Recovery plans: Questions for supervisors to consider in reviewing recovery plans Prepared for Bangko Sentral ng Pilipinas April 2021 Purpose of paper 1. This paper is intended to assist Bangko Sentral ng Pilipinas (BSP) bank supervisors in their review and assessment of the DSIBs’ recovery plans. 2. The paper should be read in conjunction with the presentation from the World Bank to BSP on 8 April 2021 in the workshop on recovery planning. 3. In preparing this set of guidance, the World Bank has had close regard to the BSP regulation on recovery planning: Circular No. 904 of Series 2016, Guidelines on Recovery Plan of a Domestic Systemically Important Bank (DSIB), issued by the BSP Monetary Board in its Resolution No. 254 dated 12 February 2016. 4. In this context, the paper provides guidance on expectations for recovery plans and indicative questions for supervisors on the following elements of recovery plans: • Executive summary of the recovery plan • Governance of recovery plans • Integration of recovery plans with the bank’s risk management framework • Overview of the bank and group, and critical functions and services • Triggers for activation of the recovery plan • Restoration points to achieve financial soundness • Recovery options • Scenarios • Communications • Preparatory measures • Testing of the recovery plan • Review of the recovery plan Executive summary of the recovery plan General guidance 5. The recovery plan should include an executive summary encompassing information on the trigger framework, internal escalation and decision-making processes, recovery options and communication strategy. It should serve as a roadmap to the recovery plan which allows the senior management and Board of a bank to quickly understand and assess the recovery options in a severe stress. 6. The Executive Summary should be relatively brief and should provide a succinct summary of all of the elements of the plan, including: a. the objectives and scope of the plan; b. governance of the plan – both in terms of approval process and governance in a recovery plan activation process; c. its integration with the risk management framework, ICAAP, BCP and related matters; d. the triggers for recovery plan activation, and escalation and implementation arrangements; e. the ‘restoration points’ for key variables – i.e. especially capital and liquidity; f. the recovery options; g. a brief description of the scenarios; h. communications; i. process for regular review and testing. 7. The Executive Summary should either contain or include reference to a short checklist of decisions and actions that the senior management team and Board can use to: a. determine whether to invoke the recovery plan; b. ascertain the nature of the problem affecting the bank, its cause, and its impact; c. determine the recovery strategy, including recovery actions and communications; d. ensuring that all actions are subject to effective oversight and coordination. Indicative questions for supervisors 8. The Executive Summary should be relatively brief (e.g. 3 to 5 pages) and should provide a succinct summary of all of the elements of the plan, including: 2 a. Does the recovery plan contain an executive summary that is succinct and practical in its focus? b. Does the executive summary cover the items listed above? c. Would the executive summary be a useful guide for senior management and directors for use of the recovery plan in a situation where the plan needs to be applied? Is the executive summary easy for a user to access and apply? d. Does the executive summary contain a checklist of key decisions and actions that senior management and the Board need to make in deciding to invoke the recovery plan, in determining the nature and impact of the problem being addressed, and in applying recovery actions? If not, does a separate document exist which contains such a checklist? Governance of recovery plans General guidance 9. The recovery plan should contain a description of the specific governance arrangements relating to the plan, including clearly articulating the respective roles and responsibilities of the Board and senior management during the different stages of recovery planning, namely: • development, review, approval, and ongoing maintenance of the recovery plan during a business-as-usual environment; and • monitoring and internal escalation processes for triggering the recovery plan, and execution of recovery options during a crisis. 10. The recovery plan should contain a section on governance that explains how the recovery plan was developed, the processes for obtaining senior management approval, and the processes for obtaining Board Risk Committee and Board approval. There should be a senior-level ‘owner’ of the recovery plan, with responsibility for overseeing its development and review, and submission for approval. The owner is often a bank’s Chief Risk Officer. The plan should clearly identify the responsibilities of the Board, the relevant Board committees and senior management in relation to the recovery plan. 11. The recovery plan should describe how the plan would be activated, based on the triggers for the plan, and identify who has responsibility for monitoring the triggers and for authorising the activation of the plan or any part of the plan. The plan should also identify the management structure during the recovery phase, including who has responsibility for particular recovery actions and the authorisations and delegated authorities required for recovery actions. It is common for the CEO or the CEO and Chairperson of the Board to have responsibility for the activation of the recovery plan. A Crisis Management Team (CMT) is often established by the CEO to coordinate the recovery process, overseen by the CEO and EXCO, and with ultimate oversight by the Board. It is usual for the recovery plan to specify, for each recovery option, the level of authority needed to obtain approval to undertake that particular recovery option. 