Recovery Planning: Supervisory Assessment Presentation to Bangko Sentral Ng Pilipinas Geof Mortlock World Bank Consultant Purpose of Workshop • This Workshop is intended to assist BSP supervisors to deepen their understanding of bank recovery plans and to provide guidance on the supervisory assessment of recovery plans • It draws on international good practice on bank recovery plans, including lessons learned in the development of recovery planning over the last 10 years 2 Content of presentation • This presentation covers the following issues: o Recap on the purpose and key elements of a bank’s recovery plan o Key findings from assessments of bank recovery plans o Objectives of supervisory assessments of recovery plans o Nature of supervisory assessments o Key issues to assess in reviewing a recovery plan 3 Purpose of a Recovery Plan • A recovery plan is an important part of a bank’s risk management framework • It is intended to enable a bank to restore itself to financial soundness within a short timeframe following a potentially severe financial shock • It also needs to provide a framework for responding to and addressing the causes of the financial stress – especially in idiosyncratic scenarios • It should be designed to deal with a range of adverse scenarios, including idiosyncratic stress, system-wide stress and a combination of both 4 Purpose of a Recovery Plan • A recovery plan should sit alongside, but be separate from, a bank’s contingency plans for capital and liquidity, and its business continuity plan • This is because the recovery plan is intended to address more severe scenarios than do the standard capital and liquidity contingency plans • A recovery plan is also intended to be more comprehensive and holistic – i.e. to integrate capital, liquidity and operational elements into one plan, and to apply on a whole-of-bank and whole-of-group basis • However, as we will discuss shortly, it needs to be integrated closely with these other contingency plans 5 Scope of Recovery Plan • A recovery plan needs to apply not just to the licensed bank, but also to the banking group headed by the bank (or by a holding company of the bank) • Recovery plan triggers, restoration points, recovery actions and all related matters need to apply to the licensed bank and to the regulated group, as well as to any functionally important legal entity in the group • In the case of a financial conglomerate, there should be a recovery plan for the entire conglomerate, prepared by the ultimate holding company, and separate plans for each financial group within the conglomerate • Foreign subsidiaries and branches need to have their own recovery plan that ties into the parent plan 6 Who should be subject to recovery plans • In most advanced countries, recovery planning requirements apply to all licensed banks, and not just to the D-SIBs • This is good practice, given that all banks – regardless of their systemic importance – should have the means to restore themselves to financial soundness • This is equally true for domestic and foreign banks • However, the scale and complexity of recovery plan will obviously differ markedly between the large banks and the small banks 7 Cross-border cooperation • In the case of domestic banks with foreign operations, the recovery plan should deal with recovery strategies for the whole group, but with distinct recovery plans for the subsidiaries and branches • Likewise, for foreign banks with subsidiaries or branches in the Philippines, the parent recovery plan should extend to the subsidiaries or branches, but the foreign bank operations in the Philippines also need their own distinct recovery plans • There is therefore a need for close cooperation between home and host supervisory authorities in the specification of cross-border recovery planning requirements and in the supervisory review of recovery plans 8 Recovery Plan versus Resolution Plan • A recovery plan is separate from and serves a fundamentally different purpose from a resolution plan • A recovery plan is designed to avoid a bank becoming non-viable – i.e. a level of capital from which recovery is not practicable • A resolution plan is based on a resolvability assessment and is designed to enable a non-viable bank to be resolved in a manner that maintains continuity of critical functions and services, protects insured depositors, and minimizes fiscal costs • It is best to treat recovery plans and resolution plans as separate and distinct 9 Key elements of a Recovery Plan • We will discuss the main elements of a recovery plan in detail later in this workshop, but for now it is useful to remind ourselves of the key elements of a recovery plan • A recovery plan will usually have the following elements: o An Executive Summary that provides a succinct overview of the recovery plan o A section on governance that sets out the various responsibilities for the recovery plan approval process and for governance in a period when the plan has been activated o A section on integration that describes how the recovery plan is integrated within the bank’s risk management