EBA Publishes Consultation Paper on draft RTS on recovery plans

Introduction

On 11 March 2013, the European Banking Authority (EBA) published a consultation paper concerning “Draft Regulatory Technical Standards (RTS) on the content of recovery plans under the draft directive establishing a framework for the recovery and resolution of credit institutions and investment firms” (RRD).

The draft RTS have been developed pursuant to Articles 5(7) and 7(4) of the proposed RRD and relate to the information to be contained in recovery plans that are not subject to simplified obligations under Article 4 of the RRD.  The consultation itself runs until 11 June 2013.  Thereafter, the EBA will submit the final draft RTS to the Commission within twelve months from the date of entry into force of the RRD (expected to be early in 2015), although the EBA acknowledges that the RTS may have to be amended, depending on the final form of the RRD.  The regulation will enter into force on the 20th day following that of its publication in the Official Journal of the European Union.

A summary of the requirements is provided below.  However, as currently drafted, the requirements of the draft RTS should not be a cause of concern, particularly not for FSA regulated firms already used to complying with FS12/1.

Draft RTS on Recovery Plans

General

Recovery plans are expected to contain a discussion of at least the following five items (but not necessarily in the following order):

  • a summary of the recovery plan;
  • a discussion of governance issues;
  • a strategic analysis;
  • a communication and disclosure plan; and
  • an analysis of preparatory measures.

Summary

As the name suggests, this section takes the form of a summary of the key elements of the recovery plan, taken from the other sections.

Governance

The governance section of a recovery plan should provide a detailed description of:

  • how and by whom the recovery plan was developed, the way in which it is integrated into the risk management framework of the firm and processes in place to ensure that it is kept up-to-date;
  • the policies and procedures governing plan approval;
  • the conditions and procedures necessary to ensure timely implementation of recovery options, including:
    • escalation and decision-making processes; and
    • indicators which may require plan activation; and
    • management information systems.

Strategic analysis

The strategic analysis section of a recovery plan should provide:

  • a description of the institution/group (as applicable), including:
    • a mapping of core business lines and critical functions to legal entities and material branches[1];
    • a detailed description of the group’s legal and financial structures, including:
      • intra-group legal, operational and financial interconnectedness; and
      • external interconnectedness with respect to material branches/legal entities;
      • recovery options dealing with a number of stress scenarios and providing the following information with respect to each recovery option:
        • a description of the option;
        • an impact and feasibility assessment;
        • an operational contingency plan, dealing at the very least with the maintenance of:
          • operational processes (both for any separated and remaining entities); and
          • access to financial market infrastructure; and
          • an assessment of the effectiveness of recovery options and adequacy of indicators in a range of scenarios of financial distress so as to facilitate an overall assessment of recovery capacity.

Communication and disclosure plan

A recovery plan should include a detailed communication and disclosure plan which:

  • addresses both internal and external communication;
  • describes, for each recovery option, how the communication and disclosure plan would be implemented; and
  • provides an assessment of the potential impact on the business and on general financial stability.

Preparatory measures

A recovery plan must include an analysis of any preparatory measures:

  • to facilitate the sale of assets/business lines in a timeframe conducive to the restoration of financial soundness; and
  • that the institution/group has taken or plans to take in order to facilitate implementation of the recovery plan or improve its effectiveness.


[1] A “material branch or legal entity‟ is one that:

  • substantially contributes to profits/funding or holds an important share of assets, liabilities or capital;
  • performs key commercial activities;
  • performs key operational, risk or administrative functions centrally;
  • bears substantial risks;
  • could not be disposed of or liquidated without being likely to trigger a major risk;
  • has importance for the financial stability of at least one of the Member States in which it is incorporated or operates.

EBA Template Highlights the Data Challenge of RRP

Introduction

On 23 January 2013, the European Banking Authority (EBA) published its recommendation on the development of recovery plans.

The recommendation is a follow-up to the EBA’s Discussion Paper on recovery plans published on 15 May 2012 and is primarily for the benefit of national competent authorities pending the finalisation of the EU directive establishing a framework for the recovery and resolution of credit institutions and investment firms (the “RRD”).  It aims to ensure consistency and convergence on highest standards across the EU.

The requirement to complete the template recovery plan outlined in the recommendation applies to a list of 39 banks, as detailed in Schedule 1 to this article.  The template itself must be completed no later than 31 December 2013.