3 12. Senior management and the Board need to ensure that the recovery plan covers all of the regulatory requirements and is comprehensive. As importantly, they need to ensure that the recovery plan is ‘fit for purpose’ – i.e. that the recovery plan enables the bank to restore itself to financial soundness within a reasonably short timeframe (generally within 3 months of the trigger points in the plan being breached, and no more than 6 months), sufficient to ensure that the bank is in compliance with all prudential requirements, is prudentially sound and resilient to future shocks, can resume normal operations (at least in respect of its critical functions and services) and has the confidence of all relevant stakeholders, including the financial markets. This means that the senior management team and Board must ensure that: a. the recovery plan has clearly defined triggers that apply before there is any breach of prudential requirements – i.e. the triggers should occur sufficiently early as to enable the bank to take corrective actions soon enough to avoid breaches of prudential requirements and to avoid, where possible, a significant deterioration in market confidence in the bank; b. the recovery plan is based on well-defined scenarios that are realistic and sufficiently severe as to result in the bank sustaining a major fall in capital and liquidity (see later in this note), with all relevant assumptions pertinent to the scenarios being clearly identified, and where scenarios include both idiosyncratic and system-wide scenarios (and a hybrid of the two); c. the recovery plan contains specific and detailed recovery actions that are realistic and practicable, with the priorities for each recovery action being clearly identified; d. the recovery plan quantifies the expected contribution of each recovery action to the purpose for which it is intended – e.g. that recovery actions designed to increase capital include quantification of the amount of capital expected to be raised by the particular recovery action; e. the recovery actions are supported by details relating to how each recovery action would be implemented, including step-by-step implementation guidance and associated documentation required for implementation; f. the stakeholders (internal and external) have been identified and their information needs assessed, and the means by which they will be provided with information (and when) is identified in the recovery plan; g. all staff are aware of the recovery plan and know their responsibilities in relation to it; h. the recovery plan is closely integrated into the bank’s risk management framework, including early warning indicators, stress testing, risk monitoring, risk limits and controls, ICAAP, liquidity contingency planning and business continuity planning; and 4 i. the recovery plan is kept under regular (generally annual) review, is updated to reflect changes to the bank’s operations and structure, and is subject to regular testing (e.g. an annual ‘desk top’ form of testing and a live simulation exercise every three years). 13. The Board needs to maintain a close overview of senior management’s performance of its responsibilities in relation to the recovery plan in order satisfy itself that the senior management has performed all of its responsibilities effectively. The Board also need to understand its own responsibilities in relation to the recovery plan, including the recovery actions entrusted to the Board. The Board needs to maintain a comprehensive understanding of the recovery plan and to be satisfied that it complies with all regulatory requirements, is comprehensive and is practical and realistic. They also need to ensure that the plan is subject to regular testing and to assess the results of the tests. Occasionally, it would be appropriate for the Board to participate in the tests of the recovery plan, both as active participants and as observers. Issues to be assessed by supervisors 14. Indicative questions that supervisors should consider in reviewing the governance arrangements for recovery plans are: Governance over the preparation and sign-off of the recovery plan a. Does the recovery plan have an ultimate ‘owner’ in the bank, with suitable skills, experience and seniority, such as the Chief Risk Officer? b. Was the recovery plan prepared by a senior-level team of staff with dedicated responsibility for developing the recovery plan? c. Did the recovery plan team comprise representatives of the key areas of the bank relevant for the recovery plan, including the CRO (or deputy), CFO, Head of Treasury, Head of Operations, Head of IT, Head of Legal, Head of Compliance and Head of Communications? d. Was the recovery plan subject to comprehensive oversight by the Board Risk Committee and ultimately by the Board? e. How thorough was the Board Risk Committee and Board review and sign-off of the plan? How much time did the Board Risk Committee and Board dedicate to reviewing the recovery plan? f. How thorough