Testing times require time for testing − speech by Ruth Smith

Good afternoon. It’s a pleasure to have the opportunity to speak to you today. Thank you to UK Finance for hosting us. Resolvability is a journey that the Bank and firms are on together, and engagement with industry has been essential to the progress we’ve made so far. Resolution matters because, as we have been reminded in recent years, when a financial institution fails, resolution enables the ongoing provision of critical financial services, protects customer deposits and prevents disruption to the wider economy. Maintaining a credible, effective and responsive resolution regime is at the heart of financial stability in testing times – supporting a resilient financial sector, which in turn enables households and firms to thrive. In January, my colleague Dave Ramsden spoke about this need for responsiveness and evolution in the Bank’s approach to resolution, so the regime’s outcomes are met in an ever-changing landscape.^{footnote [1]}

Today, I want to focus on the idea of outcomes, and the goal we as the Resolution Authority have in mind for all firms – ongoing resolvability.

I will discuss our outcomes-based approach to the assessment of different firms, how we apply the Resolvability Assessment Framework, or RAF, to different groups of firms, and how we use testing and assurance to maintain progress.

I also want to look ahead to the principles we expect to guide us in evolving our approach to assessing resolvability. While our end destination remains the same, how we get there must respond to the growing maturity of firms’ capabilities, and the changing terrain and system that they are a part of.

The Resolvability Assessment Framework

The RAF applies to our major and mid-tier banks and building societies.^{footnote [2]} The starting point is that it is proportionate by design and inherently risk-based. Firms are different, and they pose different challenges in resolution. While our objective is for all firms to be resolvable, the path to getting there will not be the same for everyone.

That is why the RAF is focused on outcomes. As firms grow in size and complexity, we expect more from them because their failure could have a greater impact on financial stability. To maintain that proportionality, we recently updated the calibration of the framework, raising both the MREL and Resolution Assessment thresholds.

The proportionality steps are broadly:

• one, the RAF applies to firms where we will use our resolution powers if they fail – typically those with more than £25 billion in assets.
• two, firms with bail-in resolution strategies need more capabilities than transfer firms:^{footnote [3]} including financial resources to enable recapitalisation and capabilities to plan for post-resolution restructuring.
• and three, major UK firms – those with £100 billion or more in retail deposits – must meet the RAF reporting and disclosure requirements, providing a layer of additional, public transparency and scrutiny for both firms and the Bank.

In all cases, we expect firms to own their resolvability, regardless of where they are on their journey. This means that firms’ senior management and boards are responsible for ensuring that their firm has the capabilities necessary for resolution and that these are tailored to the individual attributes of the firm.

The RAF also sets out three outcomes we want to see for the Bank to consider a firm resolvable: firms having adequate financial resources for resolution, being able to continue to do business through resolution and restructuring, and co-ordinating and communicating effectively.^{footnote [4]}

This is not a box-ticking exercise: each firm needs to take the necessary steps to be ready for orderly resolution. What is needed for an established G-SIB differs to a neobank. And once capabilities are in place, they should be maintained to ensure they remain ready, including as the firm and the market evolve. Ongoing testing is crucial, to ensure capabilities operate effectively and are ready for use when required.

For international firms, the Bank works intensively in BAU so we are ready to support home authorities to implement a co-ordinated resolution if needed. While we expect international firms in the UK to achieve broadly the same outcomes as our home firms, how they do this may differ as they focus on having the capabilities required to deliver their group resolution strategy.

Assessing resolvability in these cases is not a one-size-fits-all exercise. We consider the approach of the home jurisdiction, alongside each firm's own preparations and UK business model. And we maintain active, practical engagement with international authorities to ensure we are all ready to use our respective powers if required.

Maintaining these close relationships enables us to respond with speed and agility in a crisis. We did this during the failures of Silicon Valley Bank and Credit Suisse. Such strong co-operation and co-ordination between authorities is a lesson from the financial crisis we cannot forget. Effective co-operation and co-ordination is the core purpose of the work of the Financial Stability Board’s (FSB) Cross-Border Crisis Management group for banks, which I chair. Structures like the FSB, Trilateral Principal Level Exercises (with the UK, US and Banking Union authorities), firm-specific Crisis Management Groups and regular bilateral engagement are essential for authorities to build resilience and readiness which can be relied upon in a crisis.

Our approach to assessing resolvability to date

I’ve led the RAF journey since 2018. At this point I think it is important to reflect on what we, as an authority, have done to foster progress towards firms being fully resolvable, as well as the progress that firms have made over their own resolvability.