framework 10 Key elements of a Recovery Plan o A section on critical functions and services – i.e. functions and services needed to maintain essential banking business o A section on triggers that sets out the indicators used to invoke the recovery plan o A section on early warning indicators that provide early-stage alerts to the possible future breach of a trigger o A section on restoration points that sets out the level to which key financial settings should be restored post-recovery o Recovery options, including sequencing, feasible contribution to restoration, approval required, and timeframe 11 Key elements of a Recovery Plan o Preparatory measures, which set out the legal and operational pre-positioning needed for recovery actions o A section on scenarios that sets out the main scenarios as examples of the types of stress to which a bank could be subject and for which recovery actions would be needed – the scenarios generally comprising idiosyncratic, system-wide and a combination of both o Guidance on communications strategies – both proactive and reactive o A section on the testing framework for the recovery plan o A section on the review of the recovery plan 12 Typical findings from reviews of Recovery Plans • Before we discuss the process for supervisory review and the issues a supervisor needs to assess in reviewing a recovery plan, it is useful to briefly identify the typical findings from reviews of bank recovery plans • Some of the typical findings are: o Lack of a succinct Executive Summary – often either too long or alternatively so short and lacking in information as to be of questionable use o Absence of a ready-to-use checklist of key actions for directors and senior management to use in a crisis 13 Typical findings from review of Recovery Plans o Recovery plans often tend to be very long and unwieldy o Inadequate attention to group recovery actions – e.g. support for key subsidiaries and foreign branches o Poorly structured business-as-usual governance – e.g. lack of well-defined ownership and approval process o Inadequate governance in an activation process – i.e. ‘who does what’, role of the Board, level of approval for key actions, etc o Triggers are often too low – e.g. close to breach of regulatory minima 14 Typical findings from review of Recovery Plans o Sometimes there are too many triggers, making it unnecessarily complex o Poorly specified critical functions and services – lack of sufficient detail o Insufficient information on how the recovery plan is integrated into the risk management framework – e.g. linkage to the Risk Appetite Statement, ICAAP, capital and liquidity contingency plans, business continuity plan, etc o Lack of guidance on restoration points – especially for capital and liquidity o Recovery options are often poorly sequenced – e.g. just a long list of unprioritized recovery options 15 Typical findings from review of Recovery Plans o Recovery options are often not quantified as to contribution to capital or liquidity o Recovery options often lack realistic timeframes for implementation o Preparatory measures are often poorly specified for recovery options – especially for capital issuance, securitization, asset disposal and access to standby facilities o Scenarios tend to be insufficiently severe in impact – e.g. often do not assume a breach of regulatory capital and liquidity ratios o Scenarios are often too detailed in narrative (cause of shock), rather than focusing on impact of shock 16 Typical findings from review of Recovery Plans o Often there is inadequate differentiation in recovery strategy between idiosyncratic and system-wide scenarios – e.g. lack of recognition of the greater difficulty in issuing capital, securitizing assets, disposal of assets, and accessing liquidity in a system- wide scenario than in an idiosyncratic scenario o Communications strategies are often inadequately specified o Review procedures are often inadequately specified – e.g. as to the factors to take into account in the annual review and the linkage to reviews of the risk management framework o Insufficient testing undertaken of recovery plans – e.g. lack of Internal Audit assessment, lack of live simulation testing 17 Objectives of supervisory assessment • Let’s now discuss the supervision of recovery plans • There are several objectives in the supervisory assessment of recovery plans: o Ensure that the recovery plan is fit for purpose – i.e. that it will enable a bank to restore itself to financial soundness within a reasonable timeframe o Ensure that the recovery plan complies with regulatory requirements o Ensure that the recovery plan is subject to effective governance arrangements o Ensure that the recovery plan is integrated into a bank’s ICAAP, risk management framework, capital and liquidity contingency plans, and business continuity plans 18 Principles of supervisory assessment • It is important to ensure that supervisory assessment is not just a compliance-checking process • It needs to be a thorough assessment of the quality of the recovery plan and its overall effectiveness • But