was the controlling shareholders’ review and sign-off of the plan, particularly as regards responsibilities applicable to them, such as in relation to capital issuance? g. What arrangements have been made to ensure that all relevant staff are aware of the recovery plan? Governance in the activation of the recovery plan 5 a. Is there a clearly defined governance process for the activation of the recovery plan? Who has the power to activate the recovery plan? b. Does the recovery plan clearly set out responsibilities for decision-making in respect of particular recovery actions? For example, does it set out those recovery actions which are subject to Board approval, those which are subject to CEO approval, and those which can be made by others under delegated authority? c. Is there a clear allocation of authorities for exercising recovery actions? d. Is there a crisis committee with responsibility for coordinating recovery actions? e. Is there a Board-level crisis committee that oversees and approves the recovery strategy and key recovery actions? f. Do members of the Board understand their responsibilities in the recovery plan, including for particular recovery actions? Integration of recovery plan with risk management arrangements General guidance 15. Recovery plans need to be closely integrated with banks’ risk management policies and processes. To ensure effectiveness, recovery planning should be treated as a critical component of a bank’s risk management framework, rather than an isolated process that is merely prepared for regulatory compliance reasons. Several linkages are particularly noteworthy: a. the role that a bank’s stress testing processes (and especially reverse stress tests) play in assessing the potential impacts on capital and liquidity arising from financial and economic shocks, and for informing scenarios used in the plan; b. the importance of early warning indicators, supported by robust management information systems, in informing a bank’s management and Board on the triggering of the recovery plan, and the linkage between the early warning indicators and relevant risk settings in the Risk Appetite Statement (RAS); c. the close linkages between the recovery plan and a bank’s ICAAP and ILAAP, particularly as regards the setting of the restoration point for capital and liquidity; d. the importance of the triggers in the recovery plan being informed by and linked to the minimum risk tolerances in the RAS; e. the importance of the restoration points in the recovery plan being informed by and linked to the desired risk settings in the RAS; f. the linkages between the recovery plan (especially triggers and recovery actions) as regards capital-related matters in the recovery plan and the bank’s capital 6 contingency plan, and as regards liquidity-related matters in the recovery plan and the bank’s liquidity contingency plan; g. the linkages between recovery planning and business continuity planning, particularly in relation to key operational requirements for recovery actions; and h. the feedback from the recovery plan to the bank’s risk appetite settings and risk limits (e.g. adjustments of risk limits and capital and liquidity buffers following the materialization of shocks that necessitated the activation of the recovery plan, or in situations where the supervisors conclude that recovery plan lacks credibility). 16. It is therefore important that a bank ensures that its recovery planning processes are fully integrated into the wider risk management framework. The recovery plan should include information that sets out the nature of the linkages between the recovery plan and the above matters, and the means by which the bank seeks to ensure that there is a strong degree of integration of recovery planning into the risk management framework. Issues to be assessed by supervisors 17. Indicative questions that supervisors should consider in reviewing the integration of the recovery plan with the bank’s risk management framework and related matters are: a. Is the recovery plan adequately integrated with the bank’s stress testing arrangements? b. Have the scenarios, restoration points and recovery actions been informed by stress test results? In particular, have reverse stress tests been used by the bank to identify the magnitude of economic and financial shocks required to cause the bank to breach recovery plan triggers? c. Is the recovery plan integrated with the bank’s risk management framework and RAS, especially as regards the setting of triggers and restoration points? Are the triggers for the recovery plan aligned to minimum tolerance levels in the RAS in respect of capital and liquidity? d. Are Early Warning Indicators (EWIs) used in the recovery plan informed by the bank’s stress testing and RAS? e. Is the recovery plan integrated with the bank’s ICAAP and capital contingency plan? f. Is the recovery plan integrated with the bank’s liquidity contingency plan? g. Is the recovery plan integrated with the bank’s business continuity plan? Overview of the bank – and critical functions and services General guidance 7 18. The recovery plan should include comprehensive information on a bank’s structure and operations. This should include information on: a. the ownership structure of the bank, including an identification of all parties with a significant ownership stake; b. the group structure if the bank has subsidiaries or is owned by a holding company, including an organization chart for the group and