Banks deemed systemically important to the financial system are required to produce and maintain recovery and resolution plans*. These set out the arrangements in place to ensure their ability to recover from short-term stresses, in the event of a material deterioration in their financial situation.
Plans must include recovery options that cater for a range of scenarios of severe macroeconomic and financial stress that could be relevant to the bank’s specific conditions, including system-wide events and stresses specific to the individual entities as well as its wider group, if applicable.
Increased scrutiny from regulators
US and EU regulators continue to push recovery and resolution planning as a key driver to reduce systemic risk and the likelihood of an institution being ‘too big to fail.’
In April 2016 the Federal Reserve Board (FRB) and the Federal Deposit Insurance Corporation (FDIC) jointly determined, for the first time, that certain recovery and resolution plans submitted by domestic systemically important banks (D-SIBs) were ‘not credible, or would not facilitate an orderly resolution’ under the US Bankruptcy Code.
US regulators issued prescriptive guidance, increasing expectations for the eight US D-SIBs’ recovery and resolution plan submissions, due July 1 2017.
Impact on banks
Banks have had to allocate more resources and implement strategic initiatives to address requirements outlined in the recovery and resolution planning guidance.
Regulators expect institutions to embed resolvability concerns into business-as-usual processes (risk management, contingency planning, operational policies and procedures, and governance practices).
Banks are also required to develop a framework and strategy for the evaluation of recovery and resolution plans and establish a continuous monitoring programme to oversee risk management, control and governance processes.
Following the Brexit outcome of the UK referendum in June 2016, financial services firms now need to factor the impact of this added complexity into their recovery and resolution plans.
Under the Dodd-Frank Act US Bank Holding Companies (BHC) with consolidated assets exceeding $50 billion are required to submit recovery and resolution plans to the FRB and FDIC on a biennial, annual or semi-annual basis, depending on the size and complexity of the organisation. Under the Banking Recovery and Resolution Directive all EU banks must submit recovery plans on an annual basis. National resolution authorities (e.g. the Prudential Regulatory Authority in the UK) prepare the resolution plans for each bank. The plans are based on data submissions made by the banks, using prescribed templates issued by the authorities.
- Access to critical services may be restricted or lost if the real estate supporting those services are not owned by a resolution resilient entity or service company.
- There may be tax, regulatory or legal implications of disposing of real estate or transferring it to a service company or resolution resilient entity.
- Access to critical technology infrastructure and applications may be restricted or lost if not owned by a resolution resilient entity.
- The disposal of a business may require the migration of data from source to external technology platforms.
- The disposal of a business could impact the pension rights of existing employees.
- There are potential tax implications for the bank if the disposal of a business results in employees having to exit share options schemes.
Third Party Contracts
- Third party supplier contracts may need to be assessed to determine whether they can be relied upon for critical services.
- Where third party contracts are shared across multiple entities, untangling the inter-group arrangements could potentially place the contracts at risk.
How Holley Holland can help
Since 2012 we have worked closely with US and European banks to review their recovery plans and to support them in addressing impediments that may cause significant disruption to the continuity of critical services during a recovery event.
We have supported banks to make major changes to their legal entity structures and intra-group service provision models, as well as to develop documentation (e.g. Operational Continuity Playbooks) in order to strengthen overall resolvability.
As a result, we have gained substantial experience in the practical steps needed to ensure plans for facilitating an orderly resolution are robust, viable and credible to the regulators.
Viability of disposal options
Regulators expect the disposal of assets or parts of the business included in any recovery and resolution plan to be feasible and viable
Assess operational continuity strategy
Regulators expect banks to have appropriate governance, robust service agreements with appropriate charging structures and detailed playbooks
Review critical services
The identification and validation of critical services, material entities and shared services is an essential component of the recovery and resolution plan. Robust processes must be in place to manage the process
Assessing the viability of your recovery plans
Review communication plans
Banks are required to develop comprehensive communications plans to accompany the deployment of recovery options
Review service agreements
Regulators expect banks to have in place detailed service agreements for all critical services with appropriate charging mechanisms ,ensuring that the service is performed on an arm’s length basis