On 16 July 2013, the Financial Stability Board (FSB) published the following three papers intended to assist authorities and systemically important financial institutions (SIFIs) in implementing the recovery and resolution planning (RRP) requirements set out under the FSB’s key attributes of effective resolution regimes for financial institutions:
This paper describes key considerations and pre-conditions for the development and implementation of effective resolution strategies, dealing with such issues as:
- the sufficiency and location of loss absorbing capacity (LAC);
- the position of LAC in the creditor-hierarchy, particularly with respect to insured and uninsured depositors;
- operational and legal structures most likely to ensure continuity of critical functions;
- resolution powers necessary to deliver chosen resolution strategies;
- enforceability, effectiveness and implementation of “bail-in” regimes;
- treatment of financial contracts in resolution, specifically the use of temporary stays on the exercise of contractual close-out rights;
- funding arrangements;
- cross-border cooperation and coordination;
- coordination in the early intervention phase;
- approvals or authorisations needed to implement chosen resolution strategies;
- fall-back options for maintaining essential functions and services in the event that preferred resolution strategies cannot be implemented;
- information systems and data requirements;
- post-resolution strategies;
- single point of entry (SPE) versus multiple point of entry (MPE) resolution strategies; and
- disclosure of resolution strategies and LAC information.
This guidance is designed to assist authorities and CMGs in their evaluation of the criticality of functions that firms provide to the real economy and financial markets. It aims to promote a common understanding of which functions and shared services are critical by providing shared definitions and evaluation criteria.
After describing the essential elements of a critical function and a critical shared service, the annex to the guidance provides a non-exhaustive list of functions and shared services which could be critical:
- Deposit taking;
- Lending and Loan Servicing;
- Payments, Clearing, Custody & Settlement;
- Wholesale Funding Markets; and
- Capital Markets and Investments activities.
- Finance-related shared services; and
- Operational shared services.
This guidance focuses on two specific aspects of recovery plans:
- criteria triggering senior management consideration of recovery actions (“triggers”), specifically: design and nature, firm’s reactions to breached triggers, and engagement by supervisory and resolution authorities following breached triggers; and
- the severity of hypothetical stress scenarios and the design of stress scenarios generally.