an identification of each entity in the group; c. the functions performed by the bank and each of the other entities in the group – domestically and in other countries; d. the financial products and services provided by the bank and each entity in the group; e. key risks of the bank and each entity in the group, and a description of (or reference to) the risk management framework applied to identify, measure, monitor and manage all material risks; f. the nature of the inter-connections between entities in the group, including financial and operational inter-connections; g. location of all branches of the bank and offices of other entities in the group, domestically and in other countries; h. identification of correspondent banks and other banks or financial service providers with which the bank or group has significant business dealings; i. nature and extent of participation of the bank and group in financial markets, by category of financial market; j. nature and extent of participation of the bank and group in payment and settlement systems; k. entities that provide critical functions or services to the bank and group (see below for a definition of critical functions and critical services); and l. extent and nature of any outsourcing of critical functions and services to parties outside the group. 19. An important aspect of recovery planning is the identification of a bank’s critical functionality. Banks need to identify the critical functions and services they perform, the legal entities and jurisdiction in which the functions and services are located, and the inter-dependencies between these entities. Recovery actions should be designed to ensure that, at a minimum, these functions and services can be maintained without interruption. 20. The definitions of critical functions and critical services applied by the Financial Stability Board (FSB) – the international body that provides guidance on bank recovery plans - are set out in the box below. 8 FSB definition of bank critical functions and services “Critical functions are activities performed for third parties where failure would lead to the disruption of services that are vital for the functioning of the real economy and for financial stability due to the banking group’s size or market share, external and internal interconnectedness, complexity and cross-border activities. Examples include payments, custody, certain lending and deposit-taking activities in the commercial or retail sector, clearing and settling, limited segments of wholesale markets, market- making in certain securities and highly concentrated specialist lending sectors.� “A critical function has the following two elements: • it is provided by a bank to third parties not affiliated to the bank; and • the sudden failure to provide that function would be likely to have a material impact on the third parties, give rise to contagion or undermine the general confidence of market participants due to: o the systemic relevance of the function for the third parties; and o the systemic relevance of the bank in providing the function.� “Critical shared services are activities performed within the firm or outsourced to third parties where failure would lead to the inability to perform critical functions and, therefore, to the disruption of functions vital for the functioning of the real economy or for financial stability. Examples include the provision of information technology given the dependency of core banking processes on IT and other services such as facility management and administrative services.� 21. Recovery plans should identify all critical functions and services, as well as the legal entities (including outsourced providers) that perform these functions and services, the jurisdiction in which they are located, and the inter-dependencies between them. 22. At a minimum, the critical functions should include: a. deposit-taking, particularly the capacity to receive deposits into transaction- facilitated deposit accounts and short-term deposits; b. wholesale funding, including the capacity to receive deposits from other banks, correspondent banks and corporate entities, capacity to transact with the central bank for money market operations, issuance and servicing of bonds and paper, capacity to meet obligations under securities lending, repos and risk transformation services; c. lending and loan servicing, particularly the capacity to provide credit under committed credit facilities (such as overdrafts and standby facilities), participation in existing syndicated lending facilities, trade finance, leasing and factoring; d. credit card services; e. payments, clearing and settlement, and custodial services, including retail and wholesale payments services, capacity to meet obligations to payment and settlement 9 service providers and other Financial Market Infrastructures (FMIs), treasury and cash management services; f. capacity to meet obligations (paying and receiving) in relation to financial derivatives, such as swaps, options, forward contracts and other financial instruments used by the bank or its clients for risk hedging purposes; and g. capacity to meet obligations in relation to capital market transactions and services. 