Solvent Exit Planning for Non-Systemic Banks and Building Societies
The PRA published the supervisory statement SS 2/24 in March 2024 where it set out the new rules and expectations for non-systemic banks and building societies. The proposed Solvent Exit exercise expects the firms in scope to make preparations for ‘Solvent Exit’ as part of their BAU activities. The crux of the regulation is: orderly wind down after returning or transferring deposits and cancellation of the Part 4A PRA permission.
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Solvent Exit Planning for Non-Systemic Banks and Building Societies
Systemic failures of banks have been long debated and the supervisory authorities have continuously been involved in the development of mitigating actions targeted at increasing the robustness of the economic ecosystem. To tackle the recurring systemic failures of several key banks, the Bank of England published its findings from the first Recovery Assessment Framework (RAF) in 2022 followed by a consultation paper on solvent exit planning proposal for non-systemic banks and building societies. The policy statement 5/24 was published in 12 March 2024 which captured the clarification for firms going through the solvent exit process, improving communication throughout the process and offering a better chance of a smooth, successful exit. This soon culminated in the supervisory statement 2/24.
Who does it apply to?
Noting the existing regulation for Globally Systemically Important Institutions (GSII), this applied to:
UK-incorporated banks that are not subject to the Operational Continuity Part of the PRA Rulebook
UK-incorporated banks that are not members of a group which is a GSII or any other systemically important institution (O-SII).
What is the timeline?
The PRA expects the in-scope firms to meet the requirements of solvent exit planning by October 2025. The capabilities must enable the firms to develop a solvent exit analysis (SEA) and solvent exit execution plan (SEEP) that would allow for sufficient preparation in case the firm’s business becomes non-viable.
In addition to the above, the PRA expects non-systemic firms to integrate solvent exit planning into their recovery and resolution planning (RRP) framework, aiming to remain solvent should they choose or need to wind down PRA-regulated activities.
What are the fundamental requirements?
The consultation paper 10/23 issued by the PRA on 28 June 2023 proposed a requirement to prepare for solvent exit regardless of how remote one may seem – and, if needed, to be able to execute one. The PRA made adjustments after reviewing feedback on CP 10/23 to its final policy to provide clearer guidance on solvent exit planning.
It requires firms to prepare for a solvent exit as part of their business-as-usual activities, and to document the preparations in a solvent exit analysis (SEA). If solvent exit becomes a ‘reasonable prospect’ for a firm, that firm is then also required to prepare a solvent exit execution plan (SEEP).
The SS also provides further details on managing deposits and permission removal of Part 4A, specifying solvent exit indicators as advisory rather than serving as automatic triggers for wind down and exit. There is greater emphasis on handling stakeholder expectations and communications.
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