Solvent exit planning for non-systemic banks and building societies

Key summary

Solvent exit rules were communicated by the PRA as a part of SS2/24. The focus is on a requirement for firms to prepare a solvent exit analysis (SEA) in BAU and then a solvent exit execution plan (SEEP) at a time when Solvent exit becomes more likely. The rules will come into effect on 1 October 2025.

In our webinar, we focused on 5 key areas. This was informed by previous discussions with clients and the regulatory authorities. It was also informed by our experience working with firms on wind down plans and recovery plans, both of which have clear crossover with the forthcoming solvent exit rules.

1. Solvent exit indicators

We think that the solvent exit indicator framework has crossover with existing recovery plan indicators. Solvent exit indicators should be forward-looking and enable sufficient time to prepare a SEEP. More generally, given the overlap between Recovery Planning and solvent exit, firms should draw the feedback from the 15 May DCEO on Recovery Planning and reflect it in their approach to solvent exit.

2. Resources and costs

Key considerations here include what will be the sources of cost in the event of a solvent exit. Staffing and operational costs are of most interest to the regulators. We also highlighted the fact that firms will need to consider the implications of enacting a solvent exit in a stressed market versus an exit that is the result of idiosyncratic factors. This is because the latter may result in smaller haircuts and less exceptional costs. Other areas of regulatory focus will include the need for clear justification for costing and detail on staff numbers in any SEA.

3. Barriers and risks

Box B within SS2/24 is an invaluable source of information for firms assessing risks and barriers related to solvent exit. It is our view that firms will need to approach this process in a fluid and agile manner. Some of our clients have started to take immediate actions, and others have expressed interest in implementing this in the coming months. To mitigate this barrier, firms may consider updating contact details, understanding, and addressing complex legal structures, assessing the feasibility of substitutability, undertaking asset valuations under certain scenarios, and arranging for external support (where applicable).

4. Solvent exit execution plan

There is a clear benefit for firms to draw up their SEA and SEEP in conjunction with each other. This is because a large amount of analysis required for a SEEP has a clear crossover with expectations and details needed to develop a high-quality SEA. 

5. What firms should do to prepare

We expect that some of the requirements may well take time for firms to implement, especially when competing for time and resources with other major pieces of regulator change like Basel 3.1 and/or Strong & Simple. Therefore, firms should begin preparations sooner rather than later. We also think that firms should focus on the more complex elements of the proposals. This includes understanding the resourcing and costs, in addition to barriers and risks sub-elements of SEA requirements.