AuthorHellwig, Martin F.
Valuation reports in the context of banking resolution: What are the challenges?Valuation reports in
the context of banking resolution: What are the challenges?
PE 624.417 5
In the aftermath of the financial crisis of 2007-2009, the European Union has introduced a legal
framework for bank resolution as an alternative to a traditional insolvency procedure. The Lehman
Brothers bankruptcy had shown that, even if the prevailing legal regime is debtor friendly and favours
the continuation of operations of the insolvent company, letting a major financial institution go into
bankruptcy can cause severe damage to the financial system. Bank resolution should provide a way to
deal with the bank’s problems without causing such damage.
Resolution affects the rights of bankscreditors. In contrast to traditional insolvency law, the legal
norms concerning bank resolution prioritize the protection of the financial system over creditor
protection. In particular, the bail-in tool provides for the possibility of imposing losses on creditors
without going through an insolvency procedure.
Under the “no-creditor-worse-off” principle (Art. 73 (b) BRRD, Art. 15 Par. 1 (g), SRM Regulation), a bail-
in should not make any creditor worse off than an insolvency procedure would. However, the
counterfactual of what an insolvency procedure would imply for creditors is difficult, perhaps even
impossible, to ascertain.
Write-downs and conversions in a bail-in depend on the valuation of the bank’s assets. If the assessed
total value of assets falls short of the credi tors’ total claims, shareholder equity is written down. Debt is
bailed in, by write-downs or conversions, in the inverse order of its standing in the hierarchy of claims.
The impact of a bail-in on creditors is obviously very sensitive to the results of the valuation. For the
valuation, Articles 36 and 74 of the BRRD and Article 20 of the SRM Regulation stipulate a two-step
procedure. The first valuation takes place when the resolution procedure is initiated, the second, when
the resolution procedure is finished. The purpose of the first procedure is to provide a basis for the
resolution authority’s choice of actions, including a bail-in of creditors. The purpose of the second
procedure is to compare the claims of shareholders and creditors under the initial bail-in to the
payments they would have received in an insolvency procedure, providing for compensation if the
latter claims turn out to be larger.
In cases where the urgency of resolution precludes a valuation by independent agents that complies
with all conditions in the Directive and the Regulation, the resolution authority can proceed on the
basis of a provisional valuation. This provisional valuation must be replaced by a definitive valuation
that fulfils all the conditions in the Directive and Regulation as soon as po ssible.
These arrangements raise a number of questions. Some of these questions have been articulated in the
discussion about the European Banking Authority’s (EBA) regulatory technical standards (RTS).1 Some
of them have arisen from the experience with the resolution of Banco Popular Español (BPE) in June
One set of questions concerns the relation between the two valuations and the relation between them
and the valuations that preceded the authorities’ assessment that a bank was faili ng or likely to fail. EBA
observes that the three valuations occur in different circumstances and serve different purposes:
Valuations before the initiation of resolution (“Valuation 1”) provide information to market participants
in the absence of any intervention. Valuations at the onset of resolution (“Valuation 2”) provide an input
into the resolution authority’s decisions. Valuations after resolution (“Valuation 3”) serve as a basis for
implementing the no-investor-worse-off principle. To take account of these differences, EBA proposes
1 EBA (2017)

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