HANDBOOK ON VALUATION FOR

PURPOSES OF RESOLUTION
22 FEBRUARY 2019
HANDBOOK ON VALUATION FOR PURPOSES OF RESOLUTION

Contents
List of figures 4
Abbreviations 5
Executive summary 6
Introduction 6
Legal basis and overview 6
1. Introduction: overview of the EU valuation framework 9
1.1 Outline of EU legislative and regulatory sources on valuation for purposes of resolution 9
1.2 Valuation before resolution 10
1.2.1 Horizontal issues 10
1.2.2 Valuation 1 11
1.2.3 Valuation 2 11
1.3 Valuation 3 13
2. Valuation before resolution: horizontal issues 14
2.1 Valuation date, definitive and provisional valuations 14
2.1.1 Valuation date 14
2.1.2 Definitive and provisional valuations: general considerations 14
2.1.3 Ex-post definitive valuation 15
2.2 Best point estimates and value ranges 15
3. Valuation 1 16
4. Valuation 2: general considerations 19
4.1 Valuation 2: purposes and general considerations 19
4.2 Measurement bases: hold value and disposal value 20
4.2.1 Hold value 20
4.2.2 Disposal value 21
4.3 Further considerations on Valuation 2: best point estimate and value ranges 22
4.4 Operational costs 24
4.5 Provisional valuation: buffer for additional losses 26
5. Valuation 2: single asset/liability (granular) valuation 28
5.1 Overview of the valuation process 28
5.2 DCF methodology: cash flows according to hold/disposal value calculation 32
5.3 DCF methodology: discount rate according to hold/disposal value calculation 40
5.4 Market value methodology 48
5.5 Adjusted book value based methodology 49
5.5.1 (Amortised) cost as basis for the book value 49
5.5.2 Fair value as basis for the book value 50

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5.6 Further valuation methodologies 51

5.7 Valuation of derivatives 51
5.8 Valuation of funding liabilities 51
5.9 Contingent assets and liabilities 54
5.9.1 Contingent assets 54
5.9.2 Contingent liabilities 54
6. Valuation 2: equity valuation of the institution 56
6.1 Overview and valuation process 56
6.2 DCF methodology 59
6.3 Market value methodology 61
7. Valuation 2: tool specific considerations 63
7.1 Write Down and Conversion of Capital Instruments (‘WDCCI’) 63
7.2 Bail-in tool 63
7.2.1 Execution of the bail-in tool: steps related to the valuation 63
7.2.2 Specific consideration during the valuation 65
7.2.3 Estimate PCEV 66
7.3 Sale of business tool 67
7.3.1 Implementation of the sale of business tool: valuation considerations 67
7.3.2 Specific considerations on the derivation of the franchise value 68
7.4 Bridge institution tool 68
7.5 Asset separation tool: asset management vehicle (AMV) 70
8. Valuation 2: process and report 72
8.1 Process 72
8.1.1 Appointment of the independent valuer and performance of the valuation 72
8.1.2 General considerations on the performance of the valuation 74
8.1.3 General considerations on the timeframe 74
8.1.4 Specifics in the valuation of asset and liability valuations 76
8.1.5 Potential content of the Valuation 2 report 76
9. Specific aspects of Valuation 3 81
9.1 Conceptual and procedural aspects 81
9.2 Methodologies for assessing realisation from assets 82
9.2.1 General considerations 82
9.2.2 DCF methodology 83
9.2.3 Market value methodology 83
9.2.4 Other valuation methodologies 84
9.3 Specific considerations for certain assets/liabilities 84
9.4 Determination of recoveries to creditors 84
9.5 Potential content of the valuation report 85
10. Management Information Systems (MIS) 87
Annex 89
Overview of valuation approaches 89
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General considerations 89
DCF methodology 90
Market value methodology 91
Adjusted book value based methodology 93
(Amortised) cost as basis for the book value 93
Fair value as basis for the book value 93
List of references 95

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List of figures
Figure 1.: Example of value range (illustrative example, for further explanations see the text below)
23
Figure 2. Outline of the conceptual steps that a single asset and liability valuation might follow 29
Figure 3. Simplified scheme for loan valuation and deriving expected cash flows (source:
Schwamborn et al., 2011, translated and slightly amended to reflect requirements of valuation 2)
39
Figure 4. Simplified description of Bottom Up and Top Down approaches 46
Figure 5. Simplified description of Top Down discount rate consideration 47
Figure 6. Sample Bottom-Up cash flow adjustments 47
Figure 7. Simplified illustration of the equity valuation process and its interaction with the
application of resolution tools 58
Figure 8. Possible input parameters for a P&L-focused value driver analysis of institutions (source:
Adamus/Koch, 2007, translated) 60

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Abbreviations

AMV asset management vehicle

AVA additional value adjustment
Directive 2014/59/EU on bank recovery and
BRRD
resolution
CAPM capital asset pricing model
COE cost of equity
CRD Directive 2013/36/EU on capital requirements
CRE commercial real estate
Regulation (EU) No 575/2013 on capital
CRR
requirements
DCF discounted cash flow
DTA deferred tax asset
DTC deferred tax credit
EBA European Banking Authority
FOLTF failing or likely to fail
GAAP generally accepted accounting principle
IFRS International Financial Reporting Standards
MIS management information system
NAV net asset value
NCWO no creditor worse off
NPL non-performing loan
P&L profit and loss
PCEV post-conversion equity value
PD probability of default
RA resolution authority
European Commission Delegated Regulation
Regulation on valuation before resolution
No 2018/345
European Commission Delegated Regulation
Regulation on valuation after resolution
No 2018/344
RTS Regulatory technical standards
RWA risk-weighted assets
SOTP sum of the parts
write-down or conversion of capital
WDCCI
instruments

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Executive summary

Introduction
Directive 2014/59/EU of the European Parliament and of the Council establishing a framework for
recovery and resolution of credit institutions and investment firms (BRRD) 1 provides a
comprehensive framework of powers for resolution authorities (RAs) to intervene in failing banks
to protect the public interest and financial stability. To ensure that authorities exercise these
powers in ways that reduce the risk of costs falling on the taxpayer, preserve value where possible
and respect the property rights of affected shareholders and creditors, the BRRD requires
independent valuations to be carried out to inform RAs’ decisions.
The BRRD relies on valuations conducted by a person meeting conditions of independence for a
number of purposes.
The BRRD lays down the general criteria and requirements that such valuations should comply with,
and delegates to the European Banking Authority (EBA) responsibility to supplement and specify
them in regulatory technical standards (RTS) enacted by the European Commission in the form of
delegated regulations. This body of law represents the harmonised European Union (EU) legal and
regulatory framework on valuation in resolution matters, is directly applicable in all Member States
and has to be observed by valuers and RAs when conducting the valuation.
To support the RAs in the context of valuation, the EBA has developed this Handbook on valuation
for purposes of resolution (‘Handbook’) with a view to operationalising the valuation process in
order to facilitate its implementation by RAs in times of crisis. The Handbook is therefore
subordinate to the abovementioned Level 1 and Level 2 texts (the BRRD, and RTS developed by the
EBA and endorsed by the European Commission in the form of delegated regulations; see summary
table in Section 1.1) and has been developed bearing in mind the need to be consistent with that
body of law.

Legal basis and overview

The Handbook is developed on the basis of Article 29(2) of Regulation (EU) No 1093/2010
establishing the EBA, to promote common approaches and practices. While it is not binding and
not subject to ‘comply or explain’, it is aimed at fostering the convergence of practices in the
implementation of the valuation process, including in the interaction with valuers.
The Handbook is addressed to the RAs and aims to be a useful non-exhaustive support document
in the context of the valuations requested under Articles 36 and 74 of the BRRD. It does not purport
to be a comprehensive and prescriptive valuation manual but aims to provide a non-exhaustive
overview of selected aspects of valuation methodologies that could be used when conducting the
valuation in accordance with the EU legal and regulatory framework, and of the related
implementing process.

1
The same provisions are set out in Regulation (EU) No 806/2014 establishing the Single Resolution
Mechanism (SRMR). To avoid duplication, references in this Handbook are to the BRRD provisions only rather
than also to the corresponding provisions set out in the SRMR.
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The Handbook has been developed having regard to acknowledged international valuation
standards and practices, such as the current edition of the International Valuation Standards (IVS)
produced by the International Valuation Standards Council (IVSC), a non-binding although
authoritative source of reference on best market practices, and relevant internationally
acknowledged literature (see Annex). Furthermore, RAs’ valuation experience with actual or near-
miss resolution events has provided useful background information.

The Handbook respects the valuer’s independence and freedom to choose the appropriate
valuation approaches or methodologies. In the light of this, the Handbook does not purport to
prescribe a specific level of granularity, whether the use of a top-down or bottom-up approach is
appropriate, when to use samples and of what size, or any other similar detail. In addition, it
acknowledges that the quality and the granularity of the valuation are constrained by the
circumstances, including the available timeframe, data and information.
With the above caveats in mind, the Handbook aims to outline the main steps in which valuations
may be articulated, having regard to the dynamics of the resolution strategies and of the execution
of the resolution tools, and illustrates the potential application of the most common valuation
approaches in accordance with the criteria set out in Commission Delegated Regulation 2018/345
on valuation before resolution (Regulation on valuation before resolution). Specific attention has
been paid to the development of examples of application of the autonomous notions of ‘hold value’
and ‘disposal value’ that are set out in the Regulation on valuation before resolution, including in
the context of each resolution tool.
While the Handbook covers all types of valuations to be performed for purposes of resolution, it
mainly focuses on the valuation informing the RA’s decision on the adoption of the resolution
tool(s) (commonly referred to as Valuation 2). This is the most technically complex valuation and
has the greatest impact on the resolution decision affecting shareholders, creditors and potentially
public finances; for these reasons, the largest part of the Handbook is devoted to this type of
valuation. Less space is devoted to the valuation to be performed to assess if the conditions for
resolution or for write-down and conversion are met (commonly referred to as Valuation 1), since
it can be broadly considered an accounting valuation. The description of the valuation to be
performed after the execution of the resolution action in order to assess any difference in
treatment of shareholders and creditors had the entity been subject to normal insolvency
proceeding instead of resolution (commonly referred to as Valuation 3) is also dealt with in less
detail, since, broadly speaking, it is a gone concern valuation to a large extent influenced by national
insolvency law and practice.
The Handbook also deals with the valuation process, including the appointment and interaction
with the valuer, the conditions for its independence and suggestions about potential contents of
the valuation report. In doing so, the Handbook intends to support the RAs in setting the
expectations of the valuation results to effectively inform the resolution decision.
One Chapter of the Handbook (Chapter 10) deals with the assessment by the RAs, in business as
usual, of institutions’ valuation preparedness, and focuses on the capabilities to develop and/or
adjust management information systems (MISs) to meet expectations about data and information
to be swiftly provided to the RA/valuer to support a robust valuation. Work on this Chapter is still
in progress; for this reason, only a textbox is included in the current version of the Handbook.

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After an introductory Chapter providing an overview of the EU legal and regulatory framework and
a summary of the main features of the valuations to be performed for purposes of resolution,
Chapter 2 outlines horizontal issues common to the valuations before resolution, including
questions related to the valuation date, definitive and provisional valuation, best point estimates
and value ranges. Chapter 3 is devoted to a high-level illustration of Valuation 1. Chapter 4 provides
an outline of the purposes and conceptual remarks of Valuation 2, and gives attention to
considerations of operational costs and the determination of the buffer for additional losses in
cases of provisional valuation. Chapter 5 deals with asset valuation under hold and disposal value
assumptions, and outlines, among other things, considerations related to the application of cash
flows and discount rates in Valuation 2. It also covers the assessment of the value of liabilities and
of contingent assets and contingent liabilities in the context of Valuation 2. Chapter 6 deals with
the equity valuation of the institution itself, notably aspects of the dividend discount model and
market value methodology. Chapter 7 considers aspects of the implementation of the resolution
tools under Valuation 2. Chapter 8 closes the section of the Handbook on valuation before
resolution and deals with the process, including the appointment of the independent valuer, and
the potential content of the valuation report to be submitted by the valuer to the RA. Chapter 9
deals with aspects of Valuation 3, the valuation to be carried out after the execution of the
resolution action to assess differences in treatment of shareholders and creditors in resolution and
in hypothetical insolvency proceedings. Finally, Chapter 10, which relates to the enhancement of
institutions’ valuation preparedness, is in progress and is currently represented by a textbox.

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1. Introduction: overview of the EU

valuation framework

1.1 Outline of EU legislative and regulatory sources on valuation

for purposes of resolution
Valuation is critical to resolution execution: its role of informing the resolution decision, purposes
and general requirements are outlined in the BRRD and further specified in a body of EU regulation
laying down an EU harmonised approach that is mindful of ensuring consistency with the resolution
objectives and principles.
Against this background, the BRRD provides that independent valuations be performed before
resolution, under Article 36(4) of the BRRD, and after resolution, under Article 74 of the BRRD.
Pursuant to Article 36(4) of the BRRD, the valuation before resolution has to:
(i) inform the determination of whether the conditions for resolution or the write-down or
conversion of capital instruments (‘WDCCI’) are met (Valuation 1);
(ii) where the RA determines that an entity meets those conditions, inform the resolution
action to be adopted, the extent of any eventual write-down or conversion of capital
instruments, and other decisions on the implementation of resolution tools (Valuation 2);
(iii) where liabilities arising from derivatives are subject to write-down or conversion, meet
special valuation requirements set out in Article 49 of the BRRD.
Under Article 74 of the BRRD, an independent valuation is needed to:
(iv) determine whether an entity’s shareholders and/or creditors would have received better
treatment if the entity had entered into normal insolvency proceedings rather than into
resolution (principle of no creditor worse off (NCWO)) (Valuation 3).

To ensure harmonised approaches to the conduct of these valuations, the BRRD delegates to the
Level 2 regulation the tasks of setting out the criteria on which valuations for the purposes of
points (i) and (ii) have to be based, and defining the methodology for the valuation under points (iii)
and (iv). The European Commission has enacted four Delegated Regulations in matters related to
valuation in the context of resolution, based on EBA RTS. This body of law is the harmonised EU
legal and regulatory framework on valuation in resolution matters and aims to promote consistent
application of valuation throughout the European Union.

Legal source Matter

Valuation before resolution (Valuation 1 and

BRRD Article 36
Valuation 2)
Commission Delegated Regulation 2018/345 Valuation before resolution
Commission Delegated
Valuation of liabilities arising from derivatives
Regulation 2016/1401

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Commission Regulation 2016/1075 (Articles

Requirements for independent valuers
37-41)
BRRD Article 74 Valuation after resolution
Commission Delegated Regulation 2018/344 Valuation after resolution

1.2 Valuation before resolution

Valuation is a specialised technical task to be performed by professional experts. In the context of
resolution, valuation has to be conducted in accordance with valuation best practices and in order
to fulfil the purposes set out by the resolution framework in accordance with the resolution
scenarios provided by the RA to the valuer. This requires the valuer to be cognisant of the resolution
principles, objectives and dynamics in the application of the valuation methodology. When
performing the valuation before resolution, for example, attention should be paid to appropriately
balance ‘fair, prudent and realistic assumptions’ to ensure the full recognition of losses, and their
internalisation through write down and conversion, in order to protect public finances and the
business viability as the case may be, and at the same time to respect the right of property of
shareholders and creditors, having regard to the principle of NCWO. The expression ‘fair, prudent
and realistic assumptions’, which is laid down in recital (52) of the BRRD, should be interpreted in
the light of the resolution context rather than with regard to accounting notions.

Valuation before resolution may be subject to time and data availability constraints which may
affect the valuation exercise. As a general remark, a longer timeframe allows the application of a
methodology on a more granular level and possibly also the use of a second methodology, as a
consistency check; however, this may not be the case when the available timeframe is very short
or information is limited. In the light of the above, it is acknowledged that the specific
circumstances of the case at hand may greatly influence specific decisions on valuation matters.

It is also worth noting the interaction between the valuation before resolution in accordance with
the BRRD and the State aid framework. While the BRRD requires that the valuation must not
assume the provision of State aid (Article 36(5)), the interaction of the two regimes may
nonetheless result in the need for State aid or financial support from the resolution fund. In that
case, resolution action is conditional on prior and final approval under the Union State aid
framework. Thus, if such situations arise, it is suggested that resolution authorities engage the
European Commission as early as possible for pre-notification contacts.

1.2.1 Horizontal issues

Although valuation before resolution is a single process, it requires the fulfilment of different steps
and the performance of various types of valuation exercises to meet the purposes set out in the
BRRD.
As a default solution, the BRRD requires a definitive valuation to be conducted before resolution,
which is a valuation fulfilling the general requirements set out in Article 36 and conducted by an
independent valuer.

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Where such definitive valuation cannot be performed or in cases of urgency, resolution action can
be supported by a provisional valuation, which may be performed by the valuer or by the RA. As
part of the valuation before resolution, an ex ante estimate of the treatment that shareholders
and creditors would receive had the institution been subject to normal insolvency proceedings
should be made (Article 36(8) of the BRRD). In cases of provisional valuation, such assessment may
be made to the extent practicable. In cases of both definitive and provisional valuation, the
valuation date has to be as close as possible before the date on which the resolution decision is
adopted.
An ex post definitive valuation is envisaged when resolution action has been taken on the basis of
a provisional valuation (Article 36(10) of the BRRD) 2. In such a case, the valuation date has to be
the resolution date.
The valuation before resolution has to determine best point estimates and, where appropriate,
may include a discussion of value ranges and sources of valuation uncertainty and be supported by
an outline of the key methodologies and assumptions used with appropriate justification.
As regards macroeconomic assumptions, they may be based on forecasts produced by the official
sector (e.g. the European Commission, central banks etc. …) and should be the same across all types
of valuations, including Valuation 3.

1.2.2 Valuation 1

Valuation 1 is the valuation required under Article 36(4)(a) to assess whether the conditions for
resolution or for write-down or conversion are met.
As described in recital (51) of the BRRD, informing the determination of whether the conditions for
resolution or for write-down or conversion of the entity’s capital instruments are met requires a
fair and realistic valuation of the entity’s assets and liabilities that recognises losses in accordance
with letter (g) of Article 36(4). Such a valuation is principally aimed at determining whether or not
the aggregate value of the entity’s assets exceeds that of its liabilities (in other words, whether or
not the entity is balance-sheet solvent) and whether or not the conditions for authorisation are
fulfilled, including whether or not the applicable regulatory capital requirements are met. It should
be noted, however, that the assessment of this latter aspect might go beyond the valuer’s remit.
To assist with this determination, Valuation 1 must be closely linked to the accounting principles
relevant to the preparation of the entity’s financial statements and the prudential regulations
relevant to the calculation of the entity’s capital requirements. This should not prevent the valuer
from deviating from assumptions made by the entity’s existing management, if this is warranted,
based on the valuer’s independent expert judgement.

1.2.3 Valuation 2

2
It is acknowledged that the interpretation of Article 20(11) of Regulation 806/2014 establishing the Single
Resolution Mechanism (which corresponds to Article 36(10) of the BRRD) has been submitted to the Court of
Justice of the European Union. This Handbook intends to be neutral regarding the disputed issue and does
not purport to suggest any interpretation of the legal text.
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Pursuant to letters (b) to (g) of Article 36(4) of the BRRD, Valuation 2 informs the decision on the
appropriate resolution action to be taken and, depending on such action, the decisions on the
extent of the cancellation or dilution of shares, the extent of the write-down or conversion of
eligible liabilities, the assets, rights, liabilities or shares to be transferred, and the value of any
consideration to be paid. Being conducted before resolution actions are implemented, it has to
consider the impact (as yet hypothetical) of actions that may be taken by the RA to implement its
resolution strategy. For this purpose, under the Regulation on valuation before resolution the RA
“may consult with the valuer in order to identify the range of resolution actions being considered
by that authority” (Article 10(1) of the Regulation on valuation before resolution) setting the
dynamic frame for the valuation. Pursuant to Article 36 of the BRRD, the valuation before resolution
is aimed at assessing the value of assets and liabilities and “informs” the resolution decision, which
is adopted by the RA, taking into account and balancing the existing circumstances.
Valuation 2 has to be fair, prudent and realistic; it is directed at determining the economic value of
assets and liabilities, having regard to the applicable resolution scenario, in order to represent fairly
the entity’s financial position in the context of the opportunities and risks that it confronts. To that
end, the valuer may use any relevant information pertinent to the valuation date.
The determination of the economic value of assets and liabilities aims at the full recognition of
losses, consistent with the resolution objective of internalising the costs of resolution and of
protecting public funds. Where valuation 2 is provisional, the BRRD requires the inclusion and
justification of a buffer for additional losses. The buffer is aimed at approximating losses that the
valuer expects to occur or that have occurred but that the valuer has not yet been able to precisely
estimate as part of the provisional valuation.
In terms of valuation approaches, the Regulation on valuation before resolution gives precedence
to the discounted cash flow (DCF) methodology, this notwithstanding references to other valuation
approaches in that Regulation make the application of the DCF not exclusive, leaving room for other
valuation approaches — for instance the market methodology or the adjusted book value
methodology — in accordance with valuation best practices, the valuer’s judgement and the EU
legal and regulatory framework.
The Regulation on valuation before resolution sets out valuation criteria reflecting the rationale of
the resolution actions. In particular, it provides two measurement bases: the hold value and the
disposal value. For resolution strategies envisaging the entity under resolution to continue holding
some or all of the entity’s assets as a going concern, the hold value as defined in the Regulation on
valuation before resolution has to be applied (Article 11(4)). For resolution strategies entailing the
transfer of assets, rights, liabilities or shares — notably the sale of business, the bridge institution
and the asset separation tools — the disposal value has to be applied. The Regulation before
resolution also lays down autonomous definitions of ‘franchise value’ and ‘equity value’.
Where resolution envisages conversion of capital instruments or other liabilities, Valuation 2 shall
also provide an estimate of the post-conversion equity value of new shares transferred or issued
as consideration. This is necessary to enable the resolution authority to determine a rate of
conversion into equity that ensures either that the institution after resolution is adequately
capitalised from a regulatory perspective or that holders of converted instruments receive equity
of sufficient value to be consistent with their fundamental property rights and with the NCWO
safeguard under Article 73 of the BRRD.