Summary of Recovery Plan Template

The template recovery plan itself is divided into three sections:

  • General overview – providing background information on the structure of the group and the governance processes supporting the recovery plan;
  • Core of recovery plan – dealing with the design and implementation of credible recovery options; and
  • Follow-up – addressing the measures that can be taken to optimise successful resolution strategies.

A more detailed summary of the requirements is provided in Schedule 2 to this article.

The Data Challenge

Whilst much inevitably depends on the specific drafting of an individual group’s recovery plan, the EBA template does raise the prospect that a number of EU banks will be required to effectively produce two recovery plans.  Taking the UK as an example, broadly speaking, banks preparing recovery plans pursuant to FS12/1 will find that they have already undertaken most of the analysis necessary in order to produce an EBA compliant recovery plan.  Thankfully, much of the required data will have been generated as part of their Module 2 (Recovery Plans) submissions.  However, firms may need to look further afield into Modules 3, 4 and 5 in order to meet certain other requirements of the EBA template, such as those regarding:

  • group legal structure diagrams;
  • functional mappings;
  • intra-group dependencies; and
  • information management processes.

In addition, certain other aspects of the EBA template are not specifically addressed under FS12/1.  This includes the requirement to produce an “Operational Contingency Plan” explaining in detail how internal operations and access to market infrastructure will be maintained during the implementation of a recovery option.

The practical difficulties presented by the EBA template recovery plan are symptomatic of a wider issue hampering the ability of firms to meet the RRP needs of regulators.  This stems from the absence of any kind of real agreement amongst national regulators as to the set of information to be generated by firms in support of their RRPs.  Unfortunately, current indications are that any chance of uniformity with respect to RRP data requirements is actually receding yet further, with authorities in jurisdictions such as Canada and Hong Kong largely declining to follow earlier precedents set by regulators such as the FSA.  Given the administrative and financial burden associated with RRP production, the challenge to firms in the future will be to find a way to create a flexible enough view of underlying data so as to avoid having to completely reinvent the wheel for each regulator.  A technology led solution would seem to be the answer and is long overdue.

Schedule 1

List of Banks Subject to the EBA Recommendation on Recovery Plans

 

 

  • ABN AMRO Group NV
  • Allied Irish Banks, Plc
  • Alpha Bank AE
  • Banco Bilbao Vizcaya Argentaria, SA
  • Banco Comercial Portugues SA
  • Banco Santander SA
  • Bank of Cyprus Public Company Limited
  • Bank of Ireland
  • Barclays PLC
  • Bayerische Landesbank
  • BNP Paribas SA
  • Commerzbank AG
  • Credit Agricole Group
  • Cyprus Popular Bank Public Co Ltd
  • Danske Bank A/S
  •  Deutsche Bank AG
  • Deutsche Zentral-Genossenschaftsbank AG
  • Dexia
  • DNB Bank AB
  •  Erste Group Bank AG
  • Eurobank Ergasias
  • Group BPCE
  •  HSBC Holdings PLC
  • ING Bank N.V.
  • Intesa Sanpaolo SpA
  •  KBC Group NV
  • Lloyds Banking Group Plc
  • National Bank of Greece
  •  Nordea Bank AB
  • OTP Bank Nyrt
  • Piraeus Bank
  • Rabobank Group
  • Raiffeisen Zentralbank AG
  • Royal Bank of Scotland Group Plc
  • Skandinaviska Enskilda Banken AB
  • Societe Generale SA
  • Svenska Handelsbanken AB
  • Swedbank AB
  • UniCredit SpA

 

Schedule 2

Summary of EBA Template Recovery Plan

 

The EBA template is divided into three main sections, as detailed below.

1. General Overview

1.1 Summary

This should include at least:

  • the key elements presented in each section of the plan;
  • the main changes since the last update, if applicable;
  • an overview of the steps to be taken before finalisation/update of the plan.

1.2 Description of the group

This section should provide a:

  • general overview of the institution’s:
    • legal structure (including significant branches);
    • business model;
    • activities and jurisdictions in which it is active;
    • main core business lines; and
    • interdependencies;
  • mapping of:
    • legal and operational structures i.e.:
      • significant legal entities and branches;
      • activities conducted;
      • business units; and
      • employees by business unit;
    • legal and financial structures i.e.:
      • significant legal entities and branches;
      • turnover;
      • cash flows;
      • liquid assets;
      • funding needs;
      • large exposures;
      • P&L;
      • Tier 1 capital;
  • description of:
    • intra-group financial links, including:
      • material intra-group exposures;
      • material intra-group funding relationships;
      • capital mobility; and
      • intra-group guarantees;
    • critical or systemically relevant group functions, including:
      • external functions:
        • payment systems;
        • services provided to other institutions;
      • centralised functions
        • treasury;
        • collateral management;
        • IT;
        • access to market infrastructures;
        • administrative;
        • operational;
        • outsourcing.