supervisors also need to remember that ultimate responsibility for the recovery plan rests with a bank’s Board of Directors – supervisors need to minimize ‘moral hazard’ in their supervisory review 19 Off-site assessment • Off-site reviews are the main means by which supervisors assess recovery plans • Assessments would generally be performed by a combination of: o A specialised team developed for the purpose, who would review all bank recovery plans, at least until benchmarking across the banks has been established o At least two of each bank supervision team to review their bank’s recovery plan, working with the specialist team 20 Specialist team • The specialist team would comprise experienced supervisors who can bring expertise in assessing the key elements of banks’ recovery plans, such as: o Design of scenarios and associated impacts, and assumptions o Capital-related issues o Liquidity-related issues o Critical functions and services, and IT issues o Governance o Communications 21 Specialist team • The specialist team enables a consistent approach to be taken across banks in the assessment process • It facilitates ‘benchmarking’ of recovery plans – i.e. comparing one bank’s recovery plan with another’s • It brings greater depth of expertise on recovery planning issues than would otherwise be the case 22 Bank’s supervisory team • However, it is equally important that each bank’s supervisory team is closely involved in assessing their bank’s recovery plan • They bring in-depth knowledge of their bank and therefore can help to provide a deeper analysis of the recovery plan • The bank supervisors can also provide in-depth assessment of the adequacy of the integration of the recovery plan with the bank’s ICAAP, risk management framework, contingency plans, BCP, etc 23 A structured approach • For the supervisory review of recovery plans, a consistent approach to review and assessment needs to be made • The specialist team should review all recovery plans • They should work closely with the bank supervisors from each bank supervision team who have been designated to review their bank’s recovery plan 24 A structured approach • An assessment report should be prepared jointly by the specialist team and the bank supervisors for each bank recovery plan • The report should identify deficiencies and non-compliance issues • These should be conveyed by letter to each bank, followed up with a meeting as appropriate 25 A structured approach • A summary report could also usefully be prepared for BSP senior management that summarises key themes in all recovery plans – e.g. key areas of deficiency and non-compliance • The summary report would also usefully highlight each bank’s performance against the assessment criteria • The report could also identify areas where BSP might need to provide further guidance to banks in revisions to recovery plans 26 Feedback to banks • Once banks have been provided with BSP’s assessment of the draft recovery plan, they should be given reasonable time to make changes to the plan • Supervisors should respond to any reasonable questions that a bank may have in relation to BSP’s comments • Banks need sufficient time to revise the recovery plan • Industry guidance is an effective way of providing guidance to all banks simultaneously on matters that are generalized across the banking industry 27 What needs to be assessed? • The supervisory assessment of a recovery plan needs to include an assessment of many different elements of a recovery plan • These include: o Compliance: Does the recovery plan meet each of the requirements set out in the regulations? o Executive Summary: Does the plan include an effective, well-structured executive summary? o Integration: Is the recovery plan adequately integrated with the risk management framework, and especially the Risk Appetite Statement, ICAAP, ILAAP, capital and liquidity contingency plans, and business continuity plan? 28 What needs to be assessed? o Governance (BAU): Does the recovery plan have a clear governance structure in ‘business as usual’ circumstances? o Governance (in crisis): Does it have a robust governance structure in a situation where the plan must be invoked? o Critical functions and services: Does the plan set out comprehensively the bank’s critical functions and services? o Triggers: Does the plan incorporate triggers for invoking the plan that cover key factors affecting a bank’s viability and provide for early-stage intervention? o EWIs: Does the plan contain Early Warning Indicators (EWIs) linked to the triggers? 29 What needs to be assessed? o Restoration points: Does the plan set out ‘restoration points’ for capital, liquidity and other key factors which the bank should aim to achieve? o Recovery options: Does the plan have a comprehensive set of recovery options, and are they credible, practicable and appropriately sequenced? o Communications: Does the plan set out realistic communication strategies? o Scenarios: Does the recovery plan incorporate sufficiently severe scenarios, including for idiosyncratic, system-wide and hybrid shock scenarios? o Recovery strategies: Does the plan identify recovery strategies for these scenarios? 