On 7 December 2020, the Single Resolution Board (SRB) published a paper outlining its expectations for ensuring the resolvability of banks engaging in mergers and acquisitions (M&A) and other corporate transactions, building upon the SRB's Expectations for Banks document, published in April 2020 (EfB).
Background and purpose
The paper highlights that the SRB will closely monitor all stages of M&A and other corporate transactions and expects strong engagement from relevant banks, from the preparatory stage onwards. Bank M&A is likely to result in material changes to banks' structure and operations and thus impact resolution planning activities, preferred resolution strategy and resolvability. Through early involvement in such transactions the SRB aims to review on a timely basis and, where appropriate, update existing resolution approaches. The process outlined in the paper also provides a means for the SRB to engage ex ante with banks to ensure that resolvability considerations are embedded in business integration plans. The SRB highlights that well-designed and well-executed transactions may present an opportunity for banks to strengthen their resolvability.
Under principle 1.2 of the EfB, Banks are expected to contact the SRB about prospective M&A or other corporate transactions as soon as possible. As part of its engagement with banks, the SRB may request banks to provide information on top of what is required under other regulatory notification procedures, including: (i) pro forma analyses of the foreseen legal and organizational structures, (ii) the target funding (including a plan to ensure or achieve compliance with group-level MREL requirements and/or an MREL funding plan), (iii) the business and operating model, risk profile and balance sheet, and (iv) a preliminary assessment of the impact on resolvability. The SRB will cooperate closely with other supervisors, in particular the ECB, to ensure proportionality and avoid duplication of efforts.
Specific resolvability expectations
Banks are expected to be able to demonstrate how they intend to ensure compliance with the SRB's expectations regarding resolvability in a number of selected areas, including loss-absorption and recapitalization capacity, information systems, operational continuity, access to financial market infrastructure services and legal structure. The SRB highlights that M&A and other transactions may present opportunities for banks to reconsider their legal structures with a view to increasing efficiency,for example by rationalising the number of legal entities and better aligning them to business lines.
Impact of the SRB’s expectations on M&A preparation and execution
In light of the SRB's formal tools to require banks to address material impediments to resolvability ex post, its expectations will likely carry significant weight in preparing M&As and other transactions. However, it does not have a formal ex ante authority to object to transactions. In May 2015, the Dutch Ministry of Finance and the Dutch Central Bank had published a position paper with a proposal to introduce financial stability and resolvability assessment criteria to be applied by the SRB in the assessment of proposed acquisitions of qualifying holdings in banks. This would have enabled the SRB, either independently or as part of the ECB's procedure, to ex ante assess resolvability of the future entity. The proposal was rejected at the time due to lack of support of other EU member states.
The SRB intends to play an active role in all stages of M&A and other corporate transactions and expects strong engagement from the relevant banks. Its expectations may significantly impact the transaction preparations of M&A transactions and may also need to be considered in relation to the transaction documentation and timelines. At the same time, obtaining the SRB's views ex ante provides more certainty to banks in the integration phase and may present opportunities for banks to strengthen their resolvability in an efficient manner.
The SRB will closely monitor all stages of M&A and other corporate transactions and expects strong engagement from relevant banks from the preparatory stage onwards.