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1.3 Valuation 3
The BRRD provides explicit safeguards to protect the fundamental property rights of shareholders
and creditors. Article 73 of the BRRD requires that Member States ensure that shareholders and
creditors affected by resolution tools receive at least as much in resolution as they would have
received had the entity been wound-up under normal insolvency proceedings, regardless of
whether their claims are written down or modified as a result of resolution actions. The existence
of any difference in treatment is determined by Valuation 3, to be performed in accordance with
the methodology laid down in the European Commission Delegated Regulation No 2018/344
(‘Regulation on valuation after resolution’). This valuation takes place after the execution of
resolution and informs the application of the BRRD legal safeguards to protect the rights of
shareholders and creditors against decisions adopted on the basis of Valuation 2. As opposed to
Valuation 1 and 2, it is conducted on a gone concern basis.
To make those safeguards effective, the methodology described by the Regulation on valuation
after resolution seeks to determine:

(a) the treatment that shareholders and creditors would have received had the entity
under resolution entered insolvency proceedings at the time when the authority
decided to apply the resolution strategy;
(b) the actual treatment that shareholders and creditors have received in resolution;
(c) the difference between actual treatment and counterfactual treatment.

In other words, the exercise attempts to determine the treatment actually received by shareholders
and creditors existing as of the date of resolution, but immediately preceding any resolution action,
and to compare this with an estimate of the outcome resulting from a hypothetical insolvency of
the entity under normal insolvency proceedings. For this reason it has to be based on insolvency
scenarios reflecting the applicable insolvency law and practice. As is the case with Valuations 1 and
2, Valuation 3 shall be supported by key assumptions and sensitivity analysis, and reflect
uncertainties and any lack of relevant information or other issues encountered.

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2. Valuation before resolution:

horizontal issues

2.1 Valuation date, definitive and provisional valuations

Although Valuation 1 and Valuation 2 fulfil different purposes and have to be performed in
accordance with different criteria, certain requirements apply to both of them and are therefore
dealt with together in this Chapter.

2.1.1 Valuation date

According to the Regulation on valuation before resolution, the valuation date is defined as follows:

(a) “the reference date as determined by the valuer on the basis of the date as close as
possible before the expected date of a decision by the resolution authority to put the
entity in resolution or to exercise the power to write-down or to convert capital
instruments”;

(b) where an ex-post definitive valuation by Article 16(10) of Directive 2014/59/EU is

conducted, the resolution date;

(c) in relation to liabilities arising from derivatives, the point in time determined pursuant
to Article 8 of Commission Delegated Regulation (EU) 2016/1401.”

2.1.2 Definitive and provisional valuations: general considerations

The BRRD provides, as a default solution, that resolution decisions should be informed by a
valuation performed by an independent valuer and fulfilling the requirements laid down in
Article 36, i.e. a ‘definitive’ valuation informing the resolution decision. To enable the RA to take
action also in circumstances of urgency or because an independent valuation is not possible, the
BRRD envisages the possibility of adopting resolution action also on the basis of a provisional
valuation (Article 36(2) and (9)). Such provisional valuation should comply with the requirements
set out in paragraphs (1), (6) and (8) of Article 36 of the BRRD to the extent practicable. Paragraph
(8) of Article 36 of the BRRD relates to the estimated hypothetical recovery rate by creditor classes,
basically an ex ante estimate of the NCWO, that may be performed consistently with the principles
of the Regulation on valuation after resolution insofar as they can be applied prior to resolution
(Article 2(5)(b) of the Regulation on valuation before resolution). Such valuation consists of two
steps: first, the subdivision of creditors into classes; second, establishing an estimate of the
treatment that such classes would receive should the institution be put into insolvency.

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The provisional valuation may be performed by the independent valuer or by the RA itself, and it is
envisaged to be followed by an ex-post definitive valuation after the execution of the resolution
scheme (Article 36(10) of the BRRD).

2.1.3 Ex-post definitive valuation

An ex-post definitive valuation is envisaged when the resolution decision has been informed on
the basis of a provisional valuation (Article 36(10) of the BRRD) 3. The provisional and the ex-post
definitive valuation, “fully compliant with all the requirements” of Article 36 of the BRRD and
carried out “as soon as practicable” after the execution of the resolution scheme, may yield
different results owing to the higher granularity of the available information, the valuation
approach adopted and the time available.

This is consistent with the BRRD, which expressly acknowledges that the purpose of the ex-post
definitive valuation is “to ensure that any losses on the assets of the institution or entity … are fully
recognised in the books of accounts of the institution or entity”, to write back creditors’ claims or
to increase the value of the consideration paid (see Article 36(11) of the BRRD).

The ex-post definitive valuation may rely on data and information not available to the valuer or
the RA when performing the provisional valuation, provided they refer to facts occurred before
the resolution date. In accordance with Article 3(b) of the Regulation on valuation before
resolution, the valuation date in such cases is the resolution date. In accordance with Article 6(e)
of that Regulation, the valuation report should explain the differences between the methodologies
and assumptions used in the provisional and in the ex-post definitive valuation.

2.2 Best point estimates and value ranges

According to the Regulation on valuation before resolution, the valuer has to provide a “best point
estimate of the values” of the assets, liabilities and combinations thereof; value ranges should also
be determined “where appropriate” (Article 2(3) of the Regulation on valuation before resolution).
The determination of best point estimate should be supported by the clear indication and
explanation in the valuation report of any relevant assumptions, reservation and qualifications (if
any) or similar considerations. Similarly, where, in addition to the best point estimate, value ranges
are determined, the valuation report should indicate how the value range has been derived, for
instance the parameters and assumptions that are the basis for the sensitivity and/or scenario
analysis, as well as the parameters and assumptions to which the valuation is most sensitive.

3
It is acknowledged that the interpretation of Article 20(11) of Regulation 806/2014 establishing the Single
Resolution Mechanism (which corresponds to Article 36(10) of the BRRD) has been submitted to the Court of
Justice of the European Union. This Handbook intends to be neutral regarding the disputed issue and does
not purport to suggest any interpretation of the legal text.

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3. Valuation 1
Under Article 36(4)(a) of the BRRD, the valuation has to “inform the determination of whether the
conditions for resolution or the conditions for the write down or conversion of capital instruments
are met”. This valuation is commonly referred to as ‘Valuation 1’.
Valuation 1 should rely on “fair and realistic assumptions”, consistent with recital (51) of the BRRD,
and is principally aimed at determining whether the aggregate value of the entity’s assets exceeds
that of its liabilities (in other words whether the entity is balance-sheet solvent) and whether the
conditions for authorisation are fulfilled, including the applicable requirements. It should be noted,
however, that the assessment of this latter aspect might go beyond the valuer’s tasks.

The Regulation on valuation before resolution also clarifies that, when the results of Valuation 1
are available, they shall inform the competent authority’s or the RA’s determination that the
institution is failing or likely to fail (‘FOLTF’) (Article 7(1) and recital (4) of the Regulation on
valuation before resolution). The unavailability of the results of such valuation is therefore not an
obstacle to the FOLTF assessment. The latter is governed by Article 32(2) and (4) of the BRRD and
by the EBA Guidelines on the different circumstances when an institution shall be considered as
failing or likely to fail 4.

The general BRRD requirement of close cooperation between the competent authorities and the
resolution authorities, including providing each other upon request with all the information
necessary for the performance of their tasks, applies also for the purposes of Valuation 1 5. Such
cooperation should ensure that overlapping data requests and any resulting additional reporting
burden for institutions in times of crisis are avoided as far as possible.

In accordance with the general criteria set out in Articles 2(3) and 8 of the Regulation on valuation
before resolution, valuation results should be provided in the form of best point estimates and,
where appropriate, also in value ranges.

According to Article 7(2) and (3) of the same Regulation, Valuation 1 shall be consistent with the
applicable accounting and regulatory framework. Furthermore, the valuation methodologies may
rely on an institution’s internal models, if considered appropriate for the valuation, “taking into
account the nature of the entity’s risk management framework and the quality of data and
information available”. Consistent with the above, it is also possible to “challenge the assumptions,

4
EBA Guidelines on the interpretation of the different circumstances when an institution shall be considered
as failing or likely to fail under Article 32(6) of Directive 2014/59/EU (EBA/GL/2015/07) of 6 August 2015,
available at [Link]
07_EN_GL+on+failing+or+likely+to+[Link]/9c8ac238-4882-4a08-a940-7bc6d76397b6.
5
See in particular recital (17) and Article 11(2) relating to information on both resolution planning and
resolution implementation. For the Banking Union, Article 34(1) of Regulation (EU) No 806/2014 establishing
the Single Resolution Mechanism also provides that the SRB should make “full use of all information available
to the ECB”.

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data methodologies and judgements on which the entity based its valuations for financial reporting
obligations or for the calculation of the regulatory capital or capital requirement and disregard
them for the purposes of the valuation”.

Accounting values would be the valuation bases, and institutions are assumed to provide in a timely
manner updated financial statements and related information in order to conduct the valuation
when the valuation exercise is triggered 6 . Such related information may include (but is not
restricted to) information about applied valuation approaches 7, information about applied data
sources and explanations about the provision of consolidated data or individual, unconsolidated
accounts.

In accordance with letter (a) of Article 4 of the Regulation on valuation before resolution, updated
information may be provided, for instance, via supervisory reporting templates (e.g. so-called
CoRep (common reporting framework) or FinRep (financial reporting framework) templates). These
templates, however, might not cover all data needed to perform Valuation 1. Careful consideration
might also be given to the fact that they commonly cover consolidated information (regulatory view
of consolidation, which might differ from the accounting view of consolidation) rather than
information on the solo basis.

A request for the provision of updated information by an institution – potentially in a situation of

stress and as of an uncommon day (e.g. middle of the month, i.e. not end of the quarter or end of
a month) –could be a problematic request to meet by the institution in a relatively short period of
time. Such inability to provide updated information in a short term might arise, for instance, when,
due to technical reasons, accrual accounts cannot be closed during the month. However, depending
on the composition of the assets and liabilities (and including off-balance sheet positions), sudden
changes in the values of these positions on the days prior to resolution might have a material impact
on an institution’s financial position.

In such cases, careful consideration might be given to the fact that the financial institution should
be able to provide updated information on the more volatile positions (volatile in the meaning of
valuation or pricing, e.g. bonds, equity and derivative positions in times of elevated volatility). For
less volatile positions (e.g. loans and deposits, as long as there are no significant withdrawals of the
latter), recently available financial accounting information might be considered sufficiently reliable
by those performing the valuation. Very recently updated information might also be deemed
necessary for FX positions. In any case, the trade-off between data quality and timely provision of
updated data should be carefully considered when performing the valuation.

Article 8 of the Regulation on valuation before resolution points to several areas of particular
concern for Valuation 1. These include loans and loan portfolios, repossessed assets, fair valued
6
Article 4 of the Regulation on valuation before resolution provides “[…] in addition to the financial
statements, related audit reports and regulatory reporting as of a period as close as possible to the valuation
date, the relevant information may include […] (a) the updated financial statements and regulatory reporting
prepared by the entity as close as possible to the valuate date”.
7
According to letter (b) of Article 4 of the Regulation on valuation before resolution, “relevant information
may include”: “an explanation of the key methodologies, assumptions and judgements used by the entity in
order to prepare the financial statements and regulatory reporting”.

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assets (here: fair value according to the applicable accounting standard) for which the valuations
are no longer applicable or valid, goodwill and intangibles, legal disputes and regulatory actions,
pension assets and liabilities as well as deferred tax items.

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4. Valuation 2: general considerations

4.1 Valuation 2: purposes and general considerations

According to Article 36 of the BRRD, the taking of a resolution decision or the exercise of the WDCCI
are subject to a fair, prudent and realistic valuation of the assets and liabilities of the institution.
Unlike Valuation 1, an accounting valuation aimed at establishing whether the conditions for
WDCCI or resolution are met (see Chapter 3), Valuation 2 is aimed at informing the RA’s decision
on the execution of WDCCI or the resolution action and has to be conducted having regard to the
following purposes laid down in Article 36(4) letters (b) to (g) of the BRRD 8:

(b) [...] to inform the decision on the appropriate resolution action [...];

(c) when the WDCCI is applied, to inform the decision on the extent of the cancellation
or dilution of shares or other instruments of ownership, and the extent of the write down
or conversion of relevant capital instruments;

(d) when the bail-in tool is applied, to inform the decision on the extent of the write
down or conversion of eligible liabilities;

(e) when the bridge institution or asset separation tool are applied, to inform the
decision on the assets, rights, liabilities or shares or other instruments of ownership to be
transferred and decision on the value of any consideration to be paid [...];

(f) when the sale of business tool is applied, to inform the decision on the assets,
rights, liabilities or shares or other instruments of ownership to be transferred and to
inform the resolution authority’s understanding of what constitutes commercial terms [...];

(g) in all cases, ensuring that any losses on the assets of the institution are fully
recognised at the moment the resolution tools are applied or the .

To attain these purposes, Valuation 2 has to have regard to the resolution scenario provided by
the RA to the valuer, and to comply with the valuation criteria laid down in the BRRD and specified
in the Regulation on valuation before resolution. In accordance with Article 36 of the BRRD, the
valuation before resolution is meant to “inform” the resolution decision, which is adopted by the
RA taking into account and balancing the existing circumstances.

Valuation is dependent on various constraints such as time, quantity and quality of available data,
market conditions and resolution scenarios. In accordance with the Regulation on valuation before
resolution, Valuation 2 aims to establish the economic value – and not the accounting value – of
assets and liabilities or of the entire entity or selected businesses, as appropriate. The valuation

8
Article 36(4)(a) refers to valuation 1: ‘to inform the determination of whether the conditions for resolution
or the conditions for the write down or conversion of capital instruments are met’.

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approaches and methodologies described in this Handbook should therefore be applied with a view
to determining such economic value in accordance with the measurement bases of the hold value
or on the disposal value as defined in that Regulation. For that purpose, and to make sure that
losses are fully recognised, the valuation has to be based on “fair, prudent and realistic
assumptions”. At the same time, however, the valuation should be mindful to indicate any potential
violation of the principle that shareholders and creditors do not incur greater losses in resolution
than in normal insolvency proceeding (see also Chapter 9).

It is worth noting that the Regulation on valuation before resolution sets out in general terms
certain criteria or principles as well as some key variables to be used in the valuation. Although
some of these criteria and key variables reflect in particular the discounted cash flows (‘DCF’)
methodology, which is given prevalence throughout the Regulation on valuation before resolution,
the terms of that Regulation are not conclusive as to the application of a single commonly accepted
valuation methodology. Rather, the Regulation lays down specific resolution-oriented criteria for
valuation allowing for the application of various methodologies, subject to and to the extent that
they can deliver the economic value as required by the Regulation. Within the limits set forth by
and consistent with the Regulation on valuation before resolution, the valuer remains free to
choose the most suitable methodology for each specific case. A summary of commonly applied
valuation approaches and methodologies is provided in the Annex.

Valuation 2 may be a single asset and liability valuation (Chapter 5) or an equity valuation
(Chapter 6) of the whole institution. The latter may be required either when the sale of business
tool is applied in the form of share deals or, consistent with the Regulation on valuation before
resolution, for purposes of determining the conversion rate or rates when WDCCI or bail-in are
applied in accordance with Article 50 of the BRRD.

As a general rule, Valuation 2 has to include the conduct of an ex-ante estimate of the treatment
of shareholders and creditors classes in a hypothetical normal insolvency proceeding, indicating
to the RA whether creditors do not bear greater losses in resolution than they would bear had the
financial institution been subject to normal insolvency proceedings. In the case of provisional
valuation, this requirement may be fulfilled to the extent practicable (see also Section 2.1.2).

4.2 Measurement bases: hold value and disposal value

4.2.1 Hold value

To achieve the economic value, the Regulation on valuation before resolution sets out two general
criteria reflecting resolution specific situations: the hold value and the disposal value. Examples of
potential articulations of the hold value and of the disposal value and related discount rates are
illustrated in Sections 5.2 and 5.3. More generally, for purposes of the valuation, consideration can
be given to the following.

The hold value applies where the entity is envisaged to retain the assets as a going concern after
the application of the resolution tool, i.e. the bail-in tool. The continuation of the entity as a going

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concern requires some forward-looking considerations and the support of business forecasts and,
where available, restructuring plans. The Regulation on valuation before resolution does not
contemplate the application of franchise value (as defined in Article 1(g)) where the hold value is
applied. In accordance with that Regulation, “reasonable expectations for franchise value” could
be considered when determining equity value for purposes of the determination of the post-
conversion equity value in the case of application of the bail-in tool.
Under Article 1(e) of the Regulation on valuation before resolution, hold value is defined as “the
present value, discounted at an appropriate rate, of cash flows that the entity can reasonably
expect under fair, prudent and realistic assumptions from retaining particular assets and liabilities,
considering factors affecting customer or counterparty behaviour or other valuation parameters in
the context of resolution”. The last sentence of Article 11(4) of the same Regulation provides that
“The hold value may, if considered fair, prudent and realistic, anticipate a normalisation of market
conditions”.

Textbox – Hold value

As hold value is intended to be based on “cash flows that the entity can reasonably expect under
fair, prudent and realistic assumptions from retaining particular assets and liabilities”, the valuer
may consider the use of inputs and assumptions regarding the cash flows that are particular to the
entity that is retaining the assets or liabilities being valued. Given that the hold value assumes that
the subject entity retains the asset or liability, no presumed exchange (either real or hypothetical)
is assumed 9. The value-driving inputs and assumptions made by the valuer under the scenario that
the entity retains the asset or liability differ from those that would be assumed under a hypothetical
exchange between a willing buyer and willing seller. Therefore, the valuer may wish to consider and
explain the reasons for such differences in the valuation report, for example why the entity may
warrant different performance assumptions than an alternative market participant might consider.
Any such explanation should be for validation purposes only, and not yield to the determining the
hold value as being the same as the value assumed under a hypothetical exchange between a willing
buyer and a willing seller, or as the disposal value.

4.2.2 Disposal value

The definition of disposal value is set out in Article 12(5) of the Regulation on valuation before
resolution, providing that it “shall be determined by the valuer on the basis of the cash flows, net
of disposal costs and net of the expected value of any guarantees given, that the entity can
reasonably expect in the currently prevailing market conditions through an orderly sale or transfer
of assets or liabilities. Where appropriate, having regard to the actions to be taken under the

9
Where assets are being retained by the institution under resolution in order to be disposed of, in accordance
with, for instance, the balance sheet destination of specific assets or with the business plan and forecasts,
reference should be made to the disposal value having regard to the disposal horizon (see Chapter 7.2.2).

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resolution scheme, the valuer may determine the disposal value by applying a reduction for a
potential accelerated sale discount to the observable market price of that sale or transfer. To
determine the disposal value of assets which do not have a liquid market, the valuer shall consider
observable prices on markets where similar assets are traded or model calculations using
observable market parameters, with discounts for illiquidity reflected as appropriate”.
Unlike the hold value, when determining the disposal value for the purpose of transfer of business
under the sale of business or of the bridge institution tool, “the valuer may take into account
reasonable expectations for franchise value” 10 . Franchise value is defined in Article 1(g) of the
Regulation on valuation before resolution as “net present value of cash flows that can reasonably
be expected to result from the maintenance and renewal of assets and liabilities or businesses and
includes the impact of any business opportunities, as relevant, including those stemming from the
different resolution actions that are assessed by the valuer. Franchise value may be higher or lower
than the value arising from the contractual terms and conditions of assets and liabilities existing at
the valuation date. Reasonable expectations of franchise value can also be considered when
determining the equity value.

Textbox – Disposal value

The disposal value applies where assets, rights and liabilities are transferred from the entity under
resolution to a third party purchaser, the bridge institution or the asset management vehicle when
the sale of business, the bridge institution or the asset separation tool are respectively applied.

With respect to the disposal value, the valuer may need to consider the appropriateness of the
disposal costs 11 that it may be necessary to incur to get the assets or liabilities being valued into a
saleable condition (being careful that any potential change in value that may result from such
expenditure is also considered). The valuation may also wish to consider the effect that a piecemeal
sale may have (as opposed to a combined sale) with respect to factors such as (i) differences in the
observable market prices or (ii) timelines of potential sales. Similarly, the valuer may wish to
consider difference between (i) an orderly transaction with a typical marketing period and (ii) a
forced transaction with a shortened marketing period with limited (or no) buyer interest.

4.3 Further considerations on Valuation 2: best point estimate

and value ranges
As illustrated in the Chapter on the Horizontal issues of valuation before resolution (see
Section 2.2), the Regulation on valuation before resolution requires the valuation to determine the

10
For further considerations on the franchise value in the context of the determination of the disposal value,
see Section 7.3.2.
11
See Article 12(5) of the Regulation on valuation before resolution. Besides direct cost of the disposal, e.g.
legal or other consultancy costs, costs might also include expenses that may be needed to get an asset or
liability into a saleable form, as opposed to operational management costs. This may be, for example, costs
to complete work in progress, construction costs related to a commercial real estate (CRE) asset, repairs to
assets (e.g. repossessed property) or breakage fees on loans, contracts or assets etc.