30 What needs to be assessed? o Preparatory measures: Does the recovery plan identify ‘preparatory measures’ to enable the bank to be pre-positioned for recovery, and are these measures in place? o Testing: Does the recovery plan have a process for regular testing? o Annual review: Does the plan include an annual review process? • Let’s look at each of these 31 Recovery Plan Executive Summary • A recovery plan should have a succinct Executive Summary – i.e. a short section (3 to 4 pages) early in the plan that summarizes the key elements of the plan • This is typically what the Board of a bank would focus on the most, and is likely to be what gets referenced in a situation where the recovery plan needs to be invoked • It should enable the reader/user of the recovery plan to get a sound understanding of the main features of the plan, without the need to read the whole document 32 Recovery Plan Executive Summary • The Executive Summary should set out: o The objectives of the recovery plan and the circumstances in which it would be used, with a focus on the restoration of the bank to financial soundness and maintenance of critical functions and services o The governance arrangements for the recovery plan – especially as regards approval of key actions o A brief summary of critical functions and services o The triggers for invoking the plan o The restoration points for key factors, such as capital and liquidity 33 Recovery Plan Executive Summary • The Executive Summary should set out: o The main recovery options and the likely sequencing of them o A brief description of the scenarios and the likely recovery actions for each scenario o A summary of preparatory measures o Key elements of the communications strategy o Review and testing arrangements 34 Recovery Plan Action Checklist • It is good practice for a recovery plan to include a short checklist of actions for use by directors and management in a crisis • This is more likely to be helpful in responding to a quickly unfolding situation than is a lengthy recovery plan • A typical checklist would include guidance on actions for: o Determining whether triggers have been breached o Invoking the recovery plan 35 Recovery Plan Action Checklist o Ascertaining the situation, its cause(s) and its impacts o Assembling the Crisis Management Team o Ensuring a structure for effective Board oversight o Advising the regulator o Selecting recovery options o Implementation steps for recovery options 36 Recovery Plan Action Checklist o Identifying stakeholder information needs and selecting communication channels o Designing and implementing a communications strategy o Overseeing the recovery strategy o Ensuring that the underlying cause(s) has/have been fully addressed o Determining when business-as-usual can be resumed 37 Integration of Recovery Plan • The recovery plan needs to be closely integrated into the bank’s risk management function • It is especially important to ensure that: o The triggers for the recovery plan are referenced to the relevant risk settings in the Risk Appetite Statement (RAS) – e.g. linked to minimum tolerance positions for capital (CET1, tier 1 and total capital), liquidity (HQLA ratio or LCR), NPL ratios, and credit rating o The restoration points are aligned to desired risk appetite settings in the RAS – e.g. for capital, liquidity, credit rating, etc 38 Integration of Recovery Plan o The scenarios are informed by the results of stress testing, particularly reverse stress tests o The capital-related aspects of the recovery plan are informed by the ICAAP o The liquidity-related aspects of the recovery plan are informed by the ILAAP o The recovery plan is integrated with the capital and liquidity contingency plans, generally on the basis that the recovery plan applies to more severe deterioration in risk condition than in the case of the contingency plans 39 Governance arrangements • The recovery plan should set out the governance arrangements for the plan, covering business-as-usual and crisis situations • For business-as-usual situations, the recovery plan should specify: o Who has lead responsibility for and ownership of the recovery plan – generally this will be the Chief Risk Officer o The role of the CEO and EXCO in reviewing and signing off the recovery plan o The role of the Board Risk Committee and Board in reviewing and approving the recovery plan 40 Governance arrangements • For crisis situations, the recovery plan should specify: o Who has responsibility for invoking the recovery plan – e.g. often this will be the CEO or the CEO and Chairman o The role of the Board in overseeing recovery actions o The executive team responsible for implementing recovery actions – e.g. often through a Crisis Management Committee chaired by the CEO o The level of authority for particular recovery decisions, including delegated authority for some recovery actions 41 Critical functions and services • The recovery plan should describe the critical functions and services of the bank (and wider group) • These