23. At a minimum, the critical services should include the IT and other systems and controls required to: a. perform all critical functions (as identified above); b. maintain all customer and client records; c. maintain all financial and management accounting records and reporting obligations; d. identify, measure, monitor and control all material risks (including credit risk, exposure concentration risk, liquidity risk, interest rate risk, basis risk, currency risk, equity risk, asset price risk, operational risks and reputation risk); e. meet all regulatory obligations to BSP and other legally binding regulatory requirements. 24. The recovery plans should set out the recovery actions – financial and operational – to ensure that all critical functions and services can be maintained without interruption. Issues to be assessed by supervisors 25. Indicative questions that supervisors should consider in reviewing the recovery plan information relating to the overview of the bank are: a. Does the recovery plan provide sufficient detail of the bank’s organisational structure and group structure? b. Is there sufficient information on the ownership structure of the bank, including an identification of all parties with a significant ownership stake? c. Does the recovery plan identify adequately all critical functions and services, including critical shared services within the bank and group (see later in this paper)? d. Does it identify the legal entities that provide critical functions and services? e. Does it identify the inter-dependencies (functional and financial) between legal entities providing critical functions and services? f. Does it identify all material outsourcing arrangements for critical functions and services, including the legal entities with responsibility for performing these 10 functions and services, the jurisdictions in which they are based, and reference to the legal contracts under which they operate? g. Does it identify back-up and business continuity arrangements for all critical functions and services, or refer to these matters being identifiable in the bank Business Continuity Plan? h. Are cross-border operations adequately identified? i. Does it identify the financial products and services provided by the bank and each entity in the group? j. Does it identify the sources of funding for the bank and other entities in the group? k. Does it identify the key risks of the bank and each entity in the group, and a description of (or reference to) the risk management framework applied to identify, measure, monitor and manage all material risks? l. Does it identify correspondent banks and other banks or financial service providers with which the bank or group has significant business dealings? m. Does it identify the nature and extent of participation of the bank and group in financial markets, by category of financial market? n. Does it identify the nature and extent of participation of the bank and group in payment and settlement systems? Triggers for activation of the recovery plan General guidance 26. A recovery plan needs to have clearly defined triggers for invoking the recovery plan. The triggers should relate to the key risk metrics relevant to the financial soundness of a bank and banking group. Typically, the triggers will comprise: • Capital ratio (e.g. CET1, tier 1 and total capital ratios) • Liquidity ratio (e.g. HQLA to total liabilities, LCR) • Asset quality (e.g. NPLs over 90 days past due as a percentage of total loans) • Profitability (e.g. NPAT as a percentage of total assets or equity) • Credit rating 27. The triggers should be set at a level that enables the recovery plan to be invoked well before the bank breaches prudential requirements and before it gets into any significant difficulties. The triggers should enable a recovery plan to be invoked proactively ahead of emerging stress so that a bank is well placed to respond quickly and effectively to avoid breaches of prudential requirements or adverse market confidence impacts. Triggers for capital and liquidity ratios are often set at or slightly above the minimum tolerance levels in the bank’s RAS. Similarly, triggers for asset quality are generally set at or below the maximum tolerance in the case of NPLs/total loans and, for profitability, 11 at or slightly above the minimum tolerance for ROE or ROA. If a credit rating is used as a trigger, then this would usually be set at or slightly above minimum tolerance for the rating level in the RAS – e.g. one or two notches above the minimum rating for investment grade (BBB- or equivalent). 28. It is often desirable for a bank’s recovery plan to include a trigger relating to the disruption in the performance of critical functions and services. For example, some banks include a trigger relating to a sustained interruption to the performance of any material critical functions and services for more than x hours (e.g. more than 8 hours) or where the disruption to critical functions and services has the potential to cause material damage to the bank’s reputation and/or ability to meet payment and settlement obligations. 29. Not all triggers need to be quantitative. Recovery plans can also be designed to include triggers of a qualitative nature. Qualitative triggers could include elements such as: requests from counterparties for early redemption of liabilities; difficulties in issuing liabilities at current market rates; an unexpected loss of senior management; adverse court rulings; negative market commentary; fraud or malfeasance events; and significant events that could cause significant reputational damage. 