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“best point estimate of the values” of the assets, liabilities and combinations thereof. It also
provides that value ranges should also be determined “where appropriate” (Article 2(3) of the
Regulation on valuation before resolution). Without prejudice to the requirement that best point
estimates have to be indicated in the valuation, as a general consideration, value ranges seem
appropriate where the application of different valuation methodologies or assumptions influences
the valuation result.

In the case of indication of the best point estimate or of a value range, such results should be
supported with information and adequate explanation in the Valuation Report (see Section 9.5). In
particular, the parameters (e.g. valuation methodologies or assumptions) to which the valuation is
most sensitive should be clearly identified. Sensitivity and/or scenario analyses, for instance, may
be performed to address identified uncertainties regarding the result of the valuation.

Such analyses examine the impact of the applied methodologies and/or assumption(s) and
parameters on the value. In the case of, for example, equity valuation, this may be observed by
applying different methodologies (e.g. market methodology based on trading multiples and DCF
methodology, applying for instance a dividend discount model) and/or assumptions and
parameters within these methodologies (e.g. calculating the sensitivity in case the assumed interest
rates face a certain upward and downward shift) 12. A scenario analysis might also consider different
markets at which an asset might be sold, or the assumed speed of a portfolio sale, for instance.

Figure 1. : Example of value range (illustrative example, for further

explanations see the text below) 13

12
However, there is no necessity for different valuation methodologies to be applied for the valuation of, for
example, an asset or an institution’s equity.

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Figure 1 shows an illustrative example in which three different valuation methodologies are
applied for the valuation of, for example, an institution’s equity, i.e. the valuation of the institution
as a whole (see Chapter 6) 14. Within the application of these three methodologies, different value
ranges are derived, which are represented by the blue bars in the chart. With regard to the DCF
methodology, the value range might for instance result from different assumptions in respect of
the institution’s forecasted value and cost drivers - including interest margins (e.g. resulting from
the abovementioned upward and downward shifts of interest rates), its forecasted cost base, non-
performing loan (‘NPL’) trends and cost of risk — or discount rates. With regard to the market value
methodology, based on trading and transaction multiples, the value ranges might result from the
use of different peer groups (e.g. groups of institutions that are considered to be similar to the
valued one) or of different assumptions for the calculation of adjustments to the peer group’s
multiple(s).

Value range 1 in Figure 1 represents a range resulting from the application of the three different
methodologies 15 . Within this broad range, a smaller range (value range 2) might finally be
considered reasonable by the valuer. However, value range 2 is not necessarily within value
range 1, as some methodologies might be considered to be more appropriate than others,
depending on the circumstances of the valuation.

The value range should be within a reasonable range, i.e. not too widely dispersed. For the
valuation result in the form of the value range to be useful to the RA to inform its decision, the RA
and the valuer could consult each other, where necessary, paying careful attention to the
circumstances of the case at hand. To derive a reasonable range, the assumptions applied in the
sensitivity and/or scenario analyses should for instance be fair, prudent and realistic (in the above
example of calculating a sensitivity for up- and downward shifts of the assumed interest rates these
shifts should for instance be in a realistic range). From the RA perspective, it is also important that
a valuer does not just simply choose any value that is within each methodology’s range but
appropriately details why a methodology was chosen, how the range(s) come(s) into existence and
why the best estimate is at that particular point within the range.

4.4 Operational costs

For the purpose of Valuation 2, operational costs should be considered. Such operational costs
might for instance result from liquidation costs and/or costs related to the implementation of the
resolution tool(s). They might for instance include costs for closing legal entities, running down of
business lines or similar, set-up costs (e.g. for setting up an asset management vehicle or a bridge
institution), as well as other resolution and “running business” related legal and administrative
costs. By contrast, any capital injections required would not be part of the operational costs but
constitute a separate position within the valuation.

14
Depending on the concrete valuation, not all valuation methodologies might be applicable, and a value
range through, for example, the application of different methodologies might not be derived in all cases.
15
The number of methodologies applicable might depend for instance on the valued assets, the
circumstances of the valuation, available data etc. In certain cases, only one methodology might be
applicable; in other circumstances, two, three or more methodologies might be applicable.

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Dis-synergies might also be considered in this valuation, for instance when a bridge institution and
a completely separated asset management vehicle are set up, resulting in dis-synergies from certain
overhead costs that for instance remain in place despite a run-down of certain portfolios or
businesses (see Section 5.1 and Chapter 7 on the different resolution tools). To determine such
costs, communication and exchange of information between the RA and the valuer would be
important.

Whereas these operational costs have a presumably negative value, there might be other aspects
which might result in a positive effect, e.g. assumed cost reductions or income increases (through,
for example, synergy effects). Assumed cost reductions might result from the fact that, for instance,
an asset management vehicle (AMV) would not incur any costs related to the generation of new
business (e.g. attracting new clients or extending business with existing clients). To the extent that
the relevant information on potential synergy effects can reliably be estimated by the valuer and
to the extent that their inclusion helps to better approximate the expected result of a disposal, such
synergies might also be considered in the case of an expected sale of the institution or parts of it to
a competitor (see Section 5.1 and Chapter 7 on the different resolution tools). For estimating
synergies, it might be necessary to create a set of assumptions, including for instance about the size
of the recipient (e.g. large vs. small institution) and whether the recipient is an institution or another
kind of entity. In any case, estimating any potential synergy effects might be a very challenging
part in the valuation exercise and should therefore be used cautiously. It might well also be the
case that valuers are not able to properly estimate them.

In the case of an asset and liability valuation (valuation of assets and liabilities as well as of
contingent assets and liabilities or of groups of such positions), such operational costs or assumed
cost reductions or other synergy effects might be disclosed separately within the valuation (i.e.
not as part of any of the valued assets and/or liabilities but as a separate position) 16. Any double
counting of such effects (operational costs, cost reductions, etc.) in the valuation of such a separate
position and, for example, the asset and liability valuation (e.g. reflected in the assumed
administrative costs in the loan valuation; see Section 5.2) should be eliminated 17.

In the case of an equity valuation (i.e. valuation of the institution as a whole), such effects (e.g. from
operational costs and/or synergies) would presumably be considered as part of the cash flow
calculation.

Furthermore, if parts of the institution are assumed to go into insolvency (with other parts for
instance being assumed to be sold), the valuer might provide an estimation of the operational costs
for such a “legacy entity”. This could inform the resolution decision for the amount of necessary
cash to be left in this legacy entity, to meet at least the running costs of the legacy entity at the
beginning.

16
Unsettled commitments (e.g. from rental contracts, but not in case of prepayments) with long duration
might be reduced during resolution due to the BRRD option of regulation of contracts (in the example, the
liability resulting from potentially long-dated real estate contracts may thus be reduced). In such cases, the
valuation of these contingent liabilities would be based on the adjusted contractual terms.
17
As a potential example, if in the asset valuation marginal costs are considered, the operational costs would
include costs not yet considered in the asset valuation.

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4.5 Provisional valuation: buffer for additional losses

When resolution action is taken on the basis of a provisional valuation, Valuation 2 has to include
a buffer for additional losses as a remedy to dealing with the uncertainty of a fast and less granular
valuation. This buffer shall “reflect the facts and circumstances supporting the existence of
additional losses of uncertain amount or timing” (Article 13(1) of the Regulation on valuation before
resolution) that could not be taken into account due to the provisional nature of the valuation. It
should be based on a fair, prudent and realistic assessment of those additional losses, accompanied
with appropriate justifications. Along these lines, it should cover, for instance, for the lack of
accuracy of estimates and the areas of valuation which were not estimated prudently. When
determining “the size of the buffer […] factors that may affect expected cash flows as a result of
the resolution actions likely to be adopted” should be considered (Article 13(2) of the Regulation
on valuation before resolution). Article 13(3) of the Regulation on valuation before resolution also
provides two suggestions on how this buffer might be calculated:

• An estimation of the buffer based on the extrapolation of losses considered for a part of
the institution’s assets to the balance sheet: in such case, for instance, the losses
estimated for certain loan portfolios might be extrapolated to other similar loan portfolios,
i.e. the buffer would be calculated as a percentage of these assets. Alternatively, the losses
calculated for certain asset classes (e.g. loan and bond portfolios etc.) might be
extrapolated to, for instance, other similar types of assets of the institution. The buffer
would as such be estimated as a certain percentage of the total assets when there is a need
to value some portfolios on a collective basis, due to lack of time and data during the
provisional valuation.

• An estimation of the average losses for a peer competitor’s assets (e.g. NPL or non-
performing exposure (‘NPEs’) ratios of solvent peers or, to the extent available, definitive
losses incurred in similar resolution or similar market transactions) may be extrapolated to
the institution. Such an approach might result in buffers estimated as a certain percentage
of certain portfolios (if buffers are estimated for example at portfolio level) or of the
institution’s total assets (if the buffer is estimated for example for the institution as a
whole). The Regulation on valuation before resolution stresses that “necessary
adjustments for differences in the business model and financial structure” should be
considered in such calculation.

In the calculation of the buffer, “double counting of uncertainty” should be avoided (Article 13(1)
of the Regulation on valuation before resolution). This might for instance mean that if buffers,
which are assumed to include for example credit risk considerations, are applied on portfolio levels,
they should not be applied in addition on the level of total assets.

The buffer may be calculated on an aggregate basis for the total assets or on an asset per asset
class basis. In the latter case, the valuer should indicate them in the valuation report to allow the
RA to assess their combined effect.

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5. Valuation 2: single asset/liability

(granular) valuation

5.1 Overview of the valuation process

One of the approaches that might be used to perform a Valuation 2 is the single asset and liability
(also “granular”) valuation (Figure 2). According to this methodology, assets or liabilities are valued
at single asset/liability or group of assets/liabilities level. In this approach, besides assets and
liabilities, items that are not recognised on an institution’s balance sheet also need to be considered
in respect of their relevance for valuation (e.g. uncertain liabilities and franchise value; see
Sections 5.9.2 and 7.3.2) as they contribute to the overall value of the institution. The
assets/liabilities (or groups of assets/liabilities) are valued at their economic value, reflecting their
envisaged treatment under the resolution strategy.

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Figure 2. Outline of the conceptual steps that a single asset and liability valuation might follow 18

18
The assumed flow of information and process strongly depends on the applied valuation methodology/ies. The flow of information and the process might be
completely different, depending on the individual valuation and applied approach, methodology/ies, etc.

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In Step 1, all inputs are gathered. This includes in particular the updated balance sheet following
Valuation 1, which provides the valuer with an overview of the current perimeter of the institution’s
on- and off-balance sheet assets and liabilities. This information is supplemented by additional
information needed by the valuer to determine the economic value of the assets and liabilities (see
Chapter 10 on the MIS), but also any information that the valuer might need to gather on its own,
for example market data. Further inputs are those provided by the RA, which encompass the
potential resolution strategies, any potentially applicable restructuring plans, scenarios and
assumptions to be applied and any further information pertinent to the valuation that the RA might
have.

In Step 2, the assets and liabilities of the institution might be disaggregated into clusters that are
considered to be homogeneous enough to lend themselves to the application of a common
valuation methodology and model. Given that the valuation factors in the effects of the resolution
strategy, such clusters should be organised to reflect the fact that all their components are subject
to the same resolution tool and power. For example, where the use of an AMV for a group of assets
is envisaged, only assets that are subject to the transfer to the AMV would be assumed to be within
the same cluster(s); the cluster(s) would presumably not include any assets that are not transferred
to the AMV. Yet not all the assets to be transferred need to be within a single cluster. For example,
where the assets consist of loans and their respective hedging instruments, two clusters might be
needed, because loans and derivatives do not lend themselves to a common valuation
methodology. The disaggregation is entirely within the valuer’s scope of judgement in order to
achieve the best possible quality in the valuation.

In Step 3, the economic value is derived. The disaggregation and clustering would be instrumental
to facilitate the determination of the economic value of the institution’s assets and liabilities as
well as of contingent assets and contingent liabilities. In this step, and depending on the valuation
approach applied, the starting data points would be integrated with the relevant data and
information stored in the valuation MIS to calculate the economic value. This step includes the
application of the relevant measurement basis, i.e. of the hold or of the disposal value on the basis
of the relevant resolution strategy and valuation methodologies.

In Step 4, after having derived economic values, the clusters are reintegrated into a (resolution)
balance sheet. This approach allows to compare total economic values of the institution’s assets
and its liabilities. The difference informs the determination of the amount of losses to be offset by
WDCCI/bail-in. Also, operational costs or similar elements (see Section 4.4) would need to be
considered in this step.

Step 5 follows completion of Valuation 2 and contemplates a pro forma translation of the
resolution balance sheet into a pro forma (opening) balance sheet. Such a pro forma opening
balance sheet might not be applicable in all cases and is not part of Valuation 2; therefore, it is not
dealt with in this Handbook.

The valuation of single assets/liabilities or groups of assets/liabilities depends on the measurement

basis (hold vs. disposal value, see Article 1(e) and (f) of the Regulation on valuation before

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HANDBOOK ON VALUATION FOR PURPOSES OF RESOLUTION

resolution), with the measurement basis for a given item depending on the applied resolution tool,
or combination of different tools, or WDCCI power. The valuation should accordingly reflect the
resolution scenarios provided by the RA.

Where a valuation is performed on a portfolio level or for a group of assets and/or liabilities, these
portfolios or groups should be constructed in such a way that the methodology used for the same
resolution tool and powers apply to each of portfolio or group, and that the measurement basis
would be the same for the respective assets and liabilities.

The valuation approaches and methodologies described throughout this Handbook aim to establish
an economic value of assets and liabilities or of the entire entity or selected businesses, as
appropriate, as required by the Regulation on valuation before resolution. The following Chapters
build on the summary of valuation approaches and methodologies provided in the Annex.

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HANDBOOK ON VALUATION FOR PURPOSES OF RESOLUTION

5.2 DCF methodology: cash flows according to hold/disposal value calculation

Potential further
Potential further
considerations related to
Potential considerations in Valuation 2 in general considerations related to the
the disposal value
hold value calculation
calculation

Type of cash In a loan valuation, for instance, all cash flows related to the Cash flows might differentiate Cash flows are assumed to
flows respective exposure might be considered in full, pre tax and in the between holding assets for reflect all considerations
currency of the loan 19 . However, exceptions might include extracting contractual flows that the market would
syndicated loans; in that case, if the exposure to be valued (with necessary adjustments; apply.
represents only a share of the total loan, the partial cash flows see below on such adjustments
related to the respective institution’s exposure are considered. in the description of For example, the valuation
prospective financial of a loan portfolio might
In the valuation of an institution’s equity investment (e.g. FinTech information (PFI)) or take into account all costs
or insurance companies or re-possessed shares in other kinds of subsequent sale. that a potential buyer
companies, but also in other institutions), the cash flows depend would incur for holding that
for instance on the applied method (e.g. free cash flow to firm or For example, the valuation of a portfolio and that the
free cash flow to equity, dividend discount model, etc.) 20. It might loan portfolio in the core potential buyer would
for instance also be the case that the restructuring plan or the business line of the institution therefore include in its
resolution action envisages the divestment of any particular that the institution intends to determination of the
keep on its books, might rather purchase price. Also the

19
Consideration needs to be given to the exchange rate that, in a separate step, is applied to the conversion of the valued loans, as in some jurisdictions a rate defined
by law have to be applied.
20
The equity valuation of the institution itself (i.e. the valuation of the institution as a whole, applying for instance the dividend discount model) is covered in Chapter 6.

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HANDBOOK ON VALUATION FOR PURPOSES OF RESOLUTION

investment (or other assets); in that case, the disposal value has to use adjusted contractual cash “strength” of (a) potential /
be used for the specific assets. flows of respective loans. assumed purchaser(s) in
the acquisition process of
If there are specific attributes an assets/group of
attaching to the asset or assets/an institution/etc.
liability (e.g. for a loan might be considered, for
portfolio, in-house servicing instance if the
costs may be favourable potential/assumed
compared with external third purchaser(s) is/are in a
parties) then these would be strong position in the
factored into the hold negotiation to request price
valuation. reductions 21 . This might
depend on the
In contrast, the valuation of a
depth/liquidity of the
securities portfolio that the
market, at which for
institution holds for, for
instance a portfolio is
example, market-making
assumed to be sold.
purposes might rather use the
sales proceeds at the foreseen
time of a sale. Similarly, if an
NPL portfolio is considered as
held for sale (e.g. it is
considered as non-current
asset held for sale by an
International Financial
Reporting Standards (IFRS)

21
The potential strength of a buyer’s position might for instance depend on the portfolio and/or entity that is assumed to be sold as well as on the applied tool. For
instance, if “attractive” portfolios are sold, applying the sale of business tool, the buyers’ positions might be weaker, as many of them are attracted. This might be in
contrast to a case, in which a bridge institution in a highly competitive market with an unclear strategy is sold.

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HANDBOOK ON VALUATION FOR PURPOSES OF RESOLUTION

applier, i.e. for which IFRS 5 is

applied), the cash flows
considered in the valuation
might rather be those from the
assumed sale of the NPL
portfolio.

Length of the When valuing a loan or loan portfolio, for instance, the valuer may A borrower’s financial In the case of a non-
forecasted consider cash flow forecasts for the whole (remaining) lifetime of situation and/or behaviour performing exposure,
period (detailed the loan (i.e. lifetime of the valued asset). The length of the might be influenced by the fact which is for instance
planning forecasted period may take into account the clients’ behaviour in that the institution is subject to assumed to be transferred
period) respect for instance of the early redemption / prepayments or bail-in (e.g. if a client is to a private equity investor
prolongations of loans, including changed terms and conditions simultaneously a debtor and (assumed sale of business),
(see on clients’ behaviour also the following paragraph). creditor of the same the time for the recovery of
institutions and if, for some for example the collateral
Such analysis of clients’ behaviour might be analysed on portfolio reason, the client is subject to might be shorter than
level, for instance of very similar assets (e.g. mortgage loans in a the write-down or conversion formerly assumed.
specific region). of its investment). The
institution’s statistical data on The length of the
borrowers’/clients’ behaviour forecasted period might
might accordingly no longer be also depend on the applied
fully valid/applicable for the resolution tool and for
valuation. instance on the
depth/liquidity of markets
(see also Section 6.2).

Prospective PFI-related considerations include for instance reflections The institution’s refinancing The financing and cost
financial whether contractual or adjusted cash flows are applied. With and cost situation after bail-in situation of the recipient

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HANDBOOK ON VALUATION FOR PURPOSES OF RESOLUTION

information regard to a loan, contractual cash flows are the repayments and and reorganisation to the (bridge institution, AMV or
(PFI) the interest payments agreed upon in the contract. However, in extent known would be potential/assumed third
most cases further consideration needs to be given to derive applicable. party purchaser in case of
adjusted cash flows, in order to include for instance assumed cost sale of business) would be
of risk of the respective exposure, administration and funding applicable.
costs and similar parameters.
If for instance a group of
Furthermore, the expected cash flows might reflect the financial assets is transferred to
guarantees received for the related respective exposure. another institution (e.g.
through a sale of business),
All the aspects that are not considered in the cash flows, but that that institution might
are relevant for the valuation, are alternatively reflected in the realise synergies related to
discount rate. respective exposures (as it
might for example be
Where a transfer is assumed, the expected cash flows might for
specialised in the respective
instance also depend on the transfer of the valued asset to
asset class). However, the
another entity, as the recipient’s financing position and cost
identification and
structure might be different from those of the current owner of
estimation of such
the asset.
synergies might be
extremely challenging, e.g.
as it might not be known
who the purchaser will be,
nor the likelihood and
feasibility of synergies
implementation.

As in most cases the

concrete recipient — and

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HANDBOOK ON VALUATION FOR PURPOSES OF RESOLUTION

therefore applicable
financing and cost
structures or potential
synergies — might not be
known (as in most cases), a
peer group representing an
assumed/potential
recipient (e.g. a group of
institutions that might bid
for a portfolio or an
institution) might be used
for this purpose.

In the case of an assumed

sale of the exposure,
financial guarantees
received might not be
applicable any more, i.e.
also the consideration of
financial guarantees
received needs careful
examination.

Terminal value Depending on the expected cash flows and the remaining lifetime No specific hold value No specific disposal value
of the valued asset following the forecasted (detailed planning) considerations. considerations.
period, a terminal value which reflects the asset’s remaining
lifetime. Such remaining lifetime might be indefinite or it might be
restricted to a certain period.

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HANDBOOK ON VALUATION FOR PURPOSES OF RESOLUTION

An indefinite lifetime might for instance be applicable when

valuing equity investments of the institution (e.g. when valuing
the institution’s investment in a FinTech or insurance company or
similar) or when deriving a franchise value.

A finite lifetime (e.g. when a loan has an expected maturity of

nine years) might for instance be applicable when the detailed
forecasted period in the valuation of this loan is five years, but its
maturity is nine years. In such case, four years would be
considered in the terminal value calculation.

Assumed exit An example of an assumed exit could be the forecast of cash flows When an exit is assumed from The assumed exit options
from the of a commercial real estate (CRE) project financing of a newly for example a CRE financing (as might depend on the entity
investment in built hotel and which is assumed to be sold after its completion. described in the left column) to which for example a loan
future Such a case might be relevant if the CRE object was for instance but is not certain, different is transferred. A private
foreclosed by an institution. In this example, the project’s options might be considered in equity investor might for
expected cash flows are negative in the beginning. When the the valuation. These exit instance be faster in the
completed hotel is assumed to be sold in the end, the respective options might be specific to the restructuring of an SME
proceeds from the sale — i.e. the assumed “exit” — might be case of the bailed-in than an institution, which
forecasted using a market value methodology (see Section 5.4), institution. might in its respective
considering “market conditions” at the time of sale. actions consider a future
client relationship with
Also, if for instance the foreclosed stake in a small or medium- exactly this client.
sized enterprise (SME) is valued, the assumption might be that the
institution will “exit” this investment after a certain period of The nature of the disposal
time, e.g. after its restructuring. may drive a different set of
cash flows, e.g. an
accelerated exit may reflect

37
HANDBOOK ON VALUATION FOR PURPOSES OF RESOLUTION

different costs or cash flow

Exit values might also be negative, for instance if the institution
assumptions versus an
foreclosed a share in a company that will need to cover the costs
orderly sale process.
for its closure.