are the functions and services that must be maintained in a continuous manner to the extent possible, and therefore prioritized for funding • Critical functions are client-facing functions that are deemed to be critical to the ability of the bank to meet its obligations to depositors and to minimize adverse impacts on the financial system and real economy 42 Critical functions • Critical functions would generally include: o Deposit-taking functions o Retail and wholesale transactions capacity o Ability to meet obligations under credit facilities and to service the loan portfolio o Inter-bank settlement and ability to meet obligations under FMI arrangements o Ability to meet client risk hedging commitments 43 Critical services • Critical services are internally or externally provided services needed to enable the performance of critical functions and management of the bank • Critical services generally include: o IT services required for all critical functions o Services needed for maintaining security, including cyber security o Services needed to enable risks to be identified, measured, monitored and managed o Services needed to maintain client information and to meet legal obligations 44 Critical functions and services • The recovery plan should set out the arrangements needed to ensure that critical functions and services will be maintained with minimal interruption • These arrangements would typically include: o Separation or separability of critical functions and services from other functions and services o Initiatives needed to prioritize provision of funding and allocation of resources (including staffing) to critical functions and services o Robust contractual documentation of any externally provided critical functions and services in ways that identify clearly the responsibilities of all parties and avoid events of default that do not entail suspension of payment 45 Triggers • The recovery plan should set provide a specific set of triggers, any one of which would cause the recovery plan to be invoked • The triggers need to apply well before the bank breaches regulatory requirements and before the point of non-viability has been reached • Typical triggers will include: o Capital ratios (e.g. CET1, tier 1 and total capital) o Liquidity (e.g. HQLA ratio or LCR) o NPL to total asset ratio o Credit rating o Profitability 46 Triggers • It is best to avoid too many triggers or multi-layered triggers • The triggers should be set above regulatory limits • It is common for triggers to be just above or at minimum tolerance levels in the RAS • However, the triggers for the recovery plan should be at a more severe level of risk deterioration than the triggers applicable in capital and liquidity contingency plans 47 Early Warning Indicators • The recovery plan should include or refer to Early Warning Indicators (EWIs) • EWIs should be set in relation to each category of trigger • The purpose of EWIs is to provide an early-stage alert to possible future breaches of triggers • A common approach is for banks to apply graduated EWIs, using a ‘traffic light’ framework, and where each level of alert provides a trigger for early- stage preventive or corrective actions 48 Early Warning Indicators Category of trigger Corresponding EWIs Capital Early-stage deterioration in capital ratios Rapid growth in lending (beyond budgeted level) Increase in higher-risk lending or higher risk preferences Increase in exposure concentration Increase in NPLs Declining profitability Increase in market risk and operational risk 49 Early Warning Indicators Category of trigger Corresponding EWIs Liquidity Early-stage deterioration in HQLA and LCR Shortening in average maturity of funding Adverse movement in maturity mismatch Increased rate of deposit withdrawal Reduced rate of renewal of maturing deposits Increase in funding risk premium Increased volatility in inter-bank funding 50 Early Warning Indicators Category of trigger Corresponding EWIs Asset quality Increase in average duration of days past due Increase in proportion of high LVR loans Increase in proportion of high debt-to-income loans Rising unemployment and underemployment Falling asset prices Deterioration in forecast economic conditions Increasing interest rates 51 Early Warning Indicators Category of trigger Corresponding EWIs Credit rating Adverse observations by rating agency Indication of likely ‘negative outlook’ status Increase in risk appetite without matching risk mitigation Increased volatility in profitability Increased operating expenses/reduced net interest income Projected weakening in capital ratio Projected weakening in liquidity position 52 Restoration Points • The recovery plan should include ‘restoration points’- i.e. key financial indicators which a bank believes is consistent with financial soundness • Restoration points normally include: o Capital ratios (CET1, tier 1 and total capital) o Liquidity (HQLA/total liabilities or LCR) o Credit rating o Target level for performance of critical functions and services 53 Restoration Points • Restoration points are normally set at levels