Home Finance Why Solvent Exit Planning Is More Important Than Ever for Non-Systemic Banks and Building Societies

Why Solvent Exit Planning Is More Important Than Ever for Non-Systemic Banks and Building Societies

by internationalbanker

By Tony Kyriacou and Michael Laney, Principal Consultants, Consulting at Davies

 

 

 

 

Solvent exit planning has become a prominent topic in the banking and insurance sectors over recent months.

Policy Statement PS5/24 might not appear eye-catching. But this statement, published by the Bank of England (BoE) on March 12, 2024, put the spotlight on solvent exit planning for non-systemic banks and building societies, outlining how these types of firms in the United Kingdom should prepare, as part of their business-as-usual (BAU) activities, for an orderly “solvent exit”.

The changes had been in the offing for some time. In 2021, Sam Woods, chief executive officer of the BoE’s Prudential Regulation Authority (PRA), stated that ease of exit from the market was one of the regulator’s key focuses for its future work. In its business plan for 2022-23, the PRA again emphasised that it would act to increase confidence that firms can exit the market with minimal disruption in an orderly way and without having to rely on the backstop of an insolvency or resolution process.

The rationale for the changes is clear enough. The failure of any financial institution has the potential to destabilise economies—globally and domestically—as well as inflict damage on consumer, business and investor confidence. When big banks fail, financial crises can follow. And while governments are often quick to intervene when systemic firms are deemed at risk of collapsing, the effects of smaller—or non-systemic—banks and building societies failing ought not to be underestimated.

Solvent exits are important for limiting potential shockwaves when a bank or building society ceases operations. In making its changes, the PRA has aimed to ensure that non-systemic firms undertake similarly diligent planning for solvent exits as their larger counterparts do.

Specifically, the PRA released Policy Statement PS5/24 to clarify its expectations for firms undergoing a solvent exit, improve communication throughout the process and promote a better chance of a smooth, successful exit. This statement warrants careful review—it is essential that banks and building societies are completely clear on what is now required of them and that they act accordingly.

What do the changes mean for non-systemic banks and building societies?

The new rules come into effect on October 1, 2025. Broadly speaking, the regulatory changes apply to UK banks and building societies with less than £10 billion of total assets and sight deposits of less than £350 million. These non-systemic banks and building societies must be better prepared for a solvent exit, taking specific actions to be compliant with the new PRA rules and expectations.

In practice, this means that these firms must carry out a solvent exit analysis (SEA). The overall objective is to be able to cease deposit-taking activities while remaining solvent, in turn allowing the firm to repay deposits before closing down operations entirely.

Banks and building societies must maintain a SEA document, thereby demonstrating they are suitably prepared for a solvent exit. This document should be updated whenever a material change takes place and at least every three years.

Accounting for a wide range of “plausible circumstances” (stressed and non-stressed) that could lead the institution to initiate a solvent exit, the SEA document should outline how the firm would carry out a solvent run-off of its liabilities. Other alternatives could be plotted out, such as a sale or partial sale, the transfer of all or part of its business under Part VII of the Financial Services and Markets Act (FSMA) 2000 or a solvent scheme of arrangement or restructuring plan.

The firm should identify and monitor both financial and non-financial indicators that a solvent exit might be required—warning lights, if you will, based on quantitative metrics that will underscore the viability of a bank or building society’s BAU activities. It is important that these indicators are forward-looking and that measures are taken to ensure alerts are triggered as early as possible. After all, the more time a firm can afford itself, the greater the likelihood that it can achieve a successful solvent exit.

Crucially, as part of its SEA, a firm should set out the financial resources and costs—including capital, funding and liquidity—needed to execute its solvent exit. These resources need to account for the discounted rate at which assets might need to be sold off, redundancy payments and so forth. In addition, non-financial resources should also be defined, such as key staff, IT (information technology) infrastructure, premises, licences and so on.