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HANDBOOK ON VALUATION FOR PURPOSES OF RESOLUTION

Figure 3. Simplified scheme for loan valuation and deriving expected cash flows (source:
Schwamborn et al., 2011, translated and slightly amended to reflect requirements of valuation 2)

Figure 3 outlines the main high-level components for valuing loans. There are various approaches
for the cash-flow-based valuation of loans; the textbox in Section 5.3 (Loan valuation: two potential
cash flow-based approaches) provides two examples, namely (i) a top-down (high-level) approach
and (ii) a bottom-up (granular) approach. Figure 3 shows one example of how loans might be valued
where most of the components are considered in the cash flows. They might alternatively be
considered in the discount rate, for instance when current interest rates for a loan of similar risk
are identified and then transferred into a discount rate. Figure 3 is also rather focused on
performing loans, since in the case of non-performing loans the focus might rather be for instance
on the realisation of collateral and the time to recovery.

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HANDBOOK ON VALUATION FOR PURPOSES OF RESOLUTION

5.3 DCF methodology: discount rate according to hold/disposal value calculation

Article 11(6) of the Regulation on valuation before resolution provides a list of parameters for the determination of the appropriate discount rate. The
following table is based on that list. To the extent that any of these parameters are already considered in the forecasted cash flows, they should not be
reflected in the discount rate and the valuer should report in which parameters they were considered.

Potential further
Potential further
considerations related to
Potential considerations in Valuation 2 in general considerations related to
the disposal value
the hold value calculation
calculation

Timing of The discount rate has to be time specific, i.e. the time over which Discount rates might for Discount rates are assumed
related cash the forecasted cash flows are discounted — as of the valuation date instance differentiate to reflect market
flows — should be correctly reflected in the discount rate. Such between holding assets for expectations.
consideration might include the question at which point in time the extracting contractual flows
forecasted cash flows are assumed in the planning horizon, e.g. per (with necessary adjustments)
year-end or in the middle of the year. or subsequent sale.

Risk profile The discount rate has to reflect the risks inherent in for instance a Under the hold value The disposal value might be
valued loan or foreclosed real estate asset (e.g. a warehouse), assumption, normalised short-term oriented, i.e.
market conditions might be rather depending on e.g. the

40
HANDBOOK ON VALUATION FOR PURPOSES OF RESOLUTION

assuming that this has not yet already been included in the cash considered, i.e. the assumed current market situation of a
flows. risk inherent to e.g. the valued real estate property.
valued loan or foreclosed This might for instance be
The level of risk of a newly built shopping centre in a competitive real estate property might be reflected by currently low
environment might for instance be significantly higher than the risk lower, when compared to returns (low rates of return)
from retail mortgages in a city that forms the economic centre of a the risk assumed in the for this property (when
country. disposal value assumption 22. compared to its long-term
Normalised market average profitability) and
conditions, and therefore a elevated price volatility,
normalised risk profile of a which would accordingly be
valued asset, might be reflected in the discount rate
derived from the long-term calculation.
average risk profile of
respective asset (i.e. Disposal values are also
considering periods of assumed to generally reflect
elevated risks and for prices investors would be
example increased price willing to pay at the disposal
volatility related to the date. Therefore, the
valued asset, and periods of considerations of potential
lower risks and for example investors, for instance
subdued volatility). regarding the future risk-
return-expectations might
accordingly be reflected. The
uncertainty surrounding such
expectations, including the
potential purchaser(s)
strength in the purchase or

22
On assuming the normalisation of market conditions if the hold value is applied, see Article 11(4) of the Regulation on valuation before resolution.

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HANDBOOK ON VALUATION FOR PURPOSES OF RESOLUTION

the depth/liquidity of the

market at which an asset is
assumed to be sold, might
accordingly be reflected in
discount rates, which might
reduce current valuations.

Also the “strength” of the

potential/assumed
purchaser(s) in the
acquisition process of an
assets/group of assets/an
institution / etc. might be
considered, for instance if
the potential / assumed
purchaser(s) is / are in a
strong position in the
negotiation to request price
reductions.

Also the homogeneity and

transparency of the portfolio
might affect the risk profile
considerations.

Financing costs Financing costs might depend, for instance, on the question on who The institution’s refinancing If for instance another
is the assumed ‘owner’ of the valued asset in future. When the position after bail-in would institution is assumed to
potential buyer is subject to the State aid framework, the valuation be applicable, which may become the owner of an

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HANDBOOK ON VALUATION FOR PURPOSES OF RESOLUTION

should ensure not to assume financing costs lower than market also depend on many issues asset or portfolio (e.g.
level, which would provide a more favourable treatment because related for instance to assumed sale of business),
of the State connection or support. possible restructuring of an this institution’s financing
existing portfolio of senior costs might be considered.
loans, of which some may be Although very challenging
converted into equity, and owing to the uncertainty
similar cases. regarding the potential
acquirer during the valuation
exercise, the latter might be
reflected through the
consideration of the
financing costs of one
particular institution that is
assumed to “most probably”
purchase the portfolio, or the
average financing costs of a
group of institutions that
might bid for the portfolio.

Market Market conditions as appropriate to the asset being measured: this If the hold assumption Where the transfer of a non-
conditions might include macroeconomic conditions or consideration of the persists, i.e. no disposal of performing exposure, e.g. a
marketability of an asset. the valued asset is assumed, CRE exposure, is assumed
consideration of the under any resolution tool,
In the event of an economic crisis, it might be difficult to dispose of marketability of respective respective marketability
financial instruments, even those for which under common asset might be irrelevant should be considered. The
economic conditions a liquid market exists. It might be even more given that the hold value may potential impact on the
challenging for, for example, non-performing loans of non- discount rate depends on for
performing commercial real estate (CRE) assets, as the instance the size of the

43
HANDBOOK ON VALUATION FOR PURPOSES OF RESOLUTION

marketability of such assets might be extremely low. This might for anticipate normalisation of market, its liquidity, as well
instance be considered through a marketability discount (i.e. the market conditions. as the current level of
reducing the value of the portfolio). potential distress and similar
considerations.

Disposal If a fast disposal of certain assets is assumed, the discount rate Similar to the above: if the If for instance the resolution
strategy might be short-term oriented and might even assume a discount for hold assumption persists, i.e. scheme envisages a sale of a
an accelerated sale. no disposal of the valued non-performing CRE
asset is assumed, exposure is to be
If a specific (group of) potential recipient(s) is targeted for the
disposal, discount rates should adequately reflect the consideration of the immediately implemented,
considerations on which such (a) recipient(s) would base its/their marketability of respective which might imply
purchase price. asset might be not relevant potentially distressed
given that the “holder” of the circumstances, such ‘disposal
asset may anticipate pressure’ (accelerated sale)
normalisation of the market should be considered and
conditions. would be likely to have a
significant impact on the
discount rate (depending
also on the size of the
market, its liquidity, the
current level of potential
distress and similar factors;
see Article 12(5) of the
Regulation on valuation
before resolution regarding
for example the discount in

44
HANDBOOK ON VALUATION FOR PURPOSES OF RESOLUTION

the event of an accelerated

sale.

Entity’s post- This aspect includes consideration of for example the funding The institution’s financial The entity’s post-resolution
resolution composition of the entity. This might for instance include the position after bail-in should financial position might for
financial assumption that an asset shall be held on the institution’s balance be considered. instance be reflected
position sheet, in which case the institution’s financial position (e.g. through the average
including implied rating) after resolution might be considered when financing costs of a group of
deriving the discount rate. institutions that might for
example be considered as
potential bidders for a
portfolio in the case of a sale
of business.

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HANDBOOK ON VALUATION FOR PURPOSES OF RESOLUTION

Textbox — Loan valuation: two potential cash flow-based approaches

Cash flow-based loan valuations might be performed in many different ways, two of which would
include (i) top-down approach: by applying broader portfolio level assumptions, and/or (ii) bottom-
up approach: analysing individual positions, depending on the specific situation, availability of
information and required timelines (Figure 4). A valuer might work on bottom-up and top-down
approaches in parallel: they are rather not a substitute for each other but might for instance
complement each other. This would be the case when for instance a quick top-down valuation
exercise might in a first step give some broad value range but also shows key drivers/sensitivities.
In a second step, when for instance more time for the valuation exercise is available, the bottom-
up approach might be applied to derive a narrower and more reliable value range.

Figure 4. Simplified description of Bottom Up and Top Down approaches

Net Recovery (Bottom Up) Approach Yield (Top Down) Approach

Step 1: Step 1:
Cash flows derived from data provided in Cash flows derived from data provided
Generate contractual data tapes (unadjusted) Generate contractual in data tape (unadjusted)
cash flows cash flows

Step 2: Specific assumptions for prepayments, Step 2: Discount rates built-up to reflect
Generate expected default rates, loss given default, time to differences in maturity, credit-rating,
Discount contractual
cash flows recovery servicing costs and market dynamics
cash flows

Step 3:
Discount rate determined at a portfolio Step 3:
Discount expected Reflecting variations in discount rate
level based on weighted cost of capital
cash flows Sensitivity analysis build-up assumptions

Step 4: Reflecting variations in assumptions for

prepayments, default rates, loss given
Sensitivity analysis default, etc

The loan and borrower risk characteristics are reflected in The loan and borrower risk characteristics are reflected in
the expected cash flows the applied yields

(i) The Top Down approach may help to get a quick preliminary view and may also help to
understand the key value drivers as well as support with a validation of a bottom up approach based
valuation. However, using this top-down approach, the range of the valuations could be broad,
potentially even too broad for valuation in resolution purposes. Still, the top-down approach might
be used in conjunction with the bottom-up approach in considering the overall valuation ranges. It
can be divided into three steps: generation of contractual cash flows, discount contractual cash
flows and sensitivity analysis.

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HANDBOOK ON VALUATION FOR PURPOSES OF RESOLUTION

Figure 5. Simplified description of Top Down discount rate consideration23

(ii) The bottom-up valuation can help provide a much narrower and more reliable range. If possible,
both approaches might be used together to get the most reliable valuation analysis. However, if it
is not possible to perform a bottom-up analysis for the entire portfolio owing to lack of time (or
other constraints), then the valuer might aim to perform either the bottom-up analysis at cohort
level or at least perform detailed analysis/valuation for a sample of the portfolio to assess key
drivers and validate key assumptions.

Figure 6. Sample Bottom-Up cash flow adjustments

Firstly, the model calculates the baseline unadjusted cash flows assuming all payments are made as per contractual terms.
This baseline cashflow is then adjusted for a series of typical risks inherent in a loan portfolio.

Initial cashflow calculation steps

Repayment type, interest & Projected cashflow before

Opening exposure
maturity adjustments

Cashflow adjustments and discounting

Cashflow pre- Pre-payment Default Loss given default Time to recovery Adjusted NPV of Adjusted
adjustments adjustment adjustment cash flow Cash Flow
(undiscounted)
STEP 1 STEP 2 STEP 3

23
Portfolio servicing/recovery costs could potentially be included in the discount rate estimations.

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HANDBOOK ON VALUATION FOR PURPOSES OF RESOLUTION

Again, servicing/recovery costs could be either considered in the adjusted cash flow or factored in
to the discount rate.

Size (both in volume and value), granularity and availability of comparables/benchmarks also play
an important role in selecting the right approach; for example, a homogeneous mortgage portfolio
may need only a cohort-level bottom-up analysis whereas a diverse and chunky corporate book
might need individual assessment of a bigger portion of the portfolio. The latter could be resource
intensive and put even higher pressure on timelines. Cohorts could be created by any combination
of portfolio characteristics such as product (e.g. mortgage, personal loan), sub-product (e.g.
primary home, BTL), vintage (e.g. originated in 2008 or earlier, originated after 2008), industry,
location of borrower or collateral. Ultimately, the determination of the approach(es) will be
determined by the valuer’s independent and expert judgement based on the resolution case
specifics.

5.4 Market value methodology

In the context of valuation 2, market values may be used to value for instance debt or equity
securities that are traded on liquid markets (trading multiples). Where quoted prices of the same
asset are available (for instance for debt security with the same International Securities
Identification Number (‘ISIN’)), the assumed multiple would be 1 24. However, the valuer might still
consider, for instance, whether to apply an adjustment for the size of the investment held by the
institution (including effects from for example large-scale ‘dumping’ of assets on the market) or a
discount for an accelerated sale 25.

Market value methodologies might also be considered for the valuation of an institution’s equity
investments or business lines. In such cases, trading and transaction multiples might be applied 26.
This approach might require the identification of a peer group for the valued entity to identify
applicable multiples (e.g. comparable entities whose shares are quoted on a liquid market). When
applying trading or transactions multiples, adjustments might for instance also be made for
differences in the financial position of the valued equity investment or business line, compared to
the market average (e.g. the applied peer group). Furthermore, the market value methodology
might form the basis for the cash flow calculation from the sale of for example a real estate asset
(e.g. a CRE asset) or non-performing loan portfolios, based on comparable transactions.

The application of the market value methodology might be focused on — but would not necessarily
be restricted to — cases in which assets or groups of assets or the entity are assumed to be sold.
The application of this methodology should be consistent with the Regulation on valuation before

24
This might be comparable to a so-called level 1 input as described in IFRS 13.
25
This might be comparable to a so-called level 1 input as described in IFRS 13.
26
Equity value is applied in this document in the meaning of Article 1 of the Regulation on valuation before
resolution.

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HANDBOOK ON VALUATION FOR PURPOSES OF RESOLUTION

resolution, which requires the valuation to deliver an economic value and confers prevalence to
the DCF methodology. Furthermore, the determination of the economic value in accordance with
the Regulation should reflect the choice of the resolution tool to be used and rely on the application
of hold and disposal value considerations, e.g. when considering the level of distress in a particular
market. The latter might for instance include the marketability of a valued asset or an assumed
accelerated sale of an asset (see Sections 5.2 and 5.3).

Apart from being used in a stand-alone manner, market value methodologies might be applied for
the estimation of cash flows to be used in DCF models, in particular given a disposal strategy.

5.5 Adjusted book value based methodology

5.5.1 (Amortised) cost as basis for the book value

The application of this approach to Valuation 2 may be suitable for certain assets only. By way of
example, it could be applied for the valuation of a unique machine that is not income generating,
which had been provided as collateral and/or was foreclosed by an institution. Potential
adjustments to the book value should be considered, for instance in the form of discounts. In the
example of the very unique, non-income-generating, machine, the haircut might even amount to
100 %, where the machine cannot be used by the institution and there is no potential buyer
interested in such a machine. The haircut might also take into account differences in economic vs.
accounting depreciation.

Textbox — Lifetime expected losses

Depending on the applied accounting standards, lifetime expected losses can form the basis for
the impairment measurement of assets measured at (amortised) cost. For IFRS appliers, this is the
case for so-called stage 2 and stage 3 assets (i.e. those that have an increased credit risk and/or are
considered credit impaired) 27. Depending on the applied valuation approach and model, a valuer
might consider the information applied for the calculation of the lifetime expected loss as an input
parameter to their valuation.

In this case, the idea would be that the basis for the estimation of a loan’s lifetime expected loss is
similar to the approach of calculating economic values, as in both cases cash flow estimates are
required. This might mean that, if an institution has developed capabilities to estimate reliably
lifetime expected losses, these capabilities might be used as input to the calculation of economic
values. This might include, for instance, one or several parameters that form part of the cash flow
estimation or certain models applied. One such parameter might for instance be the probability of
default (PD).

When considering the PD in the calculation of economic values, it is important that several concepts
for its derivation exist. These concepts include conditional PD (annual probability of default),

27
For financial assets measured for accounting purposes at fair value, the expected loss is only one
component in the valuation. National generally accepted accounting principles (GAAPs) might have similar
requirements.

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HANDBOOK ON VALUATION FOR PURPOSES OF RESOLUTION

unconditional PD (the probability of a future default from today’s perspective, which can most
easily be derived indirectly from the accumulated PD) and the accumulated PD (the probability of
default from today until a certain future time, which can be calculated with so-called migration
matrices).

5.5.2 Fair value as basis for the book value

In the case of assets and equity values recognised at fair value (here, fair value according to the
applicable accounting standard), the remarks on the market- and DCF value-based methods apply
accordingly (see Sections 5.2, 5.3 and 5.4). If the book value is derived using such methods,
consideration might be given to its use in Valuation 2, if this is consistent with the economic value
and strategy for that asset. However, careful consideration needs to be given to the valuation
assumptions applied for deriving the book value (e.g. applied for cash flow forecasts and discount
rate calculations).

The question would be whether these values can be used as such under Valuation 2 or need
amendments. Similarly, the applied valuation model needs to be carefully examined too. One way
to accommodate the need for adjustments of book values for their use under Valuation 2 might be
the application of haircuts. However, deriving such haircuts might be as challenging as performing
a separate valuation. A valuer might also consider potential links to the prudent valuation, for
instance additional value adjustments (AVAs) or parameters applied in the calculation of such AVAs
(see Commission Delegated Regulation 2016/101 on prudent valuation under Article 105(14) of
Regulation (EU) No 575/2013).

Textbox — Valuation hierarchies applied for accounting purposes 28

Accounting standards might refer to so-called valuation hierarchies, applicable for deriving fair
values of assets and/or liabilities. As an example, the IFRS apply such a valuation hierarchy.
According to IFRS 13.76, level 1 inputs are “quoted prices (unadjusted) in active markets 29 for
identical assets or liabilities that the entity can access at the measurement date”. Level 2 inputs are
“inputs other than quoted prices included within level 1 that are observable for the asset or liability,
either directly or indirectly” and level 3 inputs are described as “unobservable inputs”.

Similarly to the DCF and market value methodology, also when the adjusted book value based
methodology is applied, the determination of an economic value (rather than accounting value)
has to be ensured, in accordance with the Regulation on valuation before resolution. Consistency
with that Regulation has also to be ensured regarding the prevalence conferred to the DCF
methodology. Along the same lines, hold and disposal value considerations apply accordingly, e.g.

28
The textbox covers respective requirements under IFRS. National GAAPs might be similar or comparable or
differ from these.
29
For the definition of “active markets” one might refer to IFRS 13, as endorsed by the EU, according to which
an active market is “a market in which transactions for the asset or liability take place with sufficient
frequency and volume to provide pricing information on an ongoing basis”.

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through the consideration of a discount in an assumed accelerated sale of the valued asset (see
Sections 5.2 and 5.3).

5.6 Further valuation methodologies

Besides the valuation methods described above, further valuation methodologies exist, for
instance the option price method. The application of such alternative valuation methods needs to
be considered carefully. They might for example be applicable when valuing — plain vanilla or
complex — derivatives or structured finance products (including synthetic securitisations and the
like) and complex loan structures (which might also involve structured products or derivative
components, in particular as part of valuation of the collateral) but also as part of the calculation
of the franchise value, for instance. Independent from the applied valuation methodology,
consistency with the economic value concept set out in the Regulation on valuation before
resolution and the prevalence conferred to the DCF methodology need to be ensured; hold and
disposal value considerations apply accordingly.

5.7 Valuation of derivatives

With regard to derivatives with negative value, if they have to be closed-out by the RA for purposes
of bail-in, the valuation of the related liabilities has to be conducted in accordance with the relevant
Regulation on the valuation of liabilities arising from derivatives, Commission Delegated Regulation
(EU) No 2016/1401. In case derivatives are not assumed to be closed-out, they continue. In such
cases they are valued at either hold value or disposal value, depending on the resolution tool
envisaged.

For the valuation of derivatives more generally, careful consideration needs to be given to whether
fair values, as calculated for instance for risk management or accounting purposes, might form the
basis for economic values. Depending on the kind of derivative, the applied valuation methodology,
valuation model, hold and disposal values under the resolution strategy for derivatives might not
differ significantly from their fair values. However, the differences might be more significant in
cases of more complex, illiquid derivatives. All such considerations need to be assessed by the
valuer during the course of the valuation, as well as the fact that derivatives might regularly form
part of a portfolio, together with other financial assets and liabilities. Further consideration on
valuation of derivatives will be contained in Chapter 10 on MIS.

5.8 Valuation of funding liabilities

The Regulation on valuation before resolution does not in general distinguish between
measurement bases for assets and liabilities. This implies that also for liabilities, including funding-
related liabilities (e.g. issued bonds, interbank financing, term deposits), an economic value would
need to be calculated. However, to avoid double counting or neglect of certain facts, the approach
taken to the valuation of liabilities might also need to reflect the way in which respective assets are
valued.

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A key consideration in the valuation of funding liabilities would be their costs, i.e. the pricing of the
existing funding instruments as described above (bonds, interbank financing, deposits, etc.) and
referred to in the following as ‘legacy’ funding costs. In carrying out Valuation 2, a valuer may
reasonably choose to account for the interest rates or coupon rates of the institution’s existing
liabilities where they are meaningfully different from the institution’s expected funding cost for
newly issued liabilities. This may result from changes in risk-free rates (in particular for instance in
the case of fixed-rate issuances, of less relevance in the case of variable interest rates) or the
institution’s individual credit spreads since the interest or coupon rate was set. Such ‘legacy’
funding costs would in such approach be reflected in the expected cash flows. Two potential
alternative approaches may be put forward. Should the valuer apply one of the following
approaches, they might need to consider carefully to what degree the valuation results will reflect
hold/disposal values on the level of single assets and/or liabilities or on the level of groups of assets
and/or liabilities. The two approaches can be applied independently of each other, i.e. a valuer
might apply one or the other. It might also be possible to apply both of them and compare the
outcome of their application against each other.

