In a drive to solve the “too big to fail” problem, industry regulators are forcing banks to consider structural reform—including recovery and resolution, separation of activities and capital adequacy.
Recent resolution reforms have given unprecedented new powers to both UK and EU regulators. Banks are expected to work with regulators to identify a suitable resolution strategy and demonstrate that the structure of their business facilitates it.
In the United Kingdom, regulators are focused on enabling bail-in and ensuring operational continuity, and they require banks to adopt either a single point of entry (SPE) or multiple point of entry (MPE) funding structure. Alongside resolution, UK regulators are also planning to force a ring-fence to separate systemically important banking activities.
In the European Union, regulators are requiring banks to produce two plans—a recovery plan and a resolution plan.
As banks consider the best way forward, two facts are clear. One is that every firm has a different starting point and a different strategy—and will therefore need to consider the impact of the regulation in the context of its circumstances and ambition. The other is that banks will need to build new capabilities. The required transformation effort will demand new skills and functionalities at scale, which banks may not currently have within their organizations.