The use of increasingly greater amounts of data is a success factor for financial institutions. The cloud is revolutionising IT infrastructures, while blockchain and disintermediation are capable of changing entire value chains (see infobox). Digitalisation provides a range of income opportunities, but also entails risks and challenges – such as those concerning potential resolution. And this manifests itself in two ways: institutions have to think about the effects of technological change on their crisis resilience and resolvability. Additionally, a state-of-the-art IT infrastructure is a prerequisite for quick and reliable resolution of an institution should it come to the worst, to prevent harm to the financial system. Digitalisation trends therefore also impact resolution planning itself.

Both these items are important – and not only from BaFin’s point of view. Resolution strategies and the resolvability of financial institutions are now also an integral part of rating agency assessments and of the institutions’ planning of capital market activities.

Intense time pressure in cases of resolution

Resolution authorities like BaFin have far-reaching powers that permit them to carry out significant interventions in areas such as institutions’ business activities, dividend policies and internal information system structuring – not only in times of crisis. If there are indications that an institution is failing or likely to fail, the authorities swiftly prepare resolution measures in order to ensure that market reactions are kept to a minimum. This means resolution is carried out under intense time pressure and essentially depends on whether the institution is capable of furnishing reliable data quickly. Quick and reliable resolution keeps market reactions and risks to financial stability to a minimum, reduces any necessary risk buffers and protects the reputation of the institution in question.

This requires intensive preparation and places high demands on the automation and thus digitalisation of processes. Institutions should therefore establish the conditions for providing up-to-date, high-quality data on an ongoing basis and giving the resolution authorities real-time access to the data. If the data is not available in the required quality and speed, this constitutes an impediment to resolvability; BaFin would raise objections. Involving internal resolution experts in technology projects early on is also advisable, as it is more time-consuming and thus more costly to remove impediments to resolvability retrospectively than to have already addressed aspects relevant to resolution during the project phase.

Large data volumes for resolution planning

Some 300 structured data points were requested in resolution planning just a few years ago. Today there can be more than two million data points in a single request. Of course, the quantity of data is not an end in itself. In order to resolve institutions, the resolution authorities have to capture information on individual capital instruments on the liabilities side so that these can be written down and converted to equity if necessary. For valuation purposes, the assets of the institution are also closely considered.

This also enables further development of the methods for accessing, managing and evaluating data. “ResTech”, referring to resolution technology, is the term used for approaches being promoted in this area. This concerns the data interface with resolution authorities as well as the automation of evaluations and the question of how unstructured data can systematically be included in analyses. Institutions are encouraged to collaborate on solutions. The aim should be the capability of delivering up-to-date, reliable data to the authorities at any time.

Outsourcing IT infrastructure to the cloud

Transferring IT infrastructures to the cloud offers opportunities for data use and integration with authorities; institutions are urged to take advantage of these opportunities. It is conceivable, for instance, that data could be available in real time and authorities could access it directly, and thus unnoticed, in the event of a crisis. The ability to do so without attracting attention is important in resolution, as uncontrolled signals within the institution or to the market are to be avoided.

At the same time, outsourcing to the cloud generates new dependencies and possibly even concentration risks, as a number of financial institutions use the same major service provider. It will therefore remain important going forward to clearly identify critical outsourcing arrangements and also push for the incorporation of resolution-relevant matters in contractual structures, such as regarding the continuity of critical services in case of resolution. Whether or not the cloud architecture itself is resolvable must also be analysed. Institutions should take these aspects of resolution planning into account in cloud strategies right from the beginning.

Disintermediation via distributed ledger technology

Blockchain and distributed ledger technology (DLT – see infobox) enable institutions’ assets and even their securitised liabilities to be digitally created and traded on a blockchain. This could significantly transform the role of established financial intermediaries in terms of custody, clearing and settlement.

A basic prerequisite for a successful resolution measure is the ability of resolution authorities to intervene in payment and securities transactions and to write down and convert capital instruments. There are now established processes and interfaces for this purpose. Market participants currently involved in blockchain and DLT projects should keep an eye on resolution requirements in addition to ongoing developments in regulation and ensure that intervention options remain intact for resolution authorities.