An institution in distress must be able to provide the resolution authority with data and information relevant to the valuation for purposes of resolution. BaFin addresses this principle in its draft circular “Minimum requirements for information systems to provide information for valuations in the context of resolution” (MaValuation) (Mindestanforderungen an Informationssysteme zur Bereitstellung von Informationen für Bewertungen im Rahmen einer Abwicklung – MaBewertung).

An essential element of resolution is that a valuer – i.e. an external valuation company or, in the case of a preliminary valuation, the resolution authority, if necessary – must assess the assets and liabilities of the bank concerned. In particular, the valuation is used by the resolution authority to assess whether the bank is failing or likely to fail and what action it will need to take in the event of resolution.

To be able to make a sound valuation of assets and liabilities, the external valuer – or BaFin, as the resolution authority – relies on the bank to provide the relevant data and information prior to the resolution weekend. To be able to provide the necessary information quickly in the event of a crisis, the bank needs to make the appropriate arrangements in advance. The resolution authority supports the bank in these tasks by laying down requirements that are as specific as possible regarding the type of data and information necessary. BaFin is now setting out its requirements in the new circular.

Types of valuation

There are three distinct types of valuation. All three are designed to assist in answering key questions regarding resolution:

Valuation 1: Are the conditions for resolution met?
The resolution authority uses Valuation 1 to determine whether the conditions for resolution are met. To this end, the external valuer or the authority itself must carry out a fair and realistic valuation of the assets and liabilities. The main objective is to determine whether the institution’s assets exceed the value of its liabilities and whether it still meets the regulatory capital requirements.

Valuation 2: How should the resolution authority best implement the resolution?
Valuation 2 serves in particular to give the resolution authority a basis on which to decide which resolution strategy to use and how to implement it. The extent to which the resolution authority writes down or converts the bank’s relevant capital instruments and, if necessary, its liabilities is determined in this context. Valuation 2 is based on fair, prudent and realistic assumptions and assesses different scenarios. In contrast to Valuation 1, Valuation 2 is based on economic values and not on accounting or prudential values.

Valuation 3: Would insolvency have put shareholders/creditors in a better position?
This is a hypothetical insolvency comparison: Valuation 3 verifies whether the bank’s shareholders and creditors are at least as well off as a result of the resolution action as they would be under normal insolvency proceedings (see info box). This is a key safeguard in resolution (No-Creditor-Worse-Off test).

Preliminary and final valuation

Before the resolution authority can apply resolution measures to a bank, an external valuer must, in principle, have carried out a final valuation of the bank. If this is not possible, for example due to time constraints, Valuations 1 and 2 may also only be of a provisional nature. On the other hand, Valuation 3 must always be final and be carried out post-resolution.

Where preliminary valuations have been used as the basis for resolution, the resolution authority must have a final valuation carried out by an independent valuer after resolution.

BaFin’s two-step approach

Based on specifications requirements issued by the European Banking Authority (EBA), BaFin has opted for a two-step approach in the MaValuation to enable less significant institutions under national supervision to act as efficiently and effectively as possible in providing data and information relevant to the valuation, in line with the principle of proportionality (see info box “MaValuation target group”).

Step I is essentially based on the bank’s pre-existing internal and external standard reports as well as other key documents, such as its business plan. In step II, BaFin will require a concrete data model that incorporates data for the valuation required for resolution.

The subject matter of the new circular is currently limited to step I. BaFin will be specifying step II at a later stage, taking into account the fact that the EBA and the Single Resolution Board (SRB) have published a handbook/framework and that specific data requirements have already been developed. BaFin will also be drawing on the discussions being conducted with the banks.

The advantages of the two-step model are that it first establishes the initial capacity to act of the parties involved and then addresses the complex challenges of step II in dialogue with the institutions. This includes data points as well as delivery channels and formats. What is more: experience gained by the SRB can flow directly into the conceptual design of a national data model.

Step I information requirements

Banks must be able to provide step I information in a specific structure to BaFin or to an external valuer in a virtual data room within 24 hours. They must submit at least the internal and external standard reports listed in the MaValuation, as well as other documents. Details regarding file formats and contents and regarding the data structure are discussed and agreed by BaFin and the banks as part of resolution planning. It must also be possible for the institution and BaFin to upload additional data and information at short notice.

Outlook

BaFin issued the draft MaValuation for public consultation from early September to 2 October 2020. It will subsequently publish the final version, including step I. Step II will encompass detailed data requirements along with a detailed data model, in compliance with EBA and SRB requirements. To this end, BaFin will be approaching the institutions in 2021.