30. In addition to the triggers, banks should include in their recovery plan or in supplementary material the nature of the early warning indicators (EWIs) they have in place in respect of each trigger, and the means by which they monitor such indicators. Banks should maintain comprehensive early warning indicators that enable them to identify, as early as possible, emerging stress that could potentially lead to a breach in one or more triggers for the recovery plan. The early warning indicators would appropriately relate to each category of trigger, including capital, liquidity, asset quality and profitability, as well as early warning indicators relating to qualitative triggers. Indicative examples of EWIs are set out below: Risk category EWIs Capital • Early-stage deterioration in capital ratios • Capital ratios falling below target levels in the RAS or in ICAAP • Rapid growth in lending • Increase in the proportion of higher-risk lending • Increase in risk appetite • Adverse movement in risk environment • Deterioration in risk management quality • Increase in risk-preferent activity • Deterioration in asset quality • Declining profitability Liquidity • Early-stage deterioration in liquidity ratios • Reduced reinvestment of maturing deposits • Shortening of average maturity of funding • Acceleration in withdrawal of deposits • Increase in risk premium on funding costs • Adverse movements in asset/liability maturity mismatch 12 • Reduced cashflows (actual or forecast) from loan portfolio • Reduced ability to obtain funding in the inter- bank market Asset quality • Early-stage deterioration in asset quality indicators • Increase in unemployment and underemployment • Lengthening in loans past due • Increase in requests from borrowers for loan restructuring due to stress • Increase in interest rates • Increase in household and corporate leverage • Decline in asset prices relevant to collateral values Profitability • Increase in operating expenses • Reduced net interest margins • High wage inflation • Weakening in asset quality • Increased competitiveness and contestability in key financial markets • Higher forecast expenses associated with IT/cyber security risk factors • Higher forecast expenditures on bank restructuring and technology updates Issues to be assessed by supervisors 31. Indicative questions that supervisors should consider in reviewing the triggers for recovery plans are: a. Does the recovery plan differentiate between the triggers for activation of the recovery plan as a whole, and the triggers for the activation of specific recovery actions? b. Do the triggers enable the recovery plan to be activated well before any breach of prudential requirements has occurred? c. Are the triggers set in relation to the risk tolerances in a bank’s Risk Appetite Statement (e.g. the bank’s lower tolerance levels for capital ratios and liquidity ratios, and its upper tolerance for impaired loans and for exposure concentration ratios)? d. What monitoring arrangements are in place to enable the senior management and the Board to regularly monitor data in relation to the triggers? e. What systems apply for alerting the senior management and Board to a breach or risk of future breach of the triggers? 13 f. Are the triggers supported by comprehensive EWIs? Are there EWIs that provide reliable predictors of possible future breaches of recovery plan triggers, including in relation to capital, liquidity, asset quality and profitability? g. What monitoring arrangements are in place to enable the senior management and Board to regularly monitor data in relation to the EWIs? h. Are the EWIs structured so that they identify escalating levels of potential risks of future trigger breaches, such as a ‘traffic light’ structure for EWIs? i. Does the plan clearly set out the process by which a bank would activate its recovery plan and to activate particular recovery actions? j. Does it identify the persons responsible for the different elements of the activation process? k. Is there a clear documentation of delegated authorities for particular actions? l. Is there an appropriate process for escalation of decision-making? Restoration points for recovery 32. The ‘restoration point’ for recovery needs to be clearly specified in a bank’s recovery plan. At a minimum, a bank must restore capital and liquidity to levels that meet the regulator’s regulatory requirements, with a sufficient cushion to achieve a very low probability of any future breaches of these requirements. However, in many situations, higher restoration points should be specified in order to ensure that the bank in question can restore and maintain market confidence - and as such, retain access to inter-bank funding - and to reduce the probability of subsequent near-failures. In many cases, banks tend to set their restoration points towards the higher end of the target range for key risk metrics in their RAS – e.g. as for capital and liquidity. 33. Bank recovery plans should set out clearly the restoration points being applied by the bank and the rationale for the restoration points. The restoration points should include restoration levels in relation to: • CET1 ratio; • Tier 1 capital ratio; • total capital ratio; • HQLA ratio; • LCR ratio; • profitability, expressed both in ROA and ROE terms; and • asset quality, expressed in terms of relevant indicators of impaired and restructured assets as a percentage of total assets or total loans. 