On 20 May 2013, the EBA published two consultation papers regarding draft Regulatory Technical Standards (“RTS”) regarding the:
The consultations follow the previous consultation published by the EBA on 11 March 2013 regarding draft RTS on the content of Recovery Plans (see this blog post for more detail) and remain open for comment until 20 August 2013. Final versions of both RTS will be submitted to the European Commission within 12 months of the date on which the “Directive establishing a framework for the recovery and resolution of credit institutions and investment firms (the “RRD”) enters force, but may be amended after the consultation to take into account possible changes to the final RRD.
RTS on the Assessment of Recovery Plans
The draft RTS have been developed pursuant to Article 6(5) of the RRD. Their main objective is to promote harmonisation across the EU regarding the assessment of recovery plans and to facilitate joint assessments of group recovery plans by different supervisory authorities. They outline the three criteria that competent supervisors must take into account when reviewing individual and group recovery plans:
- quality; and
- overall credibility.
The degree of completeness of a recovery plan is to be assessed against the following (non-exhaustive) list of factors:
- whether it covers all the information listed in Section A of the Annex of the RRD (“Information to be Included in Recovery Plans”);
- whether it provides information that is up to date with respect to any material changes to the institution or group to which the recovery plan relates;
- where applicable, an analysis of:
- how and when an institution may apply for the use of central bank facilities; and
- available collateral; and
- whether the recovery plan has been tested against a range of scenarios.
In addition to the information set out above as it applies in a group context, the completeness of group recovery plans is assessed against the following matters:
- the establishment of arrangements for intra-group financial support;
- the identification of obstacles, if any, to the implementation of recovery measures within the group; and
- the identification of substantial practical or legal impediments to:
- the prompt transfer of own funds or
- the repayment of liabilities or assets within the group.
The quality of a recovery plan is assessed against the following (non-exhaustive) list of factors:
- relevance of information;
- comprehensiveness; and
- internal consistency.
Individual Recovery Plans
Overall credibility in the context of individual recovery plans is essentially an assessment of the extent to which:
the implementation of a recovery plan would be likely to restore the viability and financial soundness of the institution in question; and
- the plan or specific options could be implemented effectively in situations of financial stress and without causing any significant adverse effect on the financial system.
‘Restoration of viability and financial soundness’ is assessed against the following (non-exhaustive) factors:
- the level of integration and consistency of the recovery plan with the general corporate governance and risk management framework of the group;
- whether the recovery plan contains a sufficient number of plausible and viable recovery options;
- whether the recovery options included in the recovery plan address the scenarios identified;
- whether the timescale to implement the options is realistic and has been taken into account in the procedures designed to ensure timely implementation of recovery actions;
- the level of the institution`s or group`s preparedness;
- the adequacy of the range of scenarios of financial distress against which the recovery plan has been tested;
- the adequacy of the testing carried out using the scenarios of financial distress;
- the extent to which the recovery options and indicators are verified by the testing carried out using scenarios of financial distress;
- whether the assumptions and valuations made within the recovery plan are realistic and plausible.
‘Effective implementation’ is assessed against the following (non-exhaustive) factors:
- whether the range of recovery options sufficiently reduces the risk that obstacles to the implementation of the recovery options or adverse systemic effects arise due to the recovery actions of other institutions or groups being taken at the same time;
- the extent to which the recovery options may conflict with the recovery options of institutions or groups which have similar vulnerabilities and which might implement options at the same time;
- the extent to which implementation of recovery options by several institutions or groups at the same time could negatively affect the impact and feasibility of recovery options.
Group Recovery Plans
Overall credibility in the context of group recovery plans is essentially an assessment of the extent to which:
- the implementation of a recovery plan would achieve the stabilisation of the group as a whole, or any institution of the group; and
- the plan identifies whether, within the group, there are:
- obstacles to the implementation of recovery measures; and
- substantial practical or legal impediments to the prompt transfer of own funds or the repayment of liabilities or assets.
‘Stabilisation’ is assessed against the following (non-exhaustive) factors:
RTS specifying the range of scenarios to be used in recovery plans
These draft RTS have been developed pursuant to Articles 5(5) and 5(6) of the RRD. They specify the range of scenarios to be designed by financial institutions when testing their recovery plans. The overriding principle is that scenarios should be based on the events that are the most relevant to the institution or group in terms of activity, size, interconnectedness, business, funding model, etc. Institutions are responsible for selecting an appropriate number of relevant scenarios (taking account of the principle of proportionality within the RRD) and national supervisors are responsible for assessing the adequacy of the chosen scenarios. Each distress scenario should be based on events that are exceptional but plausible and would threaten to cause the failure of the institution or group if recovery measures were not implemented in a timely manner and should cover:
a system wide event;
- an idiosyncratic event; and
- a combination of system wide and idiosyncratic events.
Each distress scenario should also include an assessment of the impact of the events on at least each of the following aspects of the institution or group:
- available capital;
- available liquidity;
- business model;
- payment and settlement operations; and