We’ve now completed two assessments of the major UK firms and two assessments of mid-tier firms under the RAF. These assessments provide confidence that we can manage UK bank failure in an orderly way. The findings also support the Financial Policy Committee’s judgements on the optimal level of capital needed in the banking system.^{footnote [5]}

Our first RAF assessment for major UK firms was largely desk-based. Our focus was on the capabilities firms had built and how they assured themselves that their preparations were adequate.

Our accompanying RAF public statement in 2022 provided transparency on our resolution strategies for individual firms and the areas each of them needed to focus on. We shared thematic findings and examples of good practice.

Our second RAF assessment gave us an improved view on each firm. Our assessment approach developed from being mainly desk-based to being underpinned by targeted tests of the Adequate Financial Resources outcome, providing us with a better idea of how policy would work in practice for each firm. We found continued progress by firms along with areas for further work.

Moving to our mid-tier assessments, we have mirrored our approach to the major UK firms while keeping proportionality and specificity at the forefront of our thinking. We have used the assessments to identify areas where we need to guide firms more explicitly on what we are looking for, without undermining the principle of firms’ responsibility for their own resolvability and keeping to an outcomes-based approach.

Our second assessment of the mid-tier firms last year included targeted testing of firms’ continuity capabilities, where the ultimate aim is to ensure the continued provision of services that are critical to the economy.^{footnote [6]} Events such as the failure of Silicon Valley Bank have underlined that continuity is essential for keeping the lights on while we execute resolution. This matters for all firms and especially for mid-tiers, which are more likely to have a preferred resolution strategy of transfer. It is also an area where we saw weakness in our first mid-tier assessment.

All this work with firms has enabled us to fine-tune what we need from firms, for example we have been able to reduce loss-absorbency requirements for transfer firms, increase thresholds, extend the time between RAF assessments, delete reporting templates, clarify requirements and share best practice. This makes the regime more efficient and targeted and demonstrates its responsiveness.

We are also streamlining our own internal processes for reviewing resolution plans, again being responsive while maintaining readiness. For example, we are leveraging the information gained through the RAF for our statutory resolvability assessments and, where firms’ capabilities have reached a steady state, we plan to use the flexibility the Bank has in legislation to review resolution plans less frequently.^{footnote [7]}

We are reviewing our lessons from the delivery of the RAF to make further amendments to reporting requirements. This includes reviewing Supervisory Statement 19/13 on resolution planning, where we hope to tailor the requirements for the different firms in the system, while ensuring that the Bank can deploy its resolution powers across the population of firms it is responsible for. In particular, these changes aim to enhance the resolvability of smaller firms that are not in scope of the RAF.

The value of testing

Testing – whether as part of firms’ assurance or led by the Bank – is a valuable way to enhance our collective readiness. At this point we all have a mutual understanding of what it means to be resolvable, but resolution will always be a high-pressured transaction that requires both the Bank and firm. That is why we focus on outcomes and flexible capabilities.

For the Bank, testing is crucial to assess if firms’ capabilities can deliver what we need to execute a resolution in the public interest. Our testing complements our review of firms’ assessments of their capabilities and our review of their own assurance exercises. For firms, Bank-led testing is an opportunity to understand how the Bank will engage with them in resolution and how their capabilities may be utilised.

So testing cannot be seen as a narrow regulatory compliance exercise: firms should use it to think realistically about what they would have to do and how easily they could use their capabilities at pace and under pressure in resolution.

In short, realistic testing must be a priority. By realistic I mean testing that is time-bound, end-to-end, dynamic and involving relevant decision-makers or third parties. Realistic testing ultimately forces decision-makers to exercise the muscle of making decisions in uncertainty. We have seen that firms performing more strongly in assessments are likely to have undertaken dynamic, resolution-focused, integrated fire drill exercises that test across barriers and seniority levels using different scenarios.

Questions firms should be asking themselves as part of their assurance include:

• Are data and data processes operable and effective at speed under the unique stresses of resolution? Bluntly, poor data and overly manual processes hinder rapid decision-making by senior management and the authorities, introducing unnecessary risk.
• Have firms engaged realistically with the uncomfortable options that may be necessary? Resolution is more than just deep recovery. Firms need to ensure they embed this reality in their capability design and assurance. We all need to be clear that resolution may result in significant business model and senior leadership changes to respond to the causes of failure.
• And have previous issues been remediated? Resolvability isn’t static so we will inevitably find more issues requiring remediation. Senior management need to own remediation and track progress when issues are identified.