1. Legacy funding costs (i.e. funding costs according to the existing contractual conditions)
considered on the asset side of the balance sheet: in this case, the liabilities would be valued
at their outstanding amount. Assets would be valued using a discount rate that reflects the
institution’s (in the case of a hold value) or a hypothetical/potential acquirer’s forward-looking
funding cost (in the case of a disposal value) 30, incorporating the legacy funding costs (e.g. by
taking a weighted average across of interest/coupon rates of existing and new liabilities over
time) 31.

2. Legacy funding costs considered on the liability side of the balance sheet: in this case, the
economic value of liabilities would be assessed using the DCF methodology. Both assets and
liabilities would be valued using a discount rate that reflects the institution’s (in the case of a
hold value) or a hypothetical/potential acquirer’s forward-looking funding cost (in the case of
a disposal value). In contrast to the first approach, legacy funding costs would not be considered
in any of the discount rates, i.e. in neither the asset side nor the liability side. For deriving the
forward-looking funding cost a valuer might for instance apply benchmarking data of
comparable institutions.

An alternative method would be to use the principle of substitution. This method would require a
market sounding among potential debt investors — other institutions, asset managers, insurance
companies, other private investors, etc. — to receive indications and offers for respective funding
costs. Such an exercise — i.e. contacting a broad investor base — might be extremely challenging
to perform, taking into account the strict confidentiality requirements and time constraints of
valuation for purposes of resolution.

30
When evaluating hold value, this would reflect the institution’s funding cost after bail-in execution. When
evaluating disposal value, this would reflect the funding cost that a hypothetical/potential acquirer would be
assumed to apply.
31
Where this approach is applied, the valuer might add comparability by disclosing in the valuation report
the relevant asset values both pre and post adjustment for the legacy funding costs.

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To avoid double counting, legacy funding costs would only be incorporated on one side of the
balance sheet when one of the above approaches is applied (i.e. using one, but not both of the
options above).

As the impact of legacy funding costs would also be valued based on a fair, prudent and realistic
basis, particular caution might be exercised about incorporating any benefits arising from legacy
funding costs (i.e. where these are lower than the expected funding cost for new funding). This
might be particularly relevant when evaluating hold value, where it may be less clear that this
benefit could be realised. The approach taken to the valuation of liabilities would not impact the
assessment of liability value for determining any write-down or conversion.

Example — Comparison of the two approaches for the valuation of funding liabilities

The following example provides an illustration of how the two approaches described above for
consideration of legacy funding costs might apply in practice. The example is based around the
estimation of hold value to inform the extent of a potential bail-in.

In this example, the institution being considered has a number of debt instruments outstanding
with high coupon rates relative to the cost of recent issuances by similar institutions. This may be,
for instance, because market rates have decreased since the instruments were issued, or because
the institution issued the instruments during a period of stress, reflecting a higher risk premium
attached to the institution.

The institution is expected to be able to refinance this high-coupon funding more cheaply once
recapitalised following the bail-in. The difference between the institution’s funding costs on existing
liabilities and its expected funding costs following bail-in is assumed to be large enough that it could
materially impact the amount of bail-in required.

Approach 1: legacy funding costs considered on the asset side of the balance sheet

Under this approach, the discount rate applied to the institution’s assets would reflect its weighted
average funding cost, incorporating the funding cost of the institution’s outstanding instruments
for the remainder of their maturity (or until they are expected to be called, if possible) (‘legacy
funding costs’) as well as the prospective cheaper funding cost after resolution. This would result
in a higher discount rate than if legacy funding costs had not been considered. In turn, this would
lead to a lower valuation of the institution’s assets on a DCF basis.

The institution’s liabilities would be valued at their outstanding amount. As such their valuation
would not be impacted by the institution’s legacy funding costs.

Overall, the consideration of legacy funding cost would have a negative impact on estimated net
asset value.

Approach 2: legacy funding costs considered on the liability side of the balance sheet

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Under this approach, the discount rate applied in the valuation would reflect the expected funding
costs of the institution on a forward-looking basis. The funding costs on existing high-coupon
instruments would not be incorporated into the discount rate. In this example, the discount rate
would therefore be lower than under Approach 1, resulting in a higher valuation of the institution’s
assets on a DCF basis.

To account for legacy funding costs, the institution’s liabilities would also be valued on a DCF basis.
In this example, the existing debt instruments would have a coupon rate higher than the discount
rate applied, meaning that their valuation would be higher than their outstanding amount.

Again, considering legacy funding costs would therefore have a negative impact on estimated net
asset value, as was the case under Approach 1. However, it is important to note that the total
amount of a liability available to bail-in, and the rate at which a bailed-in liability would be
converted into equity, would presumably be based on the outstanding amount of that liability.

In theory, the institution’s net asset value under each approach should be the same. However, in
practice, the two outcomes could differ. The valuer may wish to compare outcomes under both
approaches. For instance, Approach 2 could be used to assess how the valuation of assets may
change if high-coupon instruments were bailed-in as part of the resolution. In any case, it would be
important to ensure that the impact of legacy funding costs is not double counted.

While this example focuses on the application of hold value, similar considerations might apply to
disposal value. For instance, if the resolution authority is considering a sale of business, the valuer
might want to account for the legacy funding costs of the institution being valued, which may be
materially different to the expected funding cost of a potential acquirer.

5.9 Contingent assets and liabilities

5.9.1 Contingent assets

The valuation of contingent assets or contingent liabilities needs to be carefully examined.

Potentially relevant contingent assets include financial guarantees received. In case such financial
guarantees received are not yet considered for instance as part of the valuation of the loans to
which they are linked to (e.g. a guarantee for a certain exposure), a separate valuation might be
considered appropriate. Also, for such financial guarantees received and not already considered as
part of the asset valuation, a cash flow-based approach might be considered appropriate (on asset
valuation see, for example, Section 5.2, which also covers the consideration of different
measurement bases). The consideration of financial guarantees received in the valuation might for
instance require expert judgement and careful examination if the received financial guarantee is
for instance, realistically recoverable.

5.9.2 Contingent liabilities

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Contingent liabilities in the meaning of this Handbook might include those that are recognised in
the institution’s financial statement (e.g. provisions) and those that are not recognised and
therefore off balance sheet. The former include for instance pension-related provisions or
restructuring-related provisions already recognised by the institution at an earlier point in time.
The latter include contingent liabilities, i.e. liabilities whose occurrence is possible but less
probable 32.

As a first step for their valuation, all potentially relevant contingent liabilities have to be identified.
Accounting-related information might form the basis for this mapping process, but further analysis
might be needed to ensure completeness. Contingent liabilities might for instance include pension-
related provisions, litigation- or tax-related contingent liabilities as well as loan commitments and
financial guarantees provided. Also, restructuring-related liabilities that are a result of the
resolution actions would need to be considered.

Following their identification, the valuation of contingent liabilities depends on their purpose, as
for instance different kinds of information and expert knowledge are needed for the valuation of
pension-, restructuring- or litigation-related provisions. The valuation of contingent liabilities might
for instance build up on probability-weighted cash flows, i.e. consider different scenarios for
assumed cash outflows, weighted with their probability.

Certain contingent liabilities, for instance financial guarantees or loan commitments, might also
result in a positive value if the client is performing and paying a fee for respective instruments. Here
also there is a need to consider reducing that positive value to reflect the reward a potential
acquirer would demand for assuming the risk.

The estimation of the cash flows as well as their probability might for instance need input from
various experts (expert judgement), including for instance input from actuaries as well as
knowledge of the national legislative framework. Also, historical information might form the basis
for respective valuations, for instance in cases of litigation-related provisions (using for example
best practice/experience from similar court cases or similar). Where for instance loan commitments
or financial guarantees provided are assumed to be cancelled by the institution, for example in case
a loan commitment includes a break-up clause and the client’s credit quality has decreased, their
assumed value might be considered zero (i.e. the loan commitment is assumed to be cancelled, and
cash inflow or outflow is no longer assumed).

32
See footnote 16 on the RA’s ancillary power to cancel or amend the terms of a contract to which the
institution is a party or to substitute a recipient as a party in resolution (Article 64(1)(f) of the BRRD). In the
valuation of respective liabilities, the restructured terms might need to be considered as potentially
converting a contingent liability into an actual, i.e. current, liability. Also, in case future payments from such
liabilities are included within the operational costs, these should not be considered contingent liabilities, i.e.
any potential double counting of such future liabilities would need to be avoided.

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6. Valuation 2: equity valuation of the

institution

6.1 Overview and valuation process

According to the Regulation on valuation before resolution, an institution’s equity value is “the
estimated market price, for transferred or issued shares, that results from the application of
generally accepted valuation methodologies” That Regulation also clarifies that, “depending on
the nature of the assets or business, the equity value may comprise franchise value” (Article 1(h)) 33.

For the purposes of resolution valuations, equity valuations may be performed in two cases: first,
for the calculation of the post-conversion equity value (PCEV), which forms the basis for the
conversion amount when the WDCCI power or the bail-in tool are used; second, for determining
the disposal value of the equity in the event of a share deal, where the whole equity of the
institution is transferred by application of the sale of business tool or of the bridge institution.
The valuation of the institution as a whole can be conducted using a variety of valuation
methodologies, each of which is based on the cash generative capability of the entire entity, seeking
to incorporate all assets and liabilities collectively within a single valuation. Contingent assets and
liabilities and other non-balance-sheet assets (such as not recognised intangible assets) should be
implicitly captured within such valuation. In the light of this, DCF and market methodologies
(Brunner, 2009, p. 475) may be applicable: DCF, for instance, in the form of a dividend discount or
free cash flow to equity model; market methodology in the form of trading or transactions
multiples.
In terms of the process, the equity valuation may be schematically summarised in the following five
Steps, which are represented in Figure 7. These Steps refer to the valuation of one “entity”, which
might for instance be the institution on a consolidated basis. Alternatively, one might also split the
institution into different parts for valuation purposes. In such case, the institution might for
instance be split into its head office — operating in its home market — and its different subsidiaries,
which might reflect the business in different countries. If the institution is split into parts for
valuation purposes, these parts would in the end, after having performed the valuations of these
parts, again be combined (sum of the parts (SOTP)).
Step 1 is an information-gathering phase, involving provision of information through the MIS. The
RA would provided the valuer with the resolution scenario(s), which presumably drives certain
methodologies or assumptions for the valuation. In addition, to the extent possible the valuer will
seek information to support the valuation from the relevant institution. This might include for
example the institution’s financial forecasts for the business or aspects of the business, portfolio
values for investments, run-off profiles for loan portfolios, dividend or free cash flow projections
and restructuring plan(s) if available etc. Typically, if the equity valuation method is selected, the

33
See Chapter 7.3.2 for further explanations related to the franchise value.

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financial information will be ‘consolidated’ on the level of the entity subject to valuation. In
addition, the valuer may use external information to support the valuation, including
macroeconomic information/forecasts or market-based data sources from reliable and
independent providers. These may be used directly in the valuation or to support assumptions
contained within the bank’s financial models and information. Whereas the former applies
primarily where the income approach is applied, the market approach might also be considered. In
such cases, information relevant to this approach would also need to be gathered, which includes
for instance comparable company multiples (trading and/or transaction multiples).
Step 2 relates to the information collected in Step 1, validates and assesses the reasonableness of
the data, and ensures its completeness and the appropriateness for the valuation that may be
undertaken. Sources for the data should be checked and assumptions challenged where reasonable
and possible. Alternative information sources or assumptions can be considered if appropriate.
Step 3 involves the selection of valuation approach, which would presumably be either the income
or market approach. It might also be considered sensible to use different approaches where
feasible to corroborate (or otherwise) the selected approaches. Sensitivities or scenarios might
additionally be selected “within” the different approaches to highlight the volatility of the valuation
to changes in certain parameters.
The resulting outputs from the application of the methodologies in Step 3 are then considered in
Step 4 to assess the best point estimate and, where appropriate, also value ranges. Consideration
can be given at this stage to the overall process and resolution strategy to ensure consistency
between valuation method and overall proposed outcome. This step also includes the comparison
of the results from different methodologies/approaches and potential sensitivity and scenario
analyses, including the explanation of any differences between these.
Step 5 compares the economic value of the equity with the liabilities. In an SOTP valuation, the
valuer would need to determine the outcome of the sum of the parts. Particular care would need
to be given to intragroup exposures and liabilities if the SOTP approach were applied.

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Figure 7. Simplified illustration of the equity valuation process and its interaction with the application of resolution tools

Simplified illustration of the equity valuation process and its interaction with the application of resolution tools
Example

1A) Input from Resolution Authority

- resolution strategy/strategies
- valuation scenarios
- envisaged restructuring/business reorg.

2) Consider the information 3) Selection and application of approaches 4) Concluding on Value

1B) Input from bank (MIS) Develop understanding of bank's suite of financial
projections and models as well as e.g. historical Income Approach
performance; validate and analyse the provided - Dividend Disocunt Methodology (DDM)
Internal Financial Model
information - Free Cash Flow to Equity (FCFE) methodology

a pproach
Stress-test models and determine whether they can - Other methodologies if appropriate
(Detailed income, FY19 FY20 FY21 etc be used reliably for free cash flow to equity
expense, cash-flow, forecasts (e.g. also identify if the provided forecasts - Determination of cost of equity
capital, profit etc.) are rather conservative or aggressive) - Long-term / terminal year assumptions
- Determination of sensitivity drivers / boudaries
Determine need for independently developed 5) Compare estimated equity value to equity
Free Cash Flow to Equity - Definition of scenarios
projections / shadow model and other liabilities
Dividends
equity va lue

50 Economic equity value BV of Equity 100

Updated accounting Market Value Metodology Compare and and contrast results from
If independent financial model required, determine
balance sheet - Price to book value / net assets basis different methodologies and scenarios, Economic loss -50
scope, input requirements and appropriate source
20 Cash Deposits 150 - Price / earnings multiples basis validate and explain the differences
200 Loans Fin. liab's at FV 100 - Other methodologies if appropriate
200 Fin. assets at FV Other liab's 30
Determine appropriate degree of granularity for Rationalise differences and revisit
50 Other Fin. assets Long-term debt 100 - Selection of comparable companies / transactions
forecasting process. assumptions if deemed necesarry
10 Participations - Calculation of pricing multiples and adjustments
5 Goodwill/Intagibles - Selection of earnings and net assets measure
10 Properties etc. Provisions 10 - Calculation of values, consideration of adjustments
Develop forecasts on a bottom-up basis from Conclude on range (or point-estimate) of
5 DTAs Equity 100
assets, liabilities, inputs and assumptions equity value

10 Off BS assets Contingent liab's 20 Other Approaches

Total assets: 500 Total Liabs: 490

1C) Additional inputs

- Marco-economic inputs MIS
- Scenario parameters
- Market data (e.g. comparable company multiples,
broker notes, cost of capital studies etc.)

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6.2 DCF methodology

In case of a valuation applying the dividend discount model, an institution is valued by discounting
the institution’s expected dividends. These dividends (i.e. cash flows) are assumed to be derived
on the basis of detailed forecasts of the institution’s expected profits and losses (P&Ls), which can
for instance be based on an institution’s value driver analysis. Besides respective forecasted P&L
positions, further PFI might be considered as value drivers in a dividend discount model:

• Forecasted volumes (loans, bond books, deposits, etc.);

• the treasury function, for instance reflected in a fund transfer pricing (FTP) model, which might
accordingly reflect the assumed funding conditions (for instance in a model in which interest
income is decomposed into the client margin, income from term transformation/ from maturity
mismatches and income from capital benefit);

• forecasted risk-weighted assets (RWA), not least depending on the forecasted asset
composition;

• capital plans, etc. (see for example Damodaran, 2009, p. 5; Brunner, 2009, p. 472).

Given the effects of the envisaged resolution measure, an institution’s former going-concern
forecasts and business plans might no longer be valid and might need to be amended to reflect the
applied resolution measures.

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Figure 8. Possible input parameters for a P&L-focused value driver analysis of institutions (source:
Adamus/Koch, 2007, translated)

During the valuation, particular consideration might for instance be given to litigation and conduct
risks (e.g. ongoing or potentially upcoming lawsuits), the institution’s non-performing exposures as
well as its derivative book (e.g. reflecting assumed close-outs). Similar to the valuation of assets
(see detailed descriptions in Section 5.2), in case of valuation of the institution as a whole, careful
consideration might for instance also be given to the terminal/residual value, which might
constitute the major part of the institution’s value. The assumed growth rate in the terminal value
— which can be positive, zero or negative — is potentially another value driver.

In an ordinary going concern situation, assumed cash flows might be forecasted for a period of for
example three to five years, followed by a terminal value (forecasted period/detailed planning
period; see Section 5.2 and Brunner, 2009, p. 474). However, considering the requirements of the
BRRD, the presumably assumed planning years related to a bridge institution are two years,
including a positive terminal value. In the case of an open bank bail-in, Article 52 of the BRRD
requires the business reorganisation plan to set out measures to restore long term viability in a
reasonable timescale.

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Finally, the discount rate might be derived applying the CAPM or alternative approaches.
Section 5.3 provides examples of parameters that might be considered for deriving the discount
rate.

It should be noted that in some cases an SOTP might be appropriate or needed, as described above
in the valuation process chart (Section 6.1), i.e. an individual valuation of subsidiaries. The reason
might for instance be that some subsidiaries are located in different geographies and/or have
specificities (e.g. risk structure or business model), which requires an individual analysis and
valuation. This might imply the application of different methodologies and/or assumptions, such as
discount rates exchange rates etc.

As an alternative to the dividend discount model, the free cash flow to equity (FCFE) model might
for instance be applied. In general, the free cash flow to equity model commonly builds up on the
net income, minus the difference of capital expenditures and depreciation and minus the change
in non-cash working capital, plus the difference of new debt issued and debt repayments (see
Damodaran, 2002, p. 352). Given that such calculation might not be considered practical and/or
adequate in case of valuation of institutions, one might derive the free cash flow to equity as net
income minus reinvestment in capital, i.e. what part of net income is assumed to be retained in
capital (see Damodaran, 2009, p. 22). In that case, however, the FCFE model becomes comparable
to the dividend discount model (‘DDM’).

6.3 Market value methodology

Market value methodologies might also be applied derive an institution’s value. This methodology
includes trading- and transaction based multiples methods. Where the whole institution is valued,
commonly applied multiples are for instance price to earnings and price to book (see Damodaran,
2009, p. 27; see Annex on the market value based method more generally).

Market value methodologies might need careful consideration with regard to the extent of their
applicability to institutions in resolution. In case of valuation of an institution in distress —
including an institution in resolution — the market value methodology might not be appropriate,
as trading or transaction multiples might rather stem from the valuation of fully performing
institutions, and adjustments to these multiples might be extremely difficult to determine.
However, in specific — and probably rather rare — circumstances, transaction multiples might for
instance be available from a similar and comparable institution that had been in distress and sold
to or merged with e.g. a competitor. The availability of comparable transactions also depends on
the kind of institution (e.g. broad universal bank vs. specialised lender) as well as the jurisdiction
(in some jurisdictions transactions might be less frequent or not common, whereas in others they
might be more common).

When applying the trading or transactions multiples methods, adjustments might for instance be
made for differences in the institution’s financial position from the market average. For instance,
the funding costs of the institution after bail-in or of a bridge institution might differ significantly
from the market average. In the DCF methodology, this would be reflected in the discount rate (see

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Section 5.3). As this option does not exist for pure market value methodologies, such considerations
might be reflected through adjustments to multiples.

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7. Valuation 2: tool specific

considerations

7.1 Write Down and Conversion of Capital Instruments (‘WDCCI’)

In addition to the resolution tools, the RA is entrusted by the BRRD with the WDCCI power. This
power is set out in Article 59 of the BRRD, providing that it can be exercised either “independently
of a resolution action”, or “in combination with a resolution action, where the conditions for
resolution specified in Article 32 and 33 are met”. Broadly speaking, the purpose of the WDCCI is
to absorb losses and/or recapitalise the institution.

Article 59(3) of the BRRD spells out the conditions under which the WDCCI power has to be used,
namely when:

(i) the conditions for resolution have been met (letter (a) of Article 59(3) of the BRRD);

(ii) the institution or group would no longer be viable without the application of WDCCI
(letters (b) to (d) of Article 59(3) of the BRRD); or

(iii) extraordinary public financial support is required, except for the cases falling under
Article 32(4) point (d)(iii) of the BRRD (letter (e) of Article 59(3) BRRD).

In accordance with Article 36(4)(c), the exercise of the WDCCI has to be informed by a valuation
aimed at determining the “extent of the cancellation or dilution of shares or other instrument of
ownership, and the extent of the write down or conversion of relevant capital instruments”. The
sequence and the modalities of the WDCCI are governed by Article 60 of the BRRD.

The aggregate amount of the WDCCI should be determined in accordance with the applicable
measurement basis, i.e. the hold value or the disposal value depending on the resolution scenario
and the destination of each specific asset.

7.2 Bail-in tool

7.2.1 Execution of the bail-in tool: steps related to the valuation

Bail-in is one of the resolution tools provided for by Articles 43 and 44 of the BRRD to achieve the
resolution objectives consistently with the resolution principles. It may be used either to absorb
losses or to recapitalise the institution under resolution ”to the extent sufficient to restore its ability
to comply with the conditions for authorisation […] and to carry out the activities for which it is
authorised under Directive 2013/36/EU or Directive 2014/65/EU […] and to sustain sufficient
market confidence”.

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Broadly speaking, the implementation of the bail-in tool involves first the loss absorption and then
the recapitalisation of the institution under resolution.