in relation to desired risk appetite in the RAS – i.e. the upper target range for capital, liquidity, asset quality, operational performance etc in which a bank seeks to operate • The restoration points should be well above minimum tolerance levels in the RAS • For the credit rating, the restoration point would normally be, at a minimum, the lowest rating consistent with ‘investment grade’ (i.e. BBB- or equivalent) • Restoration points might need to be higher than the normal desired RAS risk settings in order to restore market confidence 54 Recovery options • The recovery plan should set out a comprehensive suite of recovery options • They should be credible, realistic, practical and achievable within a reasonable timeframe • They should be quantified in terms of maximum plausible contribution to capital and liquidity • They should include implementation guidance • The level of authority for approving each recovery option should be specified 55 Recovery options • The recovery plan should set out recovery options in at least the following types of categories: o Initiatives to increase capital o Initiatives to conserve capital usage o Initiatives to increase liquidity o Operational management • Let’s look at some typical examples of each 56 Raising capital • Capital-raising initiatives might include: o Issuance of ordinary shares via a rights issue to existing shareholders o Issuance of ordinary or preference shares by private placement o Issuance of tier 1 subordinated debt, including debt with the issuer’s right to convert to equity o Issuance of tier 2 subordinated debt o Any of the above might include underwriting by brokers or bankers 57 Capital conservation • Capital-conserving initiatives might include: o Securitizing parts of the bank’s loan portfolio o De-risking the balance sheet – e.g. by swapping HQLA into zero risk-weighted HQLA o Disposal of assets o Lowering the risk profile of new lending o Slowing the rate of new lending 58 Increasing liquidity • Liquidity-enhancing initiatives might include: o Converting HQLA into central bank settlement account balances o Entering into loan sale and repurchase arrangements – e.g. with the central bank or other banks o Drawing down under committed standby facilities o Asset disposals o Re-pricing deposits and lengthening the average maturity of the funding book 59 Operational management • Operational management initiatives might include: o Eliminating non-essential expenditure o Reducing discretionary expenses o Staff lay-offs in non-essential business functions o Sale of non-essential business entities o Changes to the Board and senior management, and to the bank’s systems and controls 60 Addressing the cause of the problem • It is important for a recovery strategy to include initiatives to address not just the impact of the problem, but to also address its cause • This is essential if confidence in the bank is to be satisfactorily restored • Stakeholders need to be assured that the problem will not re-occur – i.e. that the underlying failures that led to the impact on capital or liquidity have been rectified • The recovery plan therefore needs to include guidance on this 61 Addressing the cause of the problem • The kind of guidance that might typically be included in a recovery plan could include: o The establishment of an internal team, possibly chaired by a non-executive director, to oversee an investigation into the issues in question o The appointment of independent experts to undertake a comprehensive review of the cause(s) of the situation o The announcement of these initiatives and a commitment to report findings to regulators and to other stakeholders o A committed plan of action to make recommended changes to systems, controls and staffing, as appropriate 62 Communications • Communications are key to an effective recovery strategy • The information needs of different categories of stakeholders need to be identified • Key messages for each stage of the recovery process need to be formulated • Communication channels needed to be selected to reach each category of stakeholder • Social media are as important as news media 63 Communications • It is always best if the announcement of the ‘bad news’ can be made simultaneously with the announcement of the ‘good news’ • Keeping stakeholders up to date with developments is essential • Misinformed commentary needs to be corrected if it is harmful to the bank’s reputation • The key theme for most communications should be to convey accurate, complete and timely information on the problem(s) affecting the bank, the impact on stakeholders, the financial position of the bank, the recovery actions being taken, the restoration points, and the timeframe for completion 64 Communications • A well-prepared recovery plan will include: o Identification of stakeholders, their information needs, key messages and communication channels o Pre-identified communication strategies o Identification of ‘who does what’, including the role of the Chairman of the Board in high-level communications o Pre-identified contact details for key stakeholders o