For major firms, we have evolved our assessments to provide firms with space to perform their own assurance and to undertake specific work at the Bank’s request. That was why we chose to delay the third RAF assessment by a year.

In our third assessment we will review the clarity of firms’ assurance plans and the outputs from the valuations and restructuring planning exercises we have asked firms to undertake. Questions we will be asking include: is the assurance provided by the firm appropriate to the scale and complexity of the firm? Does it consider interdependencies between capabilities? Is it realistic? How are findings being remediated and tracked?

For mid-tier firms, we also provided an indicative scope for undertaking a valuations exercise to help firms understand our assurance expectations. This replaced a Bank-led test we had planned for this year.

We have also shared more information on how we expect to use the Bank’s powers to help firms prepare. We recently had a helpful roundtable with UK Finance to discuss the updated operational guide to bail-in and the new operational guide to transfer resolution. We issued these guides not to establish new capabilities we are asking firms to build. But to help firms and wider stakeholders understand more about how the Bank could execute a resolution transaction and what it would involve in practice. We also engage firms in a targeted way on topics where we see a need to do so, such as the recent roundtable on resolvability for building societies which was hosted by the BSA.

Third RAF assessment: assessing resolvability with agility and precision

Looking forward, we are already well underway with our third assessment of the major UK firms focused on the Continuity and Restructuring outcome. The assessment will conclude with the publication of the findings on 10 June 2027.

As I set out in my letter to CFOs in February this year, our testing and assurance work for the third assessment has evolved and is:

• More agile: recognising firms are doing their own testing, we have reduced overlaps in scope and sequenced or streamlined firm-specific engagement, without compromising our thematic, cohort-based approach.
• More precise: we have worked with firms, supervisors and our Resolution Procurement Framework suppliers,^{footnote [8]} building in their feedback to ensure we test effectively and realistically core capabilities for continuity and restructuring, including how they need to work together to deliver timely and robust outputs across the different phases of resolution contingency planning and execution.
• And more holistic: our testing across barriers is for the first time guided by a resolution scenario, to provide a single thread running through the different tests and enhance realism. But ultimately the scenario is a means to an end of testing the capabilities.

The path ahead – for established firms on the resolvability journey

We are now at a level of maturity with bank resolution planning where we consider the policy landscape is well-established. That doesn’t mean we won’t continue to be responsive to learnings, nor will we stop considering the efficiency and proportionality of the regime. But the outcomes we need for resolution are timeless and cater for the different firms in scope of the UK resolution regime. Where the context surrounding firms is changing, we may need to look at how that alters our view of firms’ resolvability, in line with the RAF being a point-in-time assessment.

Within the major and mid-tier cohorts there are two broad groups of firms: those established on their resolvability journey and those newly coming into scope.

For the more established firms, ongoing maintenance is a key focus. This recognises these firms are resolvable. That doesn’t mean they don’t all have areas to work on or new issues won’t be identified by testing. For these firms, we will focus on remediation of past lessons, targeted testing, and reviewing assurance. But our approach will continue evolving, based also on feedback from the industry and our internal preparedness work.

We expect these firms to increasingly take even more of a lead on testing capabilities as part of their own assurance work, with a focus on holistic and realistic testing across barriers. The Bank will support firms, but we won’t be prescriptive – and rightly so, given where firms’ capabilities are. This approach will enable firms to structure their assurance in a way that works best for them, helping management achieve business objectives.

At the end of our third assessment in summer 2027, we will ask the major firms to present testing plans to us, informed by our RAF feedback. We will then engage bilaterally in a risk-based, proportionate way as firms undertake their testing plans. Where relevant, we will also engage with host authorities bilaterally and via Crisis Management Groups. I want to be clear though that we recognise that the cost for firms of maintaining resolvability is likely lower, all else equal, than the design and build phase, and this will be reflected in firms’ assurance plans.

We are planning that the fourth RAF assessment of major UK firms will not be before 2029-30. This will allow firms to focus on their testing plans and for the Bank to engage with firms and stakeholders to plan the assessment.

We will say more next summer, but as with the third assessment, we want to keep advancing and focusing on outcomes and how the Bank expects to use capabilities in a resolution.

The content and approach will reflect the findings from the third assessment, work done by firms in the interim and the circumstances at the time. But we will have a focus on the Co-ordination and Communication outcome.

Management, communication and governance capabilities lend themselves to assessing how resolvability barriers come together as a whole through the lens of simulations and senior management and board walkthroughs. So, it is likely this will be a feature. We will also maximise efficiencies between the Bank’s plans and firms’ multi-year testing plans.

