Valuation Excellence in Resolution: Enhancing Crisis Preparedness

The Single Resolution Board (SRB) has initiated a public consultation regarding its proposed "Expectations on Valuation Capabilities" (EoVCs). These expectations expand on the groundwork established by the SRB's Expectations for Banks¹ and the SRB Valuation Data Set (VDS 2020)² released in December 2020 by incorporating lessons learned from previous resolution cases and aligning with the Single Resolution Mechanism (SRM) Vision 2028³ to enhance crisis preparedness for banks.

The public consultation on the EoVCs includes expectations for three key components as summarized below:

VDI: The overarching goal of the VDI is to increase the reliability and robustness of valuations during resolution scenarios. For that purpose, the VDS 2020 has been revised, and an additional, non-exhaustive, standard request list has been established. The VDI has been designed to better meet the needs of independent valuers to perform a fair, prudent and realistic valuation while simultaneously reducing the burden on banks by eliminating unnecessary data requirements.

DRR: The EoVCs also outline the minimum functionalities expected for the DRR. Banks are expected to implement processes to regularly update the DRR and ensure that the data is high-quality and reconcilable with other financial information. The EoVCs do not prescribe a specific technical implementation for the DRR. Instead, banks should determine the effective implementation based on their own management information system architecture.

Valuation Playbooks: Additionally, the EoVCs include guidance for preparing Valuation Playbooks. These playbooks enable the independent valuer to gain a comprehensive understanding of the bank’s internal valuation models, allowing them to identify critical valuation issues and provide insights into potential valuation methodologies. Independent valuers can utilize internal valuation models either by directly applying the outputs of these models or by instructing banks to re-run the models with different input parameters, ensuring the results are appropriate for valuation purposes.

Although the EoVCs encompass three components, the VDI stands out as their core innovation. The following section highlights the main insights banks can derive from the VDI, which underpins the structure of the EoVCs.

First, the EoVCs clarify which entities are expected to provide which parts of the VDI:

• The scope of the VDI varies based on whether the entity is a resolution entity (RE)⁴ or a relevant legal entity (RLE).⁵ For example, REs are expected to provide the full-scope VDI. For RLEs, the scope further depends on whether the entity is a credit institution, domiciled within or outside the banking union or designated as an intermediate holding company.
• The full-scope VDI includes Structured Information⁶ (VDS) and other Unstructured Information⁷ for the respective entities. In contrast, the reduced-scope VDI focuses on Unstructured data and does not require the VDS or any other Structured Information.

Second, the EoVCs introduce the VDI and specify the data that must be included and the way it should be provided:

• The VDI is organized into 10 key subject areas, including Structured data such as the VDS and Minimum Bail-in Data Template (MBDT)⁸ for the asset and liability valuation and Unstructured Information, such as financial information, risk management, legal and compliance and information on internal valuation models mainly for the company valuation.
• Documents already accessible to the Internal Resolution Team, such as resolution deliverables (e.g., bail-in playbooks, solvent wind-down plans), do not form part of the VDI. Also, documents available to the public (e.g., annual reports) are not expected to be submitted through the VDI.
• Banks are expected to ensure regular updates and timely submission of VDI documents to the DRR, adhering to predefined cut-off dates as well as submission frequencies, and provide additional documents on request within a short time frame.

Third, the revised VDS supersedes the VDS 2020 and has been enhanced to increase its usability for independent valuers:

• As shown in the illustration below, the VDS consists of datasets for various asset and liability classes. It closely aligns with the COREP/FINREP framework and other regulatory reporting frameworks, such as AnaCredit and MBDT. The VDS includes identifiers that serve as primary keys to link the VDS with these frameworks.

• The VDS is based on a refined data model that includes an instrument dimension for all asset classes and a counterparty and protection dimension specifically for loans that are interconnected through separate mapping tables.
• Each asset class is captured in the “Instrument” dimension, which provides the necessary information for valuing instruments on an individual basis (e.g., cash-flow information, risk characteristics, fair values).
• The “Counterparty” dimension includes identification data, general characteristics and risk characteristics, while the “Protection” dimension provides information on any protection-securing instruments, including guarantees and collaterals, with specific details for different protection classes like real estate and shipping.
• The VDS refines significant valuation data by simplifying and reducing the number of data fields (e.g., for securities and derivatives). Further, data tapes have been consolidated, such as merging the instrument datasets for exposures to legal persons, natural persons and off-balance-sheet exposures into a single instrument dataset.
• Otherwise, datasets from the VDS 2020 have been moved to the VDI, such as deferred-tax and intangible assets. Unnecessary data points have been removed or replaced with those pertinent to valuation, for example, adding the exposure at default for loans and removing the CRR exposure class.⁹

Fourth, the EoVCs improve the data quality by establishing clearly defined validation rules.

• The expectations for data quality comprise a comprehensive list of validation rules and a standardized validation report template.
• Banks are required to implement and perform validation rules that cover completeness, data format integrity, plausibility, consistency, referential integrity and reconciliation.
• Each validation rule is described in technical detail and assigned a unique identifier, ensuring that implementation is both simplified and transparent.

Outlook

The SRB emphasizes that the EoVCs are intended to act as a guiding framework for subsequent efforts in resolution planning, particularly in relation to implementing transfer strategies and ensuring the utilization of collateral.

The SRB plans to enhance the guidelines by incorporating feedback from participants of the consultation phase, running from April 2, 2025 to July 2, 2025. The finalized Operational Guidance on Valuation Capabilities is expected to be released at some point after the end of the consultation period. To support banks in aligning with these new expectations, a phased implementation period will be provided.

For any further clarification or in-depth consultation on the EoVCs, our team of resolution professionals remains available to support you with their strong expertise.