Communication is another important pillar in the strategy: Which internal and external stakeholders will need to be informed throughout different periods during the execution of a solvent exit?

Additionally, important governance requirements are involved. For instance, firms will need to name an executive accountable for the firm’s preparations for a solvent exit. At any point, the bank or building society should, upon request, be able to provide the PRA with the current version of its SEA.

Finally, the SEA should clearly outline all the potential barriers and risks to achieving a successful solvent exit. There are many considerations to address, and these will vary depending on the firm’s operation and size.

With a SEA maintained on an ongoing basis as part of its BAU activities, the PRA expects that a firm will produce a solvent exit execution plan (SEEP) within a month of there being a “reasonable prospect” that it will need to pursue a solvent exit. Firms must also be prepared to produce a SEEP upon request from the PRA at any time.

A challenging, far-reaching process

The above touches on only some of the essential, top-line elements that are involved in planning for a solvent exit. Clearly, for non-systemic banks and building societies that have hitherto not undertaken an in-depth SEA, responding to the new requirements laid out by the PRA could prove challenging.

The difficulty of the task will be dictated, at least in part, by the size and complexity of the firm. Complicated legal and corporate structures, the liquidity of the assets owned, the existence of untraceable or uncontactable customers, and regulations governing the different markets and territories in which the company operates are just some of the many factors that can make a SEA more challenging.

Importantly, a bank or building society is required to include a level of detail within its SEA (and, if required, SEEP) documentation that is “proportionate” to the nature, scale and complexity of the firm.

To that end, the SEA and the development of the SEEP ought to involve several clear and distinct phases: scoping and mobilisation; planning and documentation; testing and quality assurance; and execution and dress rehearsal. Assumptions contained within any part of the documentation—from the financial resources required through to the timeline governing which parts of the plan will be executed when—must be supported with appropriate data and analysis.

The benefits of acting promptly

There are 17 months until the new rules come into effect. Challenging though compliance might seem to some firms at this point, there are significant advantages to preparing thoroughly and promptly. These extend far beyond simply remaining on the right side of the PRA’s requirements.

  1. The likelihood of a successful solvent exit is increased. By preparing for a solvent exit as part of their BAU, firms reduce the risks of time delays and financial losses should they need to pursue this option. Stakeholders and creditors will also benefit.
  2. A smooth solvent exit will minimise disruptions to the UK economy. From a reputational perspective, this is important—poorly executed and communicated exits risk tarnishing the legacy of the brand involved, as well as the leadership teams behind it.
  3. Unsuccessful solvent exits can result in deposits not being paid in full, leading to extra costs being incurred and passed onto other firms if the Financial Services Compensation Scheme (FSCS) is required to complete the payouts.
  4. As is the PRA’s ambition, more diligent and thorough solvent exit planning ought to provide greater confidence among firms that they—and others—can exit the market more easily if the need arises. This breeds confidence among investors, offering them greater assurance that they will be able to access their funds should the firm in which they have invested become unsustainable or non-viable. This all contributes to a well-functioning and competitive market.

Now is the time to act.

Solvent exit planning will undoubtedly remain high on the agenda for the UK’s non-systemic banks and building societies over the coming years. Adapting to evolving regulation is a constant challenge for any financial-services business, and despite the recent changes having been anticipated for some time, it is crucial that banks and building societies have access to the support they require to stay abreast of the reforms.

In addition, the challenges the incoming PRA rules present should also be seen as opportunities to conduct thorough assessments of a firm’s operating model, balance sheet and customer experience. In turn, these will provide the foundations for better aligning commercial strategies, stakeholder-engagement protocols and internal governance frameworks. Although potentially complex, the reforms will mark a positive step forward for the banking industry.

The clock is ticking, and firms should know that October 2025 will roll around quickly. As such, there is no time to waste in ensuring that preparations for solvent exit planning begin in earnest if they are not already underway.

 

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