Annex Handbook on simulation exercises for resolution authorities

General Information

This document is an annex to the Handbook on simulation exercises for resolution authorities, published by the European Banking Authority (EBA) in 2025. It is a 6-page report presenting a practical example (showcase) of a simulation exercise (SimEx) intended for bank resolution authorities (RA). The scope covers the implementation and evaluation of a new decision-making procedure for taking bank resolution measures, within a simulation of a fictitious banking crisis. The scenario concerns a medium-sized (LSI) SME-oriented bank in default, over a compressed two-hour period.

Executive Summary

The document presents a concrete example of organizing a simulation exercise (SimEx) by a resolution authority (RA) aiming to test a new bank resolution decision-making procedure. This procedure, never evaluated before, concerns decision-making during a banking crisis, from the initial information of default (FOLTF) to the final resolution decision. The objective is to verify the adequacy, logical sequence of steps, roles and responsibilities, as well as the availability of necessary information. The exercise, of "desktop" type, does not require actual execution of actions, but a review and discussion of simulated documents. The simulation concerns a fictitious bank, "Mock Continental Capital", a non-cooperative SME-oriented LSI, with a resolution plan favoring business sale and conversion or write-off of capital instruments. The simulation is linear, without possible deviation, and lasts two hours. The design and control team is limited to three people, with an embedded observer tasked with identifying gaps and improvement points. The process includes an onboarding phase, an accelerated scenario, production of standard documents (PIA, resolution decision), and feedback collection via debriefing and post-exercise survey. The final report summarizes lessons learned and proposes corrective actions. This model aims to strengthen the operational preparedness of resolution authorities by testing their procedures in a controlled and realistic environment (p. 1-5).

Context and Objectives

The annex was written to provide a practical guide on implementing a simulation exercise intended to test a new bank resolution decision-making procedure. The issue is that this procedure has never been used or evaluated, creating a need for an exercise to verify its effectiveness, coherence, and identify possible gaps. The stakes are to ensure decisions are made in the correct order, with the right information and responsibilities, to guarantee effective resolution in a real crisis. The scope is limited to the decision-making procedure itself, excluding for example the document sharing platform which will be the subject of another exercise. The exercise is designed to be simple, quick (2 hours), and conducted internally without external consultants, with a limited number of participants. The simulation concerns a fictitious bank in default, with a linear scenario and no surprises, to focus on the procedure to be tested (p. 1-3).

Summary of Key Points by Theme

Exercise organization and objectives:

- The exercise aims to test a new decision-making procedure in bank resolution, from notification of default (FOLTF) to the final decision.

- It is a "desktop" exercise, without actual execution of actions, focused on document review and step discussion.

- Duration is two hours, with an accelerated and linear scenario, without possible deviation.

Participants and roles:

- Only one resolution authority (RA) participates.

- The design and control team includes three people from different functional units (legal, execution, communication).

- An embedded observer (audit) monitors the exercise to identify gaps, information needs, cooperation, and timing compliance.

Scenario and fictitious context:

- Fictitious bank "Mock Continental Capital", non-cooperative SME-oriented LSI, total assets of 12 billion euros.

- Resolution plan favoring business sale with conversion or write-off of capital instruments (WDCCI).

- Assumptions: several credible buyers, reasonable negative valuation, financing ensured by buyer, information available.

Process and methodology:

- Initial communication of FOLTF, then sequence of information exchanges between participants.

- Production of simulated documents (PIA, resolution decision) as templates.

- Control by the team in case of blockage or need for additional information.

- Document distribution via encrypted email, physical environment for the exercise.

Feedback collection and analysis:

- Observer notes during and after the exercise.

- Immediate debriefing (hot debrief) with participants.

- Post-exercise survey sent to participants.

- Final report drafted by the control team, circulated for comments, then finalized.

Materials and annex documents:

- Simplified bank description, balance sheet, solvency and liquidity ratios.

- Resolution plan detailing strategy, communication, operational continuity, legal and tax aspects.

- Simulated evaluation report (Valuation 2), indicating an almost total loss of equity (reduced to 0.1 billion euros).

Rules of procedure (RoP):

- Sequential transmission of information.

- Each participant describes expectations, actions, and recipients of outputs.

- Estimated time for each step is noted.

- Controllers may intervene to maintain the scenario.

These elements structure a realistic, pragmatic exercise focused on validating a critical procedure in bank resolution (p. 1-6).

Main Results and Lessons Learned

Established facts:

- The tested decision-making procedure was implemented in a simulated framework consistent with expectations.

- The exercise identified gaps between the written procedure and participants’ actual discussions.

- Necessary information for decision-making was generally available, but additional information requests were noted.

- Cooperation among participants and timing compliance were observed and assessed.

Assumptions:

- The linear and surprise-free scenario allowed focus on the procedure but limits assessment of flexibility in real situations.

- The fictitious bank’s non-cooperation was simulated to simplify the scenario.

Interpretations:

- The exercise showed the procedure is generally suitable but could be optimized to clarify certain roles and information flows.

- The observer’s role is crucial to detect gaps not formalized in the procedure.

- The "desktop" format is effective for a first procedure evaluation, but other exercise types will be needed to test other aspects (e.g., document platform).

Uncertainties:

- The impact of more complex or unexpected scenarios was not evaluated.

- The actual effectiveness of the procedure in a real crisis remains to be confirmed by complementary exercises.

- The absence of outsourcing (consultants) may limit the diversity of feedback.

These results provide a solid basis to improve the procedure and prepare more comprehensive future exercises (p. 1-5).

Conclusions and Recommendations

The author concludes that the presented simulation exercise constitutes an effective tool to test and validate a new bank resolution decision-making procedure in a controlled environment. It allows identification of gaps, information needs, and possible improvements, while strengthening the operational preparedness of the resolution authority. The final report from the exercise should be shared with all participants to collect their comments before finalization. It is recommended to continue with other exercises targeting complementary aspects, notably the document platform and more complex scenarios. The document highlights the importance of an embedded observer and structured feedback collection via debriefing and surveys. Finally, the simplicity and speed of the exercise favor its integration into regular preparation cycles of resolution authorities (p. 1-6).