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The Bank Recovery and Resolution Directive (BRRD) provides a comprehensive framework of powers for resolution authorities to intervene in failing banks to protect the public interest. To ensure that authorities exercise these powers in ways which reduce the risk of costs falling on the taxpayer, preserve value where possible, and respect the property rights of affected shareholders and creditors, the BRRD requires independent valuations to be carried out to inform decisions of the authorities. These valuations are required for several distinct purposes, either prior or after the resolution.
These final European Banking Authority‘s (EBA) draft RTS specify the valuation principles that shall be followed before and after a resolution occurs.
Valuation before resolution is critical to the resolution process since it informs the resolution authority's decision as to whether the conditions for resolution are met and, if so, which resolution tools should be used. To conduct a valuation before resolution, the independent valuer is empowered to challenge the banks' management assumptions, data, methodologies and judgements on which the institutions prepare their financial statements.
The decision on which resolution tools to apply is informed by a fair, prudent and realistic valuation, based on the economic value of assets and liabilities.
Valuation after resolution is instrumental to establish whether the no-creditor-worse-off (NCWO) safeguard has been breached by the resolution action and whether any compensation has to be paid to creditors and shareholders by the resolution fund. Valuation after resolution is conducted by an independent valuer who should only rely on the information, facts and circumstances that existed and could reasonably have been known at the resolution decision date.