34. The restoration points for the recovery plan should also include reference to a target credit rating (where the bank already has a rating). Other restoration points can also be applied, including ones relating to defined measures of market confidence in the bank, depositor 14 satisfaction, other stakeholder satisfaction, and resumption of business-as-usual operation of all critical functions and services. Issues to be assessed by supervisors 35. Supervisors should assess whether the recovery plan sets out clearly and specifically the restoration points for the above factors, and the reasons stated by the bank for selecting the restoration points in question. Supervisors need to satisfy themselves whether the restoration points are realistic and achievable. They also need to assess whether the restoration points are consistent with the bank resuming normal operations, especially for critical functions and services, and maintaining market confidence. 36. Indicative questions that supervisors should consider in reviewing the restoration points for recovery plans are: a. Does the recovery plan establish restoration points for key variables, such as capital, liquidity, asset quality and profitability? b. How has the bank set these restoration points? Were the levels of restoration points for capital and liquidity set in relation to the bank’s minimum tolerances in the Risk Appetite Statement? Were they set taking into account the bank’s stress tests? c. Do the restoration points provide reasonable assurance that future breaches of prudential requirements will not occur? In particular, has the bank set post-recovery capital and liquidity levels at a sufficiently high level? d. Would the restoration points enable the bank to retain an acceptable credit rating (sufficient to maintain access to financial markets and inter-bank funding)? Recovery options General guidance 37. It is essential that recovery options are set out in a comprehensive manner, in sufficient detail as to enable any person using the recovery plan to understand what is required to implement the recovery action. Each recovery action should be accompanied by step-by- step implementation guidance. The person(s) authorised to take each action in the implementation process should be identified clearly, with all delegated authorities made clear. The maximum plausible amount that the recovery action would contribute to capital or liquidity should be identified. 38. Emphasis needs to be on recovery actions which are practicable and can be implemented within a relatively short timeframe (e.g. within 3 months, and no longer than 6 months). A risk associated with bank recovery plans is that they evolve into long lists of potential actions, without adequate specification of how practical they are, their contribution to recovery and the timeframe for implementation. This risk can be lessened by banks prioritizing the recovery actions, giving prominence to recovery actions with the greatest near-term benefit in terms of restoring capital, liquidity, profitability and improving asset 15 quality, and which will have credibility with key stakeholders (such as depositors, other creditors, the news media and rating agencies). 39. For each recovery action, the recovery plan should specify: a. the quantitative amount that the recovery action would contribute to the restoration of capital, liquidity, profitability or asset quality; b. the period of time required to complete the recovery action; c. the processes and procedures required to implement the recovery action to the point of completion; d. the documentation that has been prepared or that will need to be prepared to ensure prompt implementation of the recovery action; e. the potential legal and regulatory requirements which must be met to implement the recovery action and the means by which these requirements will be met; f. the persons in the bank (including directors) with the authority to approve implementation steps for the recovery action. 40. Recovery actions also need to address the underlying causes of the problem in order for the recovery action to have credibility. For example, if poor lending decisions led to a deterioration in asset quality and associated loan losses, and a decline in capital, the recovery actions need to go beyond restoring capital adequacy and asset quality. The recovery package also needs to address the underlying cause of the problem – in this example, the poor lending decisions. Accordingly, recovery actions should provide at least generic guidance as to the steps that a bank would take to identify and resolve the underlying cause of the problems, and to do so in a manner that has credibility to all stakeholders, including rating agencies, depositors, market participants and the news media. This would often suggest the need for some form of independent expert party to be engaged to assist in the resolution process – and hence the need for guidance in the recovery plan on how this would be facilitated. Recovery actions in relation to capital 41. The recovery plan should set out comprehensive and detailed recovery actions to restore capital (CET1, Tier 1 and total capital) to the target level. The recovery actions need to be realistic, practicable and credible. Priority should be given to recovery actions that have the greatest probability of successful implementation in the shortest period of time, and which make the greatest contribution to capital restoration. Recovery actions should generally be capable of completion within 3 months desirably, and not more than 6 months. 