The execution of bail-in requires the completion of several steps, some of which specifically relate
to the valuation. The list below enumerates in a non-exhaustive manner some of the steps
necessary for the implementation of the tool and does not purport to allocate
tasks/competences/responsibility to the valuer, the RA, the supervisor or other parties:

(i) economic valuation in accordance with the hold value as described below (see also
Chapter 5) for those assets that are going to be retained by the institution under
resolution. Assets that are being retained in order to be disposed, as indicated for
instance in business forecasts or plan or in the balance sheet, should be assessed under
the disposal value taking into account the expected disposal horizon (Article 11(5) and
(6) or Article 12(4) of the Regulation on valuation before resolution). To the extent that
the bail-in tool is applied in combination with other tools, the hold value or the disposal
value should be applied, having regard to the assumed strategy per each type of asset

(ii) determination of the institution’s net asset value (‘NAV’) on the basis of the economic
valuation;

(iii) determination of the aggregate amount of write down required to absorb losses and
restore NAV to zero (Article 46(1)(a) of the BRRD);

(iv) determination of the amount by which eligible liabilities must be converted into shares
or other types of capital instruments in order to restore the Common Equity Tier 1 (CET1)
capital ratio of the institution under resolution or of the bridge institution (Article 46(1)(b)
of the BRRD), taking into account any contribution of capital by the resolution financing
arrangement pursuant to point (d) of Article 101(1) of the BRRD;

(v) The amounts determined in accordance with Article 46(1)(a) and (b) shall enable to
sustain sufficient market confidence and enable the institution to continue to meet the
conditions for authorisation and to continue to carry out the activities for which it is
authorised under Directive 2013/36/EU (Capital Requirements Directive (CRD)) or
Directive 2014/65/EU (Markets in Financial Instruments Directive II (MiFID II)) (Articles 43
and 46 of the BRRD) (recapitalisation amount);

• for the purposes above, the institution’s risk weighted assets (‘RWA’) post-resolution
should be estimated;

(vi) where the resolution scheme envisages to use the asset separation tool, the bail-in
amount has to take into account the prudent estimate of the capital needs of that vehicle
(Article 46(2) of the BRRD);

(vii) where it is envisaged to access the resolution fund, the amount of the 8% of total
liabilities, including own funds, should be calculated (Article 44(5) of the BRRD);

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(viii) identification of eligible liabilities and their insolvency ranking, as well as statutory and
discretionary exclusions (Article 44(2) and (3) of the BRRD);

(ix) on the basis of the above identification, determination of the sequence of write down
and conversion (Article 48(1) of the BRRD) and allocation of losses in compliance with the
pari passu principle (Article 48(2) of the BRRD) 34;

(x) determination of treatment of shareholders and of holders of instruments of ownership

(Article 47 of the BRRD and EBA Guidelines on the treatment of shareholders in bail-in or
the write-down and conversion of capital instruments) 35;

(xi) determination of “an estimate of the post-conversion equity value of new shares
transferred or issued as consideration to holders of converted capital instruments or
other creditors” (for equity valuation see Chapter 5), in accordance with Article 10(5) of
the Regulation on valuation before resolution;

(xii) determination of the conversion rates of debt to equity (Article 50 of the BRRD and EBA
Guidelines on the rate of conversion of debt to equity in bail-in) 36 by application of the
equity value as defined in the Regulation on valuation before resolution.

7.2.2 Specific consideration during the valuation

When deriving hold values, expected cash flows should be the assumed payments that the owner
of respective asset recovers — “cash flows that the entity can reasonably expect under fair, prudent
and realistic assumptions” (Article 1(e) of the Regulation on valuation before resolution; see
Chapter 5). These expected cash flows should in general be derived having regard to the
circumstance that the asset can be held in order to recover its expected cash flows over its
(remaining) lifetime.

It may be the case that assets are being retained by the institution under resolution in order to
be disposed of, in accordance with, for instance, the balance sheet destination of specific assets or
with business plans and forecasts. It is understood that the valuation should accommodate such
strategies, given the forward-looking nature of bail-in and the continuation of the institution under
resolution as a going concern. The valuation of such assets that are ‘held to exit’ may therefore
have regard to their expected treatment following entry into resolution. This would entail the

34
EBA Guidelines on the interrelationship between the BRRD sequence of write-down and conversion and
CRR/CRD (EBA/GL/2017/02),
[Link]
+%28EBA-GL-2017-02%[Link].
35
EBA Guidelines on the treatment of shareholders in bail-in or the write-down and conversion of capital
instruments (EBA/GL/2017/04),
[Link]
n+bail-in+%28EBA-GL-2017-04%[Link].
36
EBA Guidelines on the rate of conversion of debt to equity in bail-in (EBA/GL/2017/03),
[Link]
+to+equity+in+bail-in+%28EBA-GL-2017-03%[Link].

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HANDBOOK ON VALUATION FOR PURPOSES OF RESOLUTION

application of the disposal value having regard to ‘the expected disposal horizon’ (Article 11(5) and
(6) or Article 12(4) of the Regulation on valuation before resolution).

Where the bail-in tool is applied in combination with other tools, in particular the asset separation
tool, the assets to be transferred should be valued in accordance with the disposal value as
specified in Sections 7.3 and 7.5).

Even though for both measurement bases (hold and disposal) the valuation is cash flow oriented
(see Sections 5.2 and 5.3 on the DCF based methodologies), they might imply the use of different
valuation methodologies, as well as the application of different parameters. For instance, the
expected cash flows and the applied discount rates might depend on the assumption as to whether
an asset is assumed to be disposed of or to be held to recover its expected cash flows.

7.2.3 Estimate PCEV

The execution of the bail-in tool also requires the performance of an equity valuation to determine
post-conversion equity value. This should be an estimate of the market price for those shares that
would result from generally accepted valuation methodologies, and should inform the
determination of the conversion rate or rates pursuant to Article 50 of the BRRD (see Article 10(5)
of the Regulation on valuation before resolution).

Once the equity value is determined, it has to be allocated to the new shareholders in accordance
with valuation criteria that respect the requirements set out in the BRRD, in the Regulation on
valuation before resolution, and in the EBA Guidelines on the rate of conversion of debt to equity
in bail-in.

From a valuation perspective, without purporting to allocate tasks/competences/responsibility to

the valuer, the RA, the supervisor or other parties, a simplified process could be articulated in the
following steps:

• Use economic values derived for the identification of the loss absorption amount as
input parameters to prepare an updated pro forma balance sheet (see Step 5 of the
process described in Figure 2).

• Determination of estimate RWA.

• Determination of capital requirements.

• Performance of equity valuation in accordance with the income approach (DDM, FCFE)
or the market approach (multiples, assuming the viability of the institution under
resolution):

o “equity value may comprise franchise value” (Article 1(h)) (see Section 7.3.2 on
the calculation of the franchise value);

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o factors potentially affecting the future cash flows may be taken into account in
the valuation, including “additional or alternative valuation bases or
methodologies that are considered appropriate by the valuer […], including in
the context of assessing the post-conversion equity value of shares”
(Article 12(2)(b)).

• Attention would be paid, for instance, where the DDM shows that during the planning
horizon further capital injections might be needed (“negative dividend”). In that case,
the calculation to derive the PCEV should be re-run to fully take into account such
additional capital need. Also, in case P/B multiples derived in the market approach are
below 1, the valuer might need to consider its appropriateness. This would be driven
by the idea/assumption that the bailed-in institution would for instance not bear any
“hidden losses”, which might be in contrast to its peers that were used for deriving the
market multiple.

• The expected result of the PCEV should be an estimate of the market price for those
shares that would result from generally accepted valuation methodologies, and the
estimate shall inform the determination of the conversion rate or rates.

7.3 Sale of business tool

7.3.1 Implementation of the sale of business tool: valuation considerations

The sale of business tool is the transfer to a third party purchaser of (i) shares or other instruments
of ownership issued by the institution under resolution (‘share deal’) or (ii) all or any assets, rights
or liabilities of an institution under resolution (‘asset deal’) (Article 38 of the BRRD). Consistent with
the resolution principles and relevant BRRD provisions, the implementation of the sale of business
tool has to be accompanied by measures ensuring that shareholders and creditors bear losses first
via burden-sharing, which can be direct — application of the WDCCI and bail-in power (if required)
— or indirect — achieved by leaving shareholders and creditors behind in the ailing institution (in
the case of a partial asset transfer). For that purpose, the amount of the write-down to absorb the
losses should be determined in accordance with the disposal value (for the bail-in process see
Section 7.2.1).
Under Article 36(4)(f) of the BRRD, the valuation relating to the sale of business tool aims to inform
(i) the decision on the assets, right, liabilities or shares or other ownership instruments to be
transferred and (ii) the RA’s understanding of what constitutes commercial terms for the purposes
of Article 38 of the BRRD, i.e. “having regard to the circumstances and in accordance with the State
aid framework” (emphasis added).
In accordance with Article 11(4) of the Regulation on valuation before resolution, the hold value
cannot be applied to assets, rights or liabilities subject to the sale of business tool. Along the same
lines, the application of the criterion set out in Article 12(8) is also prohibited. The applicable
measurement basis to the sale of business tool is therefore the disposal value.

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When the sale regards the transfer of businesses, i.e. not simply assets and liabilities, reasonable
expectations for franchise value may be taken into account in the valuation (Article 12(7) of the
Regulation on valuation before resolution).
The valuation of business, assets and liabilities left behind in the institution under resolution that
is not going to remain a going concern should be conducted in accordance with Article 12(9) of the
Regulation on valuation before resolution.

7.3.2 Specific considerations on the derivation of the franchise value

When the sale regards the transfer of businesses, i.e. not simply assets and liabilities, reasonable
expectations for franchise value may be taken into account in the valuation (Article 12(7) of the
Regulation on valuation before resolution). Furthermore, where the equity value is used, the
Regulation on valuation before resolution provides that, “depending on the nature of the assets or
business, equity value may comprise franchise value” 37.
The franchise value — as defined in Article 1(g) of the Regulation on valuation before resolution —
includes effects from the maintenance and renewal of assets and liabilities (including a refinancing
of an open portfolio) or from a continuation or resumption of business in the context of the
resolution actions. The impact of any business opportunities might be included in the franchise
value, too. Consideration might also be given to the fact that the institution or the business that is
transferred would likely be different in condition and scope. Furthermore, the consideration of
potential second-round effects (“boomerang effects”) from the resolution might be needed when
deriving franchise values. This idea is based on the principle that imposing losses on a large number
of creditors could compromise the institution’s originally positive franchise value with core clients
and may compromise its overall viability.
The franchise value should be derived applying for instance the DCF methodology, including cash
flows that can “reasonably be expected”. Also, option pricing methods might be considered when
deriving the franchise value, as well as other methodologies.

7.4 Bridge institution tool

The bridge institution tool entails the establishment of a temporary institution aimed at
maintaining access to critical functions. It may be implemented by transfer of (a) shares or other
instruments of ownership issued by one or more institutions under resolution or (b) all or any
assets, rights or liabilities of one or more institution under resolution.
In accordance with Article 36(4)(e) of the BRRD, the valuation has to inform the decision on (a) the
assets, rights, liabilities or shares or other instruments of ownership to be transferred, to make sure
that assets exceed liabilities, and (b) the “decision on the value of any consideration to be paid to
the institution under resolution or, as the case may be, to the owners of the shares or other
instruments of ownership”.

37
As illustrated in Chapter 6, the equity valuation is presumably suitable to the assessment of the value of
the whole institution in the case of a ‘share deal’, since it is commonly used for purposes of a transaction.

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To cater for the bridge institution’s solvency requirements, the RA has to make sure that “the total
value of liabilities transferred to the bridge institution does not exceed the total value of the rights
and assets transferred from the institution under resolution or provided by other sources”.
Under the Regulation on valuation before resolution, the hold value cannot be applied when the
bridge institution tool is applied (second sub-paragraph of Article 11(4)).
The disposal value, as defined in Article 12(5) of the Regulation on valuation before resolution,
should therefore apply (for disposal value, see Chapter 5). The criteria set out therein require the
disposal value to be determined having regard to actual market conditions. The provision envisages
that the disposal value is determined “on the basis of cash flows net of disposal costs and net of
the expected guarantees given, that the entity can reasonably expect in the currently prevailing
market conditions through an orderly sale or transfer of assets and liabilities” (emphasis added).
A discount for accelerated sale to the observable market price of that sale or transfer may be
applied “where appropriate”. Furthermore, the determination of the “disposal value of assets
which do not have a liquid market” has to reflect discounts for illiquidity as appropriate,
consistently with the requirements set out in that provision. When business is transferred,
reasonable expectations for franchise value (see later in this Section) may be taken into account for
purposes of the valuation.
As an alternative to the determination of the disposal value as illustrated above, the disposal value
could also be determined having regard to the criteria laid down in paragraph (5) in combination
with paragraph (4) of Article 12.
The latter provides that, “where an entity’s situation prevents it from holding an asset or continuing
a business or where the sale is otherwise considered necessary by the resolution authority to
achieve the resolution objectives, the expected cash flows shall be referenced to disposal values
expected within a disposal period’ (emphasis added)”. The disposal periods and the discount rates
would be linked to the expected time of the sale of the bridge institution and at any rate not exceed
two years, which is the default lifetime of the bridge institution. Along these lines, the disposal
value would result in the present value of the cash flows that are expected to be realised within (up
to) two years (including from the sale of the bridge institution), net of disposal costs and net of the
expected guarantees given. From this perspective, for the purposes of determining the disposal
value, reference should be made to the market conditions expected at the end of the disposal
period when the actual sale of the bridge institution or parts of it would take place (i.e. up to two
years) and to the present value of the expected sale at that point in time. Having regard to expected
future cash flows, discount rates reflecting risk premium should be applied. Discounts for illiquidity
would be applied, in accordance with Article 12(5) of the Regulation, to those illiquid assets
transferred to the bridge institution. With regard to the discount for accelerated sale envisaged by
Article 12(5), which is applicable “where appropriate”, the valuation might consider whether the
extended disposal period would make an accelerated sale unlikely 38.

38
From a State aid perspective, the transfer of assets, rights, liabilities or shares at a value above current
market value may be subject to scrutiny. In principle, the entity in resolution that transfers such assets, rights,
liabilities or shares to the bridge institution should not be considered to receive an advantage under the State
aid framework if it is going to be wound down. In such circumstances the transfer at a value above current
market value would give rise to a selective advantage to the shareholders and creditors of the entity in

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In projecting the cash flows, the valuation would also take into account restructuring and
operational costs and the marketability of the institution at the time of the sale, having regard to
market and macroeconomic assumptions. In addition, the valuation would also embed the
uncertainty related to the unsettled issues concerning ownership at its termination and make sure
that the bridge institution is endowed with an adequate level of capital correlated to its lifetime
expectancy.
Reasonable expectations for franchise value may be taken into account in relation to the valuation
of businesses to be transferred to the bridge institution or at the moment of the sale of that
temporary vehicle (Article 12(7) of the Regulation on valuation before resolution; on franchise
value, see also Section 7.3.2). When determining any reasonable expectations for franchise value,
careful consideration should be given to the circumstance that the bridge institution will be a
different/new entity in respect of the institution under resolution and that an expected lifetime of
up to two years may curtail expectations of franchise value. The assumptions supporting the
expectation of franchise value should therefore be explained in the valuation report.
Operationally, when the bridge institution tool is applied, at least a pro-forma opening balance
sheet would be needed when the new entity is being set-up. With regard to the value of assets and
liabilities that are left behind in the institution under resolution and are destined to liquidation, the
value should be determined in accordance with Article 12(9) of the Regulation on valuation before
resolution relating to gone concern situations 39.

7.5 Asset separation tool: asset management vehicle (AMV)

The asset separation tool may be applied by the RA only together with another resolution tool
(Article 37(5) of the BRRD) for the purpose of managing “the assets transferred to it with a view to
maximising their value through eventual sale or orderly wind down” (Article 42(3)). For that
purpose, assets, rights or liabilities may be transferred from the institution under resolution or a
bridge institution to one or more asset management vehicles.
In accordance with Article 36(4)(e) of the BRRD, the valuation has to inform the decision on (a) the
assets, liabilities or shares or other instruments of ownership to be transferred and (b) the “value
of the consideration to be paid to the institution under resolution or, as the case may be, to the
owners of the shares or other instruments of ownership”.
The BRRD expressly envisages that the consideration of the transfer can have nominal or negative
value. When the AMV tool is applied, a pro-forma opening balance sheet would be needed, when
the new entity is being set-up.
In the implementation of the AMV, the regime set out in the BRRD and in the Regulation on
valuation before resolution has to be coordinated with the State aid framework, in particular the

resolution. To the extent that they are undertakings, it cannot be excluded that State aid scrutiny could be
performed.
39
“For parts of a group of assets or of a business that are likely to be liquidated under ordinary insolvency
procedures, the valuer may consider the disposal values and disposal periods observed in auctions involving
assets of a similar nature and condition. The determination of expected cash flows shall take into account
illiquidity, the absence of reliable inputs for the determination of disposal values, and the resulting need to
rely on valuation methodologies based on unobservable inputs”.

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Communication from the Commission on the treatment of impaired assets in the Community
banking sector 40, the Communication from the Commission on the application of State aid rules to
support measures in favour of banks in the context of the financial crisis 41 and the relevant case
law of the Court of Justice.
Under the second sub-paragraph of Article 11(4) of the Regulation on valuation before resolution,
the hold value cannot be applied when the asset separation tool is used. The application of the
criterion laid down in Article 12(8) is also excluded. The valuation of the assets, rights and liabilities
that are transferred to the AMV has to be conducted in accordance with the disposal value as
defined in Article 12(5) of the Regulation on valuation before resolution.
In accordance with the State aid framework, the transfer at a value that is higher than the ‘market
price’ can only occur in accordance with the guidance laid down by the European Commission and
the relevant applicable procedure as interpreted by the Court of Justice 42. In terms of process, this
entails that the RAs should be aware that a parallel discussion with the Directorate-General for
Competition should be initiated.

40
[Link]
41
[Link]
42
From a process perspective, the RA could also mandate the independent valuer appointed for purposes of
the valuation under Article 36 to estimate both the ‘market price’ and the ‘real economic value’ in accordance
with the State aid framework, for the purpose of submitting the State aid notification to the European
Commission. This would be without prejudice to the European Commission’s own assessment of the
existence and, if applicable, of the compatibility of the requested aid.

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8. Valuation 2: process and report

8.1 Process
8.1.1 Appointment of the independent valuer and performance of the
valuation

The appointment of the independent valuer is the indispensable premise to ensure that a definitive
or provisional — save for when the RA performs it — valuation before resolution may be
performed.

To be appointed as independent valuer, a legal or natural person has to meet the conditions of
independence set out in Articles 38 to 41 of Commission Delegated Regulation (EU) No 2016/1075.
As a precondition of the independence, the person concerned has to:

(a) have the qualifications, experience, ability, knowledge and resources to ensure that they
can perform a valuation without depending on the support of parties, in particular public
authorities — including the RA — and the relevant institution;

(b) be legally separated from public authorities — including the RA — and from the relevant
institution;

(c) not have material common or conflicting interest (within the meaning of Article 41 of that
Regulation).

As underscored by Article 38 of Regulation 2016/1075, not all conflict or common interest should
be considered as a ground for excluding the valuer’s independence. The Regulation sets a threshold
so that only those actual or potential material common or conflicting interests should be
considered by the RA as a ground for the non-appointment of the valuer.

The assessment of materiality of the potential or actual interest is left to the RA and revolves
around the influence or the perceived influence of the independent valuer’s judgement in carrying
out the valuation (Article 41(2) of Regulation 2016/1075). In particular, this assessment should
weigh the extent of the common or conflicting interests against the potential valuer’s competence
and proficiency.

The Regulation mentions only one circumstance that constitutes per se an actual material common
or conflicting interest, notably having performed the statutory audit in the year preceding the
appointment (Article 41(5)). In general, for purposes of establishing whether a potential or actual
common or conflicting interest should be considered material by the RA, the Regulation lays down
a minimum, non-exhaustive list of parties/relations and matters that are relevant to such
assessment (Article 41(3) and (4)).

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To facilitate the independence assessment, any person considered for the position of independent
valuer is required to:

(a) maintain policies and procedures to identify any actual or potential interest which may be
considered to constitute a material interest;

(b) notify without delay the appointing authority of any actual or potential interest which the
independent valuer considers may, in the assessment of the authority, be considered to
amount to a material interest;

(c) take appropriate steps to ensure that none of the staff or other persons involved in carrying
out the valuation have any material interest of a kind.

To preserve its independence, the valuer should not seek or receive instructions or guidance from
public/resolution authorities, or accept financial or other advantages save for the payment of the
remuneration and expenses. This notwithstanding, the valuer may receive instructions and
guidance where necessary for achieving the goals of the valuation (Article 39).

From a practical perspective, without being exhaustive, recent practice suggests that an initial
‘questionnaire’ revolving around at least the parties/relations and the matters envisaged in
Article 41(3)(4) of Commission Regulation 2016/1075 could be submitted to the person concerned
to facilitate the identification of potential or actual common or conflicting interests. The
assessment of the genuine character of the responses is left to the RA, as well as the assessment
of the materiality of any common or conflicting interest. Furthermore, at the moment of the
appointment, further to the RA assessment, the independent valuer could also be requested to sign
a statement of absence of further reasons of common or conflicting interest. In assessing the
materiality of a potential or actual conflict of interest, the RA could also consider whether or not,
in its own judgement, the adoption of certain measures by the person concerned would ensure
that a potential or actual interest would not amount to a material interest.