Identification of stakeholders who can play important supportive roles 65 Scenarios • Recovery plans need to contain information on scenarios • These provide importance context for refining the recovery strategies • The three basic scenarios are: o Idiosyncratic – where the bank alone is in stress and the banking system is unaffected – and is often where the bank sustains operational losses o System-wide – where the banking system is in stress and so too is the bank o Combined – where the an idiosyncratic shock occurs in the context of a system- wide shock 66 Scenarios • Scenarios should be relatively deep in impact – plausible, but sufficiently severe as to cause a breach in a bank’s capital and liquidity ratios • But they should not be so severe as to make recovery impossible • The narrative is not particularly important – i.e. they should focus on impact, with some context on cause, but avoid unnecessary levels of detail • Scenarios should include financial projections for at least two years, taking into account the financial impacts of recovery actions 67 Scenarios • For each scenario, key assumptions should be specified • The recovery options should be selected on the basis of what would be feasible and effective in that particular scenario • Some of the recovery actions will be the same across all scenarios • But some will be different – e.g. it will be more challenging to issue capital, sell assets, securitize loans and access liquidity in a system-wide scenario or combined scenario than in an idiosyncratic scenario 68 Preparatory measures • The recovery plan needs to set out preparatory measures to enable recovery actions to be implemented effectively and in a timely manner • Preparatory measures mainly include legal and operational pre-positioning for recovery actions that involve capital issuance, but can also be necessary for some liquidity-related recovery actions • The bank should identify these measures and establish a work program to ensure that the necessary pre-positioning is in place • Annual testing should include assessment of the adequacy of the preparatory measures 69 Preparatory measures • Typical preparatory measures include: o Terms sheets for ordinary shares, tier 1 subordinated debt and tier 2 subordinated debt o Draft capital issuance documentation and supervisory pre-approval o Terms sheet for underwriting agreement and draft documentation o Capital issuance implementation guidance o Identification of possible institutional investors for a private capital issuance 70 Preparatory measures • Typical preparatory measures include: o Securitization documentation and implementation arrangements o Liquidity standby facility terms sheet and documentation o Legal documentation for the sale and repurchase of loans, and identification of loans eligible for this o Identification of possible merger partners o Documentation of procedures for merger implementation 71 Testing of the recovery plan • The recovery plan should be subject to some form of testing annually • Internal audit needs to be part of the testing process, including regular assessment of the preparatory measures, assessment of the integration of the recovery plan with the risk management framework, and assessment of the governance process for the recovery plan • Desk-top forms of testing should also be performed, which are designed to assess particular aspects of the recovery plan, such as the activation framework, the selection of recovery options, and the guidance for implementation of recovery actions 72 Testing of the recovery plan • Occasional live simulation exercises should be undertaken by a bank to assess its recovery plan • These are based on a chosen scenario and are usually held over a one to two day period • They will be designed to test for particular aspects of the recovery plan – e.g. the process of assessing the situation, its cause and impact, or the selection of recovery options, or the communications process • The most useful exercises are ones which involve the Board and senior management 73 Testing of the recovery plan • Key decision-makers should perform their normal responsibilities in the test, in accordance with the authority delegated to them under the recovery plan • External parties should be role-played by bank staff or independent consultants engaged by the bank – e.g. the roles of the news media, the supervisory authority, key counterparties, etc • Exercises benefit from independent observers • The results of the exercises should be analysed, reported to the Board and used as an input to the next review of the recovery plan 74 Annual review • The recovery plan should be subject to comprehensive annual review by the bank • This should be informed by changes to the RAS, risk systems and controls, risk environment, ICAAP and ILAAP • The review should take into account any testing undertaken of the recovery plan • It should be informed by internal audit and any external reviews • The revised recovery plan should be subject to review and approval by senior management and the Board 75 March 2021 Questions and comments are welcome