Valuation reports in the context of banking resolution : what are the challenges? : banking union scrutiny : in-depth analysis

The preparation of accurate valuation reports is among the most challenging elements of the resolution mechanism. That challenge is underlined by the following observation: during the crises in the past decade, for almost half of the bailed-out banks the estimates for losses and capital needs were initially too low, resulting in several rounds of public capital injections. The single resolution mechanism has introduced a formal procedure with three valuations, respectively, to determine whether a bank is failing or likely to fail (valuation 1), to inform about the use of the resolution tools including bail-in (valuation 2), and to ensure that the 'no creditor worse off' condition is respected (valuation 3). This paper gives an initial assessment of the preparation of valuation reports in resolution. It finds that there are still substantial uncertainties regarding the outcome of these valuations due to organisational, legal and economic challenges. In order to reduce the uncertainties, several measures are suggested, such as improving the IT systems, increasing the use of historical data, shortening the procedure to assign the valuator, introducing a moratorium, and harmonising the insolvency laws for banks in a way that integrates the insolvency and resolution regimes.