that almost all banks under their remit reached their MREL¹ targets on time
  

The completion of the SRF’s build up is good news for European banks. Although periodic further contributions could be required, no regular SRF contributions will be collected from 2024 onwards. That will give banks greater capital and liquidity management flexibility, making it easier to allocate funds for lending, investment, or other strategic priorities.

As the SRB meets these targets, it’s also important for banks to consider the next phases announced by the SRB in its development. In February 2024, it launched its strategic vision (PDF 948 KB) for the next five years aimed at developing a flexible, agile and resilient SRM. The goals the SRB aims to achieve by 2028 mark an overall shift away from resolution planning and towards operationalisation, resolution testing, and crisis readiness.

The new vision will see the SRB progressively develop a more structured programme of on-site inspections (OSIs), among other activities, between 2024 and 2028. This approach is made tangible in the SRB’s planned work programme (PDF 6.4 MB) for 2024. The programme covers Core business, Governance, and Human resources, with supervisory activities likely to focus in particular on:

• The operationalisation of resolution tools – including crisis monitoring and management; working with banks to review their bail-in playbooks, procedures related to data provision and valuation data capabilities (considering lessons learnt from conducted testing exercises) to ensure full resolvability by the end of 2024; and approaches to developing variant resolution strategies.
• Testing of crisis readiness – including deep dives and OSIs; performing further dry-runs and testing, particularly of transfer strategies; and implementing the EBA guidelines on resolvability testing (PDF 445 KB), with banks expected to submit their first self-assessment report by the end of 2024.

Since this announcement, in our discussions in the industry we have noticed some first indications of these efforts materialising from the SRB, for example:

• More granular and intrusive deep-dives have been performed at some banks that are performed on-site in some cases.
• Some banks have already received communication that they will be subject to an on-site inspection this year.

Therefore, we are already seeing evidence that the SRB is stepping up this programme during the current year and is firmly building on its experience of deep dives since 2021 to continue its scrutiny of areas such as the separability assessment, liquidity in resolution, operational continuity in resolution, and the product of liability templates.

Based on banks’ experiences so far, this might involve an increasing focus on banks’ ability to absorb losses, handle liquidity crises, and maintain the data required to navigate potential crisis scenarios (e.g. institutions’ ability to estimate the potential liquidity needs arising in a resolution event, and to mobilise collateral to obtain additional liquidity).

To prepare for future OSIs by the SRB, banks should consider enhancing their governance structures and technology infrastructure. Some obvious areas of activity could include:

• Preparing to demonstrate that robust risk management frameworks and sound governance are in place to address the SRB’s areas of scrutiny
• Making operational adjustments to systems and processes to achieve compliance with SRB expectations

As the SRB enters a new phase, European banks should prepare for more hands-on supervision and anticipate a gradual expansion of the SRB’s focus on emerging systemic risks between now and 2028.

Looking beyond traditional banking risks, the SRB will increasingly focus on emerging systemic risks posed by non-bank financial institutions (NBFIs). These include the potential transmission of liquidity and leverage risks from NBFIs to regulated banks.

Institutions should therefore expect to see increased regulation of the NBF sector, with areas of focus likely to include liquidity mismatches, money market funds, levels of leverage and margining practices. After all:

In conclusion, banks should stay proactive in adapting to the ongoing improvements to the SRM. The SRB is already stepping up their activities – staying ahead of emerging risks, banks can ensure their resilience and readiness for the future.