1.3   Discussion of internal governance

This section addresses internal governance issues regarding the design of the recovery plan, providing a summary of:

  • how the plan was developed, including:
    • identification of persons responsible for the different sections; and
    • discussion of how the plan is integrated into corporate governance and risk management frameworks;
  • by whom the plan was approved, including:
    • involvement of senior management;
    • whether the plan was presented to internal/external auditors;
    • whether the plan was presented to the risk committee; and
    • confirmation of approval by Board of Directors and/or Supervisory Board;
  • the governance of recovery options during a crisis, including:
    • a description of escalation processes; and
    • the decision making process surrounding plan activation;
  • how the plan is to be updated, including:
    • responsible individuals;
    • frequency of updating; and
    • a description of the updating process in response to material changes affecting the institution or its environment.

2. Core of recovery plan

This section requires firms to provide a “menu of recovery options” enabling an institution to respond to financial stress, whether idiosyncratic or systemic, and to assess the feasibility and impact of each option.  At a minimum, the information detailed below is to be provided.

2.1 General overview of recovery options

Firms are required to provide a general description of:

  • all available recovery options; and
  • the actions that would be taken to enable timely execution of each option.

2.2 Recovery indicators

Recovery indicators determine the point at which, in a given situation, an institution starts to consider appropriate recovery options. They are both quantitative and qualitative in nature and tend to relate to the solvency and liquidity of the institution in question under stressed scenarios.  However, they do not automatically activate a specific recovery option, instead acting as an early identification of the best way forward.  This part of the recovery plan should detail how recovery indicators:

  • are incorporated into an institution’s risk management framework;
  • align with liquidity or capital contingency plan triggers;
  • align with the institution’s risk appetite framework.

2.3 Assumptions and scenarios

The objective of this section is to define a set of stress scenarios (idiosyncratic, systemic and a combination of the two) under which the efficiency of the different recovery options can be assessed by reference to their impact on such factors as:

  • solvency;
  • liquidity;
  • funding;
  • profitability; and
  • operations.

2.4 Recovery options

Recovery options are extraordinary in nature and can include:

  • external recapitalisation;
  • divestment of assets, subsidiaries or business units (or the whole institution);
  • voluntary restructuring of liabilities;
  • reduction of balance sheet;
  • strengthening of liquidity position.

With respect to each recovery option, a firm is required to perform:

  • an impact assessment, addressing:
    • financial and operational impact; and
    • external impact;
  • a risk assessment, addressing:
    • feasibility i.e. the risk that an option cannot be implemented; and
    • systemic consequences i.e. the risks resulting from implementation; and
  • a decision making process regarding implementation of recovery options.

2.5 Operational contingency plan

For each recovery option an institution is expected to provide an operational contingency plan detailing the way in which its operations can be maintained following implementation of a recovery option.  This includes at least an analysis of:

  • internal operations. e.g.:
    • IT systems;
    • Suppliers; and
    • HR operations; and
  • access to market infrastructure, e.g.:
    • clearing and settlement facilities;
    • payment systems; and
    • additional requirements in terms of collateral.

2.6 Communication plan

Firms are expected to provide a detailed communication plan regarding both internal and external stakeholders, addressing:

  • implementation of the communication plan under each recovery option; and
  • the potential impact on the business and on general financial stability.

2.7 Information management

Firms are required to describe general policy with respect to information management together with an analysis of specific information needs in relation to each recovery option.  Furthermore, each institution must be able to demonstrate an ability to satisfy not only its own information needs under each recovery option, but also the needs of its regulators.  Information required by a regulator would include:

  • intra-group exposures;
  • trades booked on a back-to-back basis;
  • amounts of liquid assets in parent banks and subsidiaries;
  • off balance sheet activities; and
  • large exposures.

3. Follow-Up

Follow-up measures focus primarily on:

  • preparations that can be taken in advance of the implementation of a recovery option; and
  • areas for improvement.