Beyond that is very much in the medium term! But my expectation is that we will continue to embed resolvability assessment within firms.

Our approach to mid-tier firms with established capabilities will draw from our assessments of the major firms. But we will continue to take a proportionate approach. We will engage firms next summer on the scope and approach to the 2028 mid-tier assessment. Firms should expect a structured information request and Bank-led tests focusing on how capabilities would be used in practice. Following the third mid-tier assessment, we will consider our future approach based on firms’ progress.

The mid-tier cohort is a broad one, especially following the PRA’s doubling of the threshold for firms to be in scope of the major firm RAF.^{footnote [9]} So, we will increasingly take a tailored approach to assessing the resolvability of mid-tier firms, based on size, complexity and resolution strategy. More complex mid-tier firms will rightly need to do more than simpler, smaller ones.

As a final thought on established firms, it is important that firms consider not just their own resolvability but their broader role in the financial system. For example, some firms act as FMI intermediaries by providing access to clearing, settlement or payment services to other banks and building societies. In these cases, providers of the intermediary service should continue to provide services, and plan accordingly, when clients are in resolution, so long as they continue to perform their obligations. They should also make information available to support clients’ resolution planning.^{footnote [10]}

The path ahead – for those just joining us on the resolvability journey or those with more ground to cover

I will turn now to another group of firms – those just joining us on their resolvability journey or those with relatively more ground still to cover. We recognise that these firms are at a different stage on their resolvability journey and that requires a different approach from us.

This group comprises firms in a variety of situations. First, it includes firms that are growing into our thresholds and have work to do to build up their capabilities. Building capacity for resolution is essential and there is no time to waste. We will engage in a targeted and technical way with these firms, supporting them to get up the curve as quickly as possible. These firms must own their resolvability and build quickly and effectively, making the most of our established policy landscape.

More established firms may also find themselves in this group where there is substantially more work to do on their resolvability. This could happen for various reasons such as because firms are making material changes to their business, such as mergers or acquisitions, which affect their ability to achieve the resolvability outcomes. We expect firms to consider their resolvability as they go through these changes, to update us on material changes and to remediate issues that would impede resolution. We will engage with firms closely throughout this process until they reach a steady state again. It may take time for firms to make the necessary changes. But we expect firms to demonstrate they have a plan and that they have considered the impact of any integration actions on resolvability.

Established RAF firms may also have more work to do where the issues we have identified have persisted and are not being adequately remediated. In such cases, you should expect us to co-ordinate our engagement closely with the PRA. You may also see us deploying our powers to appoint skilled persons. We will do this in a targeted way and as part of a wider engagement plan with each firm.

Testing has an important role to play for all of these firms as they build or enhance their capabilities. A common feature of our approach to all these groups is the involvement of technical, dedicated specialists to support our firm-facing teams where needed. Third-party advisers on our Resolution Procurement Framework have a crucial role to play here. You should expect us to work more regularly with them as providers of market and operational expertise to support the design of the Bank’s assessments and in undertaking skilled persons reviews if required.

Beyond banks

Banks are not the only firms with resolution regimes, as Dave Ramsden noted in January. We are building out our regime for UK central counterparties (CCPs). While the capabilities will be different than for banks, the underlying expectation of resolvability is the same. In May, we published a Discussion Paper that sets out three draft outcomes for a CCP to be considered resolvable.^{footnote [11]} This is a first step to invite feedback from industry on our thinking. Subject to the responses to the Discussion Paper, we expect to consult later this year on more detailed resolvability expectations, which are proportionate and reflective of the risks that a CCP failure would pose.

Conclusion

So, we have collectively come a long way towards the outcome of ongoing resolvability. This matters because a credible, effective and responsive resolution regime which is proportionate underpins financial stability and supports growth. But resolvability is a journey that can never be ‘done’. Firms, whatever waypoint they have reached on their resolvability journey, need to make sure they build and maintain their capabilities, so they are prepared for resolution on an ongoing basis. Testing must increasingly be at the heart of this. And we need to remain agile and responsive, and focused on outcomes, so we are ready and able to execute a resolution if needed in testing times.

I would like to thank Adam Cull, Kat Hind, Pauline Maburutse, Jane Maxwell and Matt Wooderson for their help in preparing these remarks. I would also like to thank Andrew Bailey, Dave Ramsden, Jackie Tibbetts and Robert Zammit for their helpful comments.