The EU framework does not specify whether the independent valuer for the valuation before
resolution has to be or may be the same as the independent valuer of the valuation after resolution.
In the absence of any specific requirement under EU law, it is for the appointing authority to decide
what path to follow.

The fast appointment of the independent valuer is crucial to ensure the timely start and
performance of the valuation, in particular having regard to the resolution time constraints 43. It is
suggested, in the light of recent practice, that RAs adopt procedures for the pre-selection of a
shortlist of potential valuers, from which a valuer that meets the conditions of independence in the
specific case could be selected without delay. The shortlist would also be useful to identify ex-ante
valuers with experience, ability, knowledge and resources; furthermore, in accordance with and
subject to each authority’s legal system, such shortlisted valuers could agree in advance on a

43
Non-disclosure agreements might need to be considered already ahead of the appointment, depending
also on national law and similar considerations.

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framework agreement to be specified at the time of the appointment with an ad hoc mandate. It is
suggested that RAs prepare a legally revised draft mandate template prior to crisis events.

As a general consideration, the mandate or any related document/exchange at the time of the
appointment should specify at least the following: (i) the type of valuation requested, i.e.
provisional or definitive; (ii) in cases of provisional valuation, it is suggested that the valuation
includes — to the extent practicable — the ex-ante estimate of the NCWO valuation in accordance
with Article 36(8) of the BRRD; (iii) the range of resolution actions that the RA requires the valuation
to consider; (iv) the timeframe of the valuation and the intermediate milestones (for instance
request of data and information to the institution, i.e. set-up of the virtual data room; performance
of the due diligence; performance of valuation of each resolution action as requested by the RA,
starting from the preferred resolution strategy or the strategy indicated by the RA as a priority);
(v) performance of sensitivity and/or scenario analysis in respect of specific parameters having
regard to the circumstances, to the range of resolution actions or to specificities of the institution;
(vi) areas where the valuer is assisted by specific experts, for example legal or accounting experts;
and (vii) non-disclosure and confidentiality obligations.

8.1.2 General considerations on the performance of the valuation

As a general consideration, interactions between the RA and the valuer in the context of the
valuation are not prohibited by the Regulation. In particular before the start of the valuation,
interaction can be helpful to set the stage and to reach a better understanding of the resolution
actions to be considered (see Section 1.2.3), the expected results of the valuation, of the data and
information needs and availability, the phases of the valuation, etc ...

After the valuation has been performed, interaction with the valuer may be helpful to reach a
better understanding of the Valuation Report. In the course of the valuation, the interaction with
the valuer may be envisaged as regards day-to-day issues, updates on the progress and state of the
valuation, on the determination of resolution actions, etc. In particular, in this latter phase, the
nature, content and frequency of such interaction should ensure that the valuer’s independence is
not undermined, save where the provision of instructions and guidance by the RA is considered
‘necessary’ for achieving the goals of the valuation (see Article 39(4)(a) of the Commission
Regulation 2016/1075). This is a case-by-case analysis.

The Regulation does not provide any guidance about the place where the valuer should perform
the valuation, whether at the institution’s, RA’s or valuer’s premises. In assessing the best solution,
also for single aspects of the valuation, regard should be given to practical considerations such as
access to data and information, exchange of views with the institution’s management and
personnel and/or with the RA, confidentiality requirements in particular with regard to potential
information leaks to the public.

8.1.3 General considerations on the timeframe

There is no pre-determined timeframe for the performance of a valuation under Article 36 of the
BRRD; in principle it can be carried out in a few weeks or in several months, depending on the level

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of granularity, on the institution’s size and complexity, on the quality, quantity and timeliness of
the data and information made available by the institution, and on the type of the crisis: slow or
fast burn. For a provisional valuation, requirements for sufficient quality are much less prevalent;
rather, a provisional valuation shall seek to deliver the best possible quality in whatever time is
available.

The BRRD does not set out an express ‘start time’ for the valuation; however, it contains useful
references for a reasonable approach. The discipline on early intervention measures (Article 27 of
the BRRD) provides some guidance on this aspect; in particular, it refers to the exchange of
information between the competent authority and the RA for the update of the resolution plan and
the performance of valuation for purposes of resolution in accordance with Article 36 of the
BRRD 44. The BRRD also requires Member States to ensure that the competent authorities notify the
RAs without any delay upon determining that the conditions laid down in Article 27(1) of the BRRD
are met 45.

RAs should assess the overall situation and consider whether to take arrangements to prepare the
valuation. In such phase, and depending on the circumstances, confidentiality issues and adverse
market impacts should particularly be taken into account when defining the practical arrangements
for the data and information collection.

The notification about the fulfilment of early intervention conditions, however, is not a
precondition for the collection of information and the start of a valuation by the RA. Article 63(1)(a)
of the BRRD gives more leeway to the RA as to the collection of information and the start of the
valuation, in a way which is disentangled from the early intervention phase. This article confers
upon the RA a general power to require any person (therefore, including the institution) to provide
any information required by the RA to decide upon and prepare a resolution action, including
updates and supplements to information provided in the resolution plans and including requiring
information to be provided through on-site inspections. This provision could therefore support a
broader approach — and anticipated in time — to the determination of the start time of the
valuation (including data collection), which does not rely on an early intervention notification but
on the RA’s discretionary assessment of the level of risk and progress in the development of
contingency planning.

The first steps to be conducted to start a valuation are the appointment of the independent valuer,
save where the provisional valuation is performed by the RA (see Section 8.1.1), and the collection

44
Article 27(1)(h) provides that the competent authority shall “acquire, including through on-site inspections
and provide to the RAs, all the information necessary in order to update the resolution plan and prepare for
the possible resolution of the institution and for valuation of the assets and liabilities of the institution in
accordance with Article 36”.
45
The EBA Guidelines on triggers for the use of early intervention measures (EBA/GL/2015/03) of 8 May 2015
([Link]
03+Guidelines+on+Early+Intervention+[Link]) provide that the breach of a trigger entails, as a first
step, the competent authority’s investigation of the matter, which may or may not lead to the adoption of
an early intervention measure. The EBA GL envisage that the competent authority should consider collecting
information to perform the valuation pursuant to Article 27(1)(h) of the BRRD when it assigns an Overall SREP
score of ‘4’ to the institution. As stated above, if the competent authority determines that the conditions for
early intervention have been met, it has to notify the resolution authority.

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and request of data and information to the institution, including the set-up of the virtual data room
(see Chapter 10).

8.1.4 Specifics in the valuation of asset and liability valuations

The process for Valuation 2 will build upon input from the RA (step 1A), the institution and its
supervisory authority (see Figure 2). On the one hand, the RA has the task of indicating to the
valuer the resolution strategies and scenarios and the envisaged restructuring plan when possible
and feasible; on the other hand, the institution should cooperate and provide the valuer or the RA
with (updated) information about the entity’s activities (including accounting data — balance sheet
and off-balance sheet positions, etc. — see step 1B in Figure 2 and Chapter 10 on the MIS). The
valuer should ensure completeness in their valuation, i.e. make sure that all assets and liabilities,
all off-balance sheet positions (contingent assets and contingent liabilities), operational costs and
the impact of measures resulting from the application of resolution tools are included. Other factors
affecting future income and cash flows should also be covered by the valuation.

8.1.5 Potential content of the Valuation 2 report

The Valuation report would presumably be written in a way that would allow an experienced reader
with access to the information provided by the institution to replicate the results of the valuation.
Having regard to transparency requirements that have been recently established by European
jurisdictional bodies in the context of disputes originating from resolution proceedings 46 , RAs
should aim to ensure effective jurisdictional protection to affected shareholders and creditors by
the publication of a non-confidential version of the valuation report, without undermining financial
stability and legitimate business secrecy concerns.

In addition to the minimum elements set out in the Regulation on valuation before resolution
(Article 6 in particular), the following information relating to specific aspects of the performed
valuation(s) might be included in the Valuation report, with a view to helping the RA to inform its
decision on the appropriate resolution action (non-exhaustive list):

• Introduction: purpose of the valuation, identification of the entity, valuation date.

• Buffer for additional losses (provisional Valuation 2; see Section 4.5): how it was
calculated, assumptions and reasoning, justification, elaboration if calculated on single
asset level or on aggregate level.

• Difference between provisional and definitive Valuation 2 (Section 2.1.2): reasons,

justifications, explanation.

• Clear indication of the assets, rights and liabilities that have been included in the valuation,
and, where the application of a combination of tools has been envisaged, clear indication

46
SRB Appeal Panel no . 41/17; SRB Appeal Panel case no . 44/2017 and 7/2018
([Link]

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of the assets, rights and liabilities that have been included in the valuation of each
resolution tool.

• Clear indication of the positions valued in accordance with either the hold or the disposal
value (Chapter 5).

• Valuation methodology (information might be provided for instance on portfolio level; see
Chapter 5): indication of the valuation methodology/methodologies that has/have been
applied, reasoning/justification, and explanation if there was one leading valuation
methodology applied and another one/others has/have been applied for specific aspects
and/or for consistency checks of the valuation results. Any potentially applied
methodologies shall be clearly documented in the valuation report, e.g.:

o DCF methodology (information might be provided for instance on portfolio level;

see Sections 5.2 and 5.3): reasoning, data basis/data sources, specifics of the
applied valuation model (e.g. length of the forecasting period, terminal value
calculation, growth rate assumptions), assumptions for cash flows (e.g. contractual
or adjusted cash flows) and discount rates (e.g. considered risk profile, disposal
strategy considered), – if applicable, etc.);

o market value methodology (information might be provided e.g. on portfolio level):

reasoning, data basis/data sources, general assumptions (e.g. for the assumed peer
group) and for example for adjustments and/or haircuts, justification, etc.;

o adjusted book value methodology (information might be provided for instance on

portfolio level; see Chapter 5.5): reasoning, data basis/data sources, general
assumptions (e.g. if book values have been updated for valuation purposes) and
for example for adjustments and/or haircuts, justification, etc.;

o other valuation methodologies (information might be provided for instance on

portfolio level; see Section 5.6): reasoning, data basis/data sources, assumptions,
specifics of the applied valuation model, justification, etc.

• Underlying assumption of the valuation(s) performed, clearly supporting the assumptions

being used such as credit spreads, cost of equity, etc., and the data and comparables that
are being used to develop such assumptions.

• Where the bail-in tool is applied (Section 7.1): explanation of aggregate amount of write-
down required to absorb losses and restore NAV to zero; NAV in accordance with the
economic valuation; initial assessment of liabilities to be written down in accordance with
insolvency hierarchy; post-conversion equity value; and treatment of shareholders and
creditors.

• Where the sale of business tool is applied (Section 7.3): commercial terms of the transfer;
equity value in the event of a ‘share deal’ or value of specific assets and liabilities in the

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event of an asset deal; a disposal value concept; assumptions and explanation supporting
the inclusion and the quantification of franchise value when considered in the valuation,
valuation of the different categories of assets and liabilities/or equity to be transferred and,
in the case of an asset deal, valuation of the legacy entity; estimation of the necessary
amount of bail-in to recapitalise the perimeter/equity transferred (if appropriate).

• Where the bridge institution tool is applied (Section 7.4): valuation of the different
categories of assets and liabilities/or equity to be transferred in the case of a share deal
and of an asset deal; valuation of the legacy entity; estimation of the necessary amount of
bail-in to recapitalise the perimeter/equity transferred; estimation of the necessary
amount of bail-in/conversion to capitalise the new institution transferred (if appropriate).

• Where the AMV tool is applied (Section 7.5): explanation of the underlying assumptions
for the transfer of the assets, rights and liabilities.

• Where the franchise value is applicable and has been applied: assumptions, including for
example expectations contained in the business, and approach to its calculation, and
information/data sources.

• Valuation of operational costs, cost reductions, synergies (to the extent already known)
and similar (Sections 4.3 and 4.4): how it was calculated, assumptions and reasoning,
justification.

• Specific consideration given for the valuation of funding liabilities (Section 5.8):
explanation, reasoning, justification.

• Specific consideration given for the valuation of contingent assets and contingent
liabilities (Section 5.9): identification approach/process, explanation of respective
valuation, reasoning, justification.

• Equity valuation of the institution as a whole (Chapter 6): valuation methodology applied,
reasoning, data basis/data sources, specifics of the valuation model applied, assumptions
for cash flows and discount rates and/or for the market value methodology.

• Best point estimates (Section 4.3: clear indication and explanation of the assumptions,
reservations and qualifications (if any), and similar considerations, that have been used and
that support the determination of the best point estimate. Where, in addition to the best
point estimate, a value range has been calculated (Section 4.3: indication of how the value
range has been derived, i.e. whether the range is the result of different approaches or
scenarios having been applied (leading to different point-estimate results) or due to the
use of ranges (as opposed to single-point estimates) in respect of value-impacting inputs or
assumptions.

o If different approaches or scenarios have driven the value-range, the report should
explain the valuer’s choice of approaches/scenarios and comment on whether or

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not they are considered to be equally appropriate (in respect of approaches) or

equally likely (in respect of scenarios).

• In the case of ranges of a particular input or assumption leading to ranges of value within
one approach and scenario:, the report should explain the valuer’s choice of the upper and
lower boundaries of the input/assumption range and comment on whether or not any
particular point within the range is deemed most appropriate or likely. Where possible, the
boundaries of the range should be justified with supporting data and such data should be
sourced - sources may include the subject bank’s MIS, market data from publicly available
data sources or macroeconomic data sources such as central banks and global financial
bodies.

• Significant differences between assumptions used in the valuation and those underlying
accounting or regulatory information, where known to the valuer (recital 13 of the
Regulation on valuation before resolution), detailing the methodologies used by the
institution where they were relied upon.

• In the case of identified losses that cannot be recognised in the updated balance sheet
owing to national specificities: a specification of the amount of and reasons for the losses
and the likelihood and time horizon of their occurrence (Article 10(4) of the Regulation on
valuation before resolution).

• Information about valuations of subsidiaries that are within the scope of internal minimum
requirements for own funds and eligible liabilities (MREL and about subsidiaries or separate
business lines that might be divested as part of the resolution-driven restructuring of the
institution.

• Subdivision of the creditors in accordance with their priority levels under applicable
insolvency law, and an estimation of their treatment, including a hypothetical insolvency
scenario and explanations about the assumptions made.

• Information about new data and information based on new, post-resolution events.

Related to organisational and other aspects applicable in the valuation, the report might include
(non-exhaustive list):

• where specific valuation standards legally in force in the jurisdiction of reference have
been applied, express indication of these standards together with the legal basis for their
application to the valuation;

• key sources of information and data:

o information/data provided by the institution and the supervisor; information as to

whether data / which data was provided by outsourced data providers; details of
data used and why changes were made;

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o other data considered, e.g. market data;

o explanation if information/data needed for performing a proper valuation is/was

missing.

• where other valuers or advisors or similar were involved in the valuation, indication of their
respective contributions;

• statement of compliance of the valuation with the applicable law;

• statement of independence of the valuer.

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9. Specific aspects of Valuation 3

9.1 Conceptual and procedural aspects

Under Article 74 of the BRRD, a valuation has to be carried out after the execution of the resolution
in order to establish the difference in treatment of shareholders and creditors in resolution and in
normal insolvency procedure (‘Valuation 3’). To put it in other terms, Valuation 3 is instrumental to
assess whether the NCWO principle has been breached.

Such valuation differs from the valuation under Article 36(8) of the BRRD, i.e. the estimate of the
treatment of shareholders and creditors had the institution been subject to normal insolvency
proceedings (ex-ante NCWO valuation). Unlike the latter, Valuation 3 is performed after the
execution of the resolution action and is based on a claim (rather than a creditor class) basis. For
this purpose, Valuation 3 requires the availability of particularly granular data.

It is worth noting that, pursuant to Article 2(1) of the Regulation on valuation after resolution,
valuation 3 requires the establishment of an “inventory of all identifiable and contingent assets
owned by the entity’ (emphasis added)”. Along the same lines “a list of all claims and contingent
claims against the entity shall be made available to the valuer” (Article 2(2)). In addition,
“encumbered assets and claims secured by those assets shall be identified separately by the
valuer”.

The Regulation on valuation after resolution sets out an important limitation on the facts and
related data and information, which can be used to carry out Valuation 3. By restricting hindsight,
it provides that “the valuation shall only be based on information about facts and circumstances
which existed and could reasonably have been known at the resolution decision date which, had
they been known by the valuer, would have affected the measurement of the assets and liabilities
of the entity at that date’ (emphasis added)” (Article 1(1)).

The reference date for Valuation 3 is the actual resolution decision date (Article 1(3) of the
Regulation on valuation after resolution; for Valuations 1 and 2, see Article 3 of the Regulation on
valuation before resolution). This date might differ from the actual treatment date or dates, i.e. the
date when shareholders and creditors receive the treatment arising from the implementation of
the resolution tools (Article 1(2) of the Regulation on valuation after resolution). When necessary
to allow the comparison with the treatment in (a hypothetical) normal insolvency proceedings at
the resolution decision date, the Regulation provides for discounting the treatment in resolution
back at the resolution decision date.

In accordance with Article 3 of the Regulation on valuation after resolution, valuation 3 is assumed
to determine:

(a) The treatment that shareholders and creditors, or the relevant deposit guarantee
scheme, would have received had the entity entered into a normal insolvency proceeding

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at the resolution decision was taken. For consistency with Valuation 2 and to ensure the
comparability of the outcomes of the treatment in resolution and in a hypothetical normal
insolvency proceedings, the Regulation clarifies that such valuation should disregard “any
provision of extraordinary public financial support”.

(b) The actual treatment that shareholders and creditors have received in the context of
the application of the resolution action. In accordance with the Regulation, such treatment
corresponds to “the value of the restructured claims following the application of the bail-
in tool or other resolution powers and tools, or of other proceeds received by shareholders
and creditors as at the actual treatment date or dates”. And

(c) “whether the outcome of the treatment in point (a) exceeds the outcome of the value
referred to in point (b) for each creditor in accordance with the priority levels in normal
insolvency proceedings”.

Valuation 3 is a liquidation type of valuation and for this reason it is significantly dependent on the
applicable national insolvency law and practice, in particular to determine the priority ranking of
creditors’ claims, or the expected disposal period or recovery rates or the relevant costs. Depending
on further national specificities, corporate law and other domains may require specific
consideration.

The BRRD does not specify whether the independent valuer performing valuation 3 could be the
same as or should be different from the valuer who has carried out Valuation 2. It is therefore up
to the authority appointing the independent valuer to decide.

9.2 Methodologies for assessing realisation from assets

9.2.1 General considerations

Similarly to the Regulation on valuation before resolution, the Regulation on valuation after
resolution lays down criteria consistent with various methodologies, even though significant
relevance is assigned to the DCF methodology. Valuation 3 (which is a liquidation valuation) is
assumed to be a valuation of single assets/liabilities (granular valuation) (see Chapter 5 on granular
Valuation 2).

Valuation methodologies, however, have to adjust to the liquidation scenario of Valuation 3. This
entails for instance the absence of future business prospects, also having regard to the withdrawal
of the authorisation, and the articulation of assumptions about administrative costs relating to the
entity in liquidation which differ/are not present in a going concern institution. Administrative costs
include for instance:

• costs for running down the business itself, e.g. for closing down branches;

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• costs related to the insolvency proceedings, e.g. reasonably foreseeable administration,

transaction, maintenance, disposal and other costs, as described in Article 4(3)(b) of the
Regulation on valuation after resolution;

• a generally different cost base of the entity that is wound- up, compared to the costs base
of an institution that is conducting business in a going concern scenario (for the latter incl.
recurring business, and as such including for example marketing and sales expenses for a
fully operative institution); for instance, in case of a gone-concern entity, variable
personnel expenditures might decrease over time, whereas other parts of personnel costs
might rather be sticky (overhead costs).

9.2.2 DCF methodology

Factors that are commonly considered risks — either in the expected cash flows or in the discount
rate — may require special attention when conducting valuation 3. Such risks include for instance
credit or liquidity risk (see in the text covering Valuation 2 in Sections 5.2 and 5.3 as well as the
Annex) and the risk of realising the asset value during insolvency proceedings. The latter considers
that an insolvency procedure is likely to impair the position of the seller of the assets, given that
buyers are presumably aware of the fact that the seller is under sale pressure.

Similarly to other kinds of risks, this factor may be reflected either in the expected cash flows (for
instance by applying adjustments to the forecasted disposal prices of assets) or in an adjustment to
the discount rate (for instance by applying an add-on to the discount rate, which reflects the weaker
position of the seller). The risk, however, also depends on the asset itself, as for instance highly
attractive repossessed CRE assets may be easily sellable, whereas other kinds of assets (e.g.
repossessed cars of an unattractive brand) may be difficult to dispose.

Applicable insolvency law and practice would need to be reflected when deriving expected cash
flows and/or discount rates (Article 4(3(a)) of the Regulation on Valuation after resolution).
Article 4(2) of the Regulation on valuation after resolution also stresses that, where applicable
insolvency law or practice requires the application of “particular rates”, this has to be considered
accordingly in Valuation 3.

9.2.3 Market value methodology

Articles 4(4) and 4(5)(a) to (c) of the Regulation on valuation after resolution point to the market
value methodology for assets, or similar assets, traded on active markets 47. Article 4(4) of that
Regulation also stresses, for instance, that the marketability of the entity’s asset(s) needs to be
considered when applying observed prices (further considerations applicable to the market value
methodology are covered in the Annex).

47
The Regulation does not provide any further explanation or reference to “active markets”, but one might
for example refer to IFRS 13, as endorsed by the EU, according to which an active market is defined as “a
market in which transactions for the asset or liability take place with sufficient frequency and volume to
provide pricing information on an ongoing basis”.

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9.2.4 Other valuation methodologies

Depending on the circumstances, the adjusted book-value based methodology as well as other
valuation methodologies (e.g. option pricing model) might also be considered appropriate for
Valuation 3 purposes. Valuation methodologies are described in more detail in Sections 5.5 and 5.6
(under Valuation 2) as well as in the Annex. Specific considerations in the application of these
methodologies in Valuation 3 might be needed, for instance for the derivation of adjustments when
applying the book value based methodology.

9.3 Specific considerations for certain assets/liabilities

Certain types of assets/liabilities might require significantly different – also when compared to
Valuation 2 – valuation approaches under insolvency proceedings, which might for instance go
beyond an adjustment to parameters. Some examples of such asset/liability types include the
following (non-exhaustive list):

• Goodwill: as goodwill relates to the entity’s ability to generate future returns, it might be
generally assumed to have no value in Valuation 3 due to the withdrawal of the banking
licence. However, if for instance goodwill is related to the holding in a subsidiary, which
might be considered to be for sale as part of the insolvency procedure, such goodwill might
still be of value.

• Deferred Tax Assets (DTAs)/Deferred Tax Credits (DTCs): not least depending on the
national legal and tax frameworks, valuation 3 might require adjustments related to
DTAs/DTCs. For instance, an entity in resolution may have accumulated DTAs as a result of
past losses, which may have a significant value to potential buyers in a going concern
scenario (e.g. following the application of a resolution tool). However, they might have zero
value under a gone-concern scenario, as the entity is assumed to fail the profitability test
owing to its insolvency. In some jurisdictions, some qualified DTAs might keep their value
also in insolvency; these are sometimes referred to as DTCs.

• Franchise value: whereas franchise value might be applicable on a going concern basis, it
could rather be assumed to be zero on gone-concern basis.

9.4 Determination of recoveries to creditors

Insolvency applies on an entity-by-entity basis. When the resolution entity of a resolution group is
put in resolution, the issue is whether Valuation 3 should be conducted only for the entity that has
been put into resolution or also for the subsidiaries belonging to the resolution group of the
resolution entity that would have been expected to be placed into insolvency had the resolution
entity been subject to normal insolvency procedure. Where a subsidiary has external creditors or
shareholders, it is possible that these claimants would bear some of the insolvency losses that may
otherwise be borne by resolution entity creditors if the subsidiary is recapitalised in resolution. This

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in turn could affect the net recoveries to those with claims of the entity in resolution, and could be
relevant to a NCWO assessment.

The assessment of outcomes under an insolvency counterfactual may also need to take into
account the following:

• Intragroup claims: in insolvency, intra-group liabilities and equity holdings as well as

intragroup guarantees would affect the flow of net recoveries throughout the group and,
ultimately, to the entity subject to resolution. They may therefore be relevant to an NCWO
assessment. In practice, an iterative approach may need to be applied to assess how
recoveries on intra-group claims would in turn affect the recoveries on other claims
throughout the group.

• Netting, set-off and collateral arrangements: these could include contractual

arrangements as well as any statutory arrangements that may exist in certain jurisdictions.
They could also include other cases where assets are encumbered in respect of an
institution’s secured liabilities. These arrangements may need to be accounted for before
any net realisations could be distributed to unsecured creditors. In accounting for these
arrangements, assumptions may need to be made about the expected behaviour of
counterparties in insolvency, such as in relation to early termination rights.

9.5 Potential content of the valuation report

The Valuation report would presumably be written in such a way that an experienced reader with
access to the information provided by the institution would be able to understand how the
valuation was carried out. In addition to the minimum elements set out in the Regulation on
valuation after resolution (in particular in Article 6), the following information relating to specific
aspects of that valuation might be included in the report (non-exhaustive list):

• indication of the difference in treatment (if any) of shareholders and creditors in resolution
and in the hypothetical normal insolvency proceeding;

• the ideas presented in Section 9.5 on topics/issues that might be covered by the report on
Valuation 2 and might apply accordingly for Valuation 3, depending on their relevance in
Valuation 3 (this might for instance include information about the valuation methodology
and key assumptions applied, etc., as well as organisational and other aspects of the
valuation carried out);

• description of the assumed insolvency strategy or strategies and how this was arrived at
(for instance through discussions with an insolvency practitioner);

• description of how the specificities of national insolvency law and other legal requirements
have been considered, and justification of any discretion applied, including estimation of
the time needed to conclude the insolvency process, calculation(s) of any recovery costs

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under the insolvency scenario, illiquidity adjustment, costs from the insolvency process,
treatment of set-off, netting, claw-back actions, etc.;

• description of the (key) differences in methodologies, assumptions, etc., between

Valuation 2 and Valuation 3; in particular, assumptions and methodological choices taken
that apply to all or some assets and liabilities and are specific to the insolvency scenario
and are not considered to be applicable on a going concern basis, including for Valuation 2;

• in particular when the DCF methodology is applied: explanation of potential adjustments

to the expected cash flows under a gone concern scenario (or, if applicable, any deviation
from such scenario);

• in case the adjusted book value based methodology is used: explanation of the basis and
assumptions regarding the estimation of adjustment to the accounting value of assets and
liabilities under the insolvency scenario, including adjustments for illiquid markets and/or
assets;

• description and explanation of the basis and assumptions applied for the estimation of
costs associated to the insolvency proceeding(s);

• additional information on the hypothetical contribution of the national deposit guarantee

scheme (DGS) in a liquidation scenario.

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10. Management Information Systems

(MIS) 48

Textbox: Management Information System (‘MIS’)

A robust valuation contributes to the effectiveness of resolution actions, including the legitimacy
and soundness of the decision, and the achievement of the resolution objectives. To be robust, a
valuation must rely on the timely provision of high quality data and information to the valuer. To
ensure this, there is the need to enhance institutions’ preparedness in the course of the resolution
planning phase. As part of the resolvability assessment, the BRRD requires RAs to assess the
institution’s MIS. Relevant legal bases are points (9) and (10) of Section C of the Annex to the
BRRD 49 . The section on resolvability assessment of the Commission Delegated
Regulation 2016/1075 further develops such requirements 50. With specific regard to valuation for
purposes of resolution, the MIS is expected to provide high quality data and information that are
necessary to conduct the valuations before resolution or to implement insolvency decisions
(‘valuation MIS’).

Article 4 of the Regulation on valuation before resolution sets out a non-exhaustive list of sources
of information to perform the valuation in addition to the entity’s financial statements, related
audit reports and regulatory reporting as of a period ending as close as possible to the valuation
date 51. It is worth underlining that in any case the valuation will be based on “any information
pertinent to the valuation date which is deemed relevant by the valuer”. This entails that the valuer
remains free to assess what information is relevant and what may be disregarded, whether it is
complete or it needs to be integrated.

The Regulation on valuation before resolution expressly envisages the possibility for the valuation
to rely on the data and information provided by the institution’s internal valuation models, by
providing for the possibility for the valuer “to determine the most appropriate valuation
methodologies that may rely on internal valuation capabilities” where they are deemed
appropriate (Article 7(2)). Overall, the Regulation indicates that the “internal capabilities and

48
This MIS Chapter is still under development and will be completed at a later stage.
49
“When assessing the resolvability of an institution or group, the RA shall consider the following […]: (9) the
“capacity of the management information systems to provide the information essential for the effective
resolution of the institution at all times even under rapidly changing conditions” and (10) “the extent to which
the institution has tested its management information systems under stress scenarios as defined by the
resolution authority”.
50
Article 22(3)(a) requires that a resolution plan contain at least “a description of the information, and
processes for ensuring availability in an appropriate timescale of that information required for the purposes
of valuation, in particular pursuant to Articles 36 and 49 of Directive 2014/59/EU […]”. Article 29(3) of the
same Regulation provides that in assessing the existence of potential impediments to resolution the RA shall
consider “the capability of the institution or group to provide information to carry out a valuation to
determine the amount of write-down or recapitalisation required”.
51
Article 4 of the Regulation on valuation before resolution clarifies that, in addition to the entity’s financial
statements, related audit reports and regulatory reporting as of a period ending as close as possible to the
valuation date, relevant information may include those listed in that provision.

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systems to support resolution valuations should be assessed by the resolution authority as part of
the resolvability assessment” 52, hence the need to enhance the preparedness of the institution in
good time.

Given the high positive correlation between an accurate valuation and the effectiveness of the
resolution action(s), including safeguarding of public money, the valuation MIS should identify the
data and information needs that in principle ensure the performance of a definitive Valuation 1
and 2 (including the ex-ante estimate of NCWO valuation for purposes of Valuation 2). Although
the valuation MIS should primarily focus on the data and information needs to support the
valuation implementing the preferred resolution strategy, it should consider the full range of
possible resolution actions, given that the RA should be ready to apply all resolutions tools and to
deviate from the resolution plan if circumstances so require. This entails that institutions will have
to develop capabilities to provide to the RA/valuer accurate granular data for the relevant asset
classes.

The RAs’ approach towards institutions’ resolution valuation MIS should be in line with the legal
framework outlined above, uniform across the EU and proportionate to the goal pursued. Along
these lines, elements for consideration are the use of data produced by internal capabilities, so that
the imposition of additional/specific data or information requirements should only be envisaged
to the extent necessary to perform a robust valuation 53 . To ensure a harmonised and
proportionate approach throughout the EU, a common data dictionary for benchmarking purposes
could be developed, without introducing regular reporting requirements.

52
Recital (3) of the Regulation on valuation before resolution.
53
Recital (3) of the Regulation on valuation before resolution indicates that “the valuer should have access
to any sources of relevant information and expertise, such as the internal records, systems, and models of
the institution. The ability of internal capabilities and systems to support resolution valuations should be
assessed by the resolution authority as part of the resolvability assessment pursuant to Article 15 of
Directive 2014/59/EU”. See also Article 7(2), which reads “The valuer shall determine the most appropriate
valuation methodologies which may rely on the entity’s internal models where the valuer deems it
appropriate taking into account the nature of the entity’s risk management framework and the quality of
data and information available”.

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Annex

Overview of valuation approaches

General considerations

The valuation approaches and methodologies described in this Handbook aim to establish an
economic value of assets and liabilities or of the entire entity or selected businesses, as appropriate,
as required by the Regulation on valuation before resolution. The following overview draws on the
International Valuation Standards 2017, as published by the International Valuation Standard
Council in 2017. Despite not being focused on bank valuation, the IVS represent an authoritative
source for valuation methodologies in accordance with general practice. The IVS are a non-binding
although authoritative source of best market practices. Where country-specific valuation
requirements legally in force in certain Member States are applicable to the valuation performed
for purposes of resolution, the valuation should ensure that prevalence is given to the EU resolution
valuation framework, and that such national valuation requirements are applied to the extent
consistent with such framework.

This brief account does not purport to provide a comprehensive explanation of the methodologies
referred to. It is only a general synopsis for information. Furthermore, it is without prejudice to
other methodologies that may be deemed appropriate by the valuer and that are consistent with
the EU framework.

The International Valuation Standards Council (IVSC) differentiates between the market, income
and cost approaches as the key valuation approaches (IVS 105.10) 54. These approaches can then
be further differentiated into different methods, which are commonly applied by valuers in their
valuation 55 . The IVSC clarifies that it is part of a valuer’s tasks in a valuation to choose the
appropriate approach(es) and method(s) when performing a valuation. Examples of methods the
IVSC refers to are the following:

• Income approach, including for example the discounted cash flow (DCF) methodology
(IVS 105.50).

• Market approach, including for example the comparable transactions methodology (using
transactions of the same or similar assets or entities (IVS 105.30).

• Cost approach, including for example the replacement and reproduction methodology
(IVS 105.70).

54
The IVS references are those to the 2017 edition of the IVS.
55
Whereas the IVS refer to valuation approaches and methods, the Regulation on valuation before resolution
normally makes reference to valuation methodologies. For purposes of this Handbook, it is assumed that
methods and methodologies can be considered similar.

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Chapter 4 further elaborates on these methods as they are commonly applied by valuers. As a
general remark, it should be noted that the valuation and thus the methods can be applied on the
level of single assets or liabilities, or on portfolio or groups of assets or combined assets and
liabilities, or businesses, or the entity considered as a whole, depending on the circumstances
(Article 2(4) of the Regulation on valuation before resolution).

The DCF methodology aims to provide the ‘intrinsic’ present value of the valued asset, or group of
assets, or combined assets and liabilities, or businesses or the entity considered as a whole, and in
optimal scenarios — notably completeness of information, correctness of assumptions and
availability of the required time to develop the analysis — might generally be considered to yield
the most accurate results.

The market approach aims to determine a relative value, derived from the comparison of the same
or of similar transactions in assets/entities or trades of (similar) assets/entities, rather than the
intrinsic value that can be derived from the cash flow approach.

Similarly to the market approach, the adjusted book value methodology aims to deliver a relative
value, but based on accounting values, adjusted with the inclusion or exclusion of haircuts or other
adjustments.

In addition to these approaches and methods, the IVS also cover the liquidation value, which is
defined as the “amount that would be realised when an asset or group of assets are sold on a
piecemeal basis” (IVS 104.80).

DCF methodology

a. General considerations

Under the DCF methodology, expected cash flows are discounted as of the valuation date; in other
words, this requires that the key parameters for the methodology are the expected cash flows and
the discount factor(s). The expected cash flows and the applied discount rate should be consistent
to avoid double counting (for example, if funding costs are computed in the cash flows they should
not be included in the discount rate). Depending on the lifetime of the asset or the entity and the
time horizon for which cash flows are forecasted, the DCF method could include a terminal value
(IVS 105.50). Broadly speaking, the terminal value reflects the value of the asset/entity at the end
of the period for which expected cash flows are forecasted for instance in a detailed valuation
model, i.e. a terminal value is only applicable in case the valued object has a lifetime which goes
beyond the period for which detailed expected cash flows are forecasted.

b. Cash flows

IVS 105.50 describes the key steps to be taken when forecasting cash flows. Without being
exhaustive, these include:

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• The choice of the “most appropriate type of cash flow”: it is for the valuer to decide
whether to consider the whole (which is usual) or the partial cash flows to an asset/entity,
as well as other factors such as the currency of the cash flows and if they are estimated pre
or post tax.

• The definition of the period over which the cash flows are forecasted: the forecasting
period depends for instance on the life (e.g. remaining lifetime) of the asset or entity,
reasonability considerations (the period for which cash flows can reasonably be forecasted)
and cyclicality aspects (the entire cycle should be included in the expected cash flows).

• The preparation of the expected cash flows: in this respect, consideration should be given
to the “prospective financial information (PFI)”, which should reflect the reason for the
valuation (for instance a valuation related to a particular measurement basis/resolution
tool), the amount and timing of the cash flows, the business forecasts on for example a
weekly, monthly or annual basis, etc.

• A terminal value should be determined where an asset’s / entity’s lifetime ends “beyond
the explicit forecast period”: such terminal value should reflect if the asset/entity has a
finite or infinite life and at what rate the cash flows are assumed to grow in the terminal
value (so-called Gordon growth model).

• Where the exit from the valued asset or entity is assumed, the “exit value” may be
determined by the application of the market value methodology 56 . In such cases, the
“market conditions” at the time of exit (e.g. the sale of a foreclosed share in a company)
should be taken into account. Whereas the “exit value” might be positive in many cases, it
might also appear to be negative in rather particular cases (e.g. for closing down a business
that is not viable and that was repossessed during foreclosure measures, or repossessed
land with possible pollution in the ground).

c. Discount rate

The discount rate should take into account several factors, including asset/entity specifics,
geographical location of an asset/entity, an asset’s /entity’s lifetime and similar aspects
(IVS 105.50). Factors that are already reflected in the cash flow forecasts should not be
incorporated in discount rates to avoid double counting. The discount rate should also be
consistent with the forecasted cash flows, e.g. in respect of the currency in which the cash flows
are applied (IVS 105.50). In a dividend discount model, for instance, the cost of equity might be the
basis for the discount rate (e.g. applying the capital asset pricing model, CAPM).

Market value methodology

56
The “exit value” is a valuation concept and not the same as disposal value in the meaning of the Regulation
on valuation for resolution.

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The market value method is commonly based on the comparison of the asset/entity to be valued
with comparable transactions of the same or similar assets/entities for which price information is
available (IVS 105.30). Following a “comparative analysis of qualitative and quantitative
similarities and differences between the comparable assets and the […] asset [to be valued]’
(emphasis added)”, adjustments to the identified price information might be applied (IVS 105.20).
Adjustments might depend on parameters including the following (IVS 105.30):

• The asset/entity itself: for instance, a so-called trading or transaction multiple 57 might be
applied depending on whether the asset/entity to be valued using the comparable price
information is the same asset/entity or a similar one. Comparable price information is for
instance that observed on a liquid market for the same asset/entity or in a transaction (for
instance mergers and acquisitions, transactions in similar loan portfolios or transactions in
similar real estate assets). As a general remark, trading multiples are commonly based on
market prices, and as such reflect prices on liquid markets, whereas transaction multiples
are commonly based on acquisition prices applied in transactions. In business valuations,
for instance, such multiples can be calculated on the basis of an entity’s observed market
or transaction price as the multiple of its earnings before interest, tax, depreciation and
amortisation (EBITDA), earnings, revenues or book value 58. IVS 105.30 further elaborates
on considerations to be given to the application of the two different kinds of multiples.

• The size of the investment: this parameter includes “control characteristics” such as, when
the investment in a significant share in a company is valued, a discount or a premium to
the assumed share price, depending on the circumstances;

• The terms of the valuation: this parameter may include the application of “Discounts for
Lack of Marketability (DLOM)” or of discounts to the observed price for a sale under
distressed conditions (including accelerated sales).

Textbox — market value in the CRR

Regulation (EU) No 575/2013 on Capital requirements (CRR) includes a definition of market value
for immovable property (Article 4(76)) according to which it is “the estimated amount for which
the property should exchange on the date of valuation between a willing buyer and a willing seller
in an arm’s-length transaction after proper marketing wherein the parties had each acted
knowledgeably, prudently and without being under compulsion”.

57
A multiple could for instance reflect an entity’s value as a multiple of its revenue or the equity value — as
observed as for example share price on a liquid market — as a multiple of the entity’s net book value (i.e.
based on accounting data).
58
An EBITDA-based multiple might not be applicable for the valuation of institutions. However, as this
Handbook also covers for instance the valuation of an institution’s (equity) investment, which might include
a wide range of different industries, it is neutral in respect of the industry of the valued asset/entity.

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Adjusted book value based methodology

(Amortised) cost as basis for the book value

When considering the book value method — i.e. using an accounting book value as basis for the
valuation — one has first to asses if the respective asset is recognised and measured at (amortised)
cost or at fair value 59. In the case of a recognition and measurement at (amortised) costs, the
method might be considered as a method under the cost approach as described by the IVS and
might be applied for instance if an asset is not income generating and owing to the unique nature
of the asset the income or market approaches are not feasible 60.

Two key methods under the cost approach are based either on the replacement costs (i.e. the costs
for a similar asset) or the reproduction costs (i.e. the costs to create a replica of an asset).
Depreciation is commonly considered in the form of physical, functional and economic
obsolescence (IVS 105.60).

Fair value as basis for the book value

In cases of a recognition and measurement at fair value (here, fair value according to the applicable
accounting standard), the way the fair value is derived comes further into focus. The fair value
might be derived for example based on prices quoted on liquid markets, or applying a valuation
model etc. In such cases, the valuation approach might be the market approach or the income
approach (in case for example a DCF model is applied for the valuation), and considerations on the
methods under these two approaches might apply accordingly. The fair value might also be based
on other valuation methods, e.g. option pricing methods.

59
The two methods of recognition and measurement described are the most important ones. However, there
might be further ways, e.g. the equity method.
60
From an institution’s point of view, this might for instance be a foreclosed, unique machine that had been
used as collateral in the financing of a small or medium-sized entity (‘SME’).

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List of references
Adamus, Nick/Koch, Thorsten, 2007: Bewertung von Banken (Bank Valuation; German), in:
Drukarczyk, Jochen/Ernst, Dietmar, Branchenorientierte Unternehmensbwertung (Industry-
specific Valuations), p. 131-162

Bank Recovery and Resolution Directive (BRRD), 2014: Directive 2014/59/EU of the European
Parliament and of the Council, as of 15 May 2014

Brunner, Fabian, 2009: Bankbewertung — Sonderfall der Unternehmensbewertung (Valuation of

Banks — A specific kind of business valuation; in German), in: Finanz Betrieb 9/2009, p. 472-480

Commission Delegated Regulation EU 2016/101 on prudent valuation under Article 105(14) CRR

Commission Delegated Regulation EU 2016/1075 supplementing various matters of

Directive 2014/59/EU

Commission Delegated Regulation EU 2016/1401 on the valuation of liabilities arising from

derivatives

Commission Delegated Regulation EU 2018/344 specifying the criteria relating to the

methodologies for valuation of difference in treatment in resolution (Regulation on valuation
after resolution)

Commission Delegated Regulation EU 2018/345 specifying the criteria relating to the

methodology for assessing the value of assets and liabilities of institutions or entities (Regulation
on valuation before resolution)

Damodaran, Aswath, 2002: Investment Valuation – Tools and Techniques for Determining the
Value of any Asset, John Wiley & Sons, New York, 2nd edition

Damodaran, Aswath, 2009: Valuing Financial Service Firms

([Link]

International Valuation Standards Council (IVSC), 2016: International Valuation Standards 2017
(IVS)

Schwamborn, Marc-Alexander/Gehrer, Judith/Pfeil, Andreas, 2011: IFRS 9/IFRS 13 —

Praxisbeispiele der Forderungs- und Beteiligungsbewertung (IFRS 9/IFRS 13 — Examples of the
valuation of loans and investment in subsidiaries; in German), in Zeitschrift fuer internationale
Rechnungslegung (IRZ), 2011, p. 391-397

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