42. Recovery actions should be classified into specific categories, including initiatives to: a. raise equity from existing shareholders via a rights issue (desirably underwritten by an investment bank) or through private placement of equity to existing controlling shareholders, consistent with what is permitted under the bank’s constitution; 16 b. raise equity from new investors, such as the issuance of shares to selected potential shareholders; c. convert debt into equity where the bank has a tranche of debt with contractual provisions to enable it to be converted into equity upon specified triggers being met; d. write down debt where the bank has a tranche of debt with contractual provisions to enable the debt to be written down upon specified triggers being met; e. suspension of distributions (including dividends) to shareholders; f. reduction or suspension in new lending, so as to reduce the amount of additional capital required; g. initiatives to reduce operational expenses, so as to reduce the amount of additional capital required; h. sale of assets or change in the mix of assets so as to reduce the amount of additional capital required and to increase the risk-weighted capital ratio by reducing the amount of risk-weighted credit exposures; i. sale of subsidiaries; j. issuance of new debt that meets the eligibility criteria for inclusion in tier 2 capital. 43. With each recovery action, the bank should specify the amount estimated to be raised or capital savings induced by the recovery action and the timeframe for completion. In each case, the recovery plan should set out the step-by-step implementation arrangements, together with the draft documentation required for the recovery action to be implemented. In the case of issuing new capital instruments or raising capital from existing shareholders, the recovery plan should include as attachments the draft capital issuance documentation and underwriting documentation, or at least detailed terms sheets for the documentation. As noted in the discussion on scenarios, later in this document, the feasibility, amount, sequencing and timeframe for implementation of recovery options will be different in an idiosyncratic scenario than in a market-wide scenario. In general, recovery actions will be more feasible, faster to implement and capable of contributing a greater amount to recovery in an idiosyncratic scenario than in a market-wide scenario. This is as true for capital-related recovery actions as it is for other recovery actions. Recovery options for liquidity 44. Recovery actions for liquidity, like all recovery actions, should be specific, realistic, practicable and credible. The recovery actions should be set out in order of priority, based on the probability of successful implementation and contribution to the estimated need for additional liquidity. Speed of implementation is critical for any liquidity actions, where success and credibility of recovery actions are measured in hours and days, rather than weeks or months. 45. Recovery actions should be set out under specific categories, such as initiatives to: 17 a. sell marketable securities; b. obtain liquid assets from controlling shareholders where feasible; c. raise liquidity via borrowing from other banks under committed standby facilities; d. borrow from the central bank under business-as-usual liquidity facilities provided routinely to banks by the central bank; e. sell illiquid assets in exchange for liquid assets, including via sale and repurchase agreements or securitisation; f. lengthen the maturity profile of liabilities; g. shorten the maturity profile of assets (where feasible); h. reduce the need for liquidity by reducing new lending and reducing operating expenses, where feasible; i. renegotiating the terms of scheduled debt repayments and debt servicing where this is considered feasible and prudent. 46. All recovery actions should be quantified in terms of the estimated impact on liquidity. The implementation steps and timeframe for implementation should be set out in relation to each recovery action. Any documentation needed for liquidity actions should be set out in draft form attached to the recovery plan or at least detailed terms sheets for documentation provided as part of the recovery plan. Recovery options for profitability 47. All recovery actions should meet the standard test of being realistic, practicable and credible, and capable of delivering the intended outcomes in a realistic timeframe. Given that the restoration of profitability is likely to be less urgent and critical to a bank’s survival (in the short-term), and likely to take longer to achieve than capital and liquidity recovery actions, the recovery plan could be expected to attach lower priority to profitability restoration initiatives in the short-term. However, the restoration of profitability will be critical for the longer-term survival of the bank, both in terms of capital maintenance and market confidence. 48. Recovery actions should be set out comprehensively with detailed implementation steps. The following categories of recovery actions are likely to be helpful: a. Initiatives to reduce operating expenses, consistent with maintaining acceptable risk management practices and critical functions and services. b. Initiatives to increase revenue from under-performing business lines where feasible and where this is consistent with the bank’s risk appetite and risk management frameworks. 18 c. Initiatives to reduce or eliminate business activities that do not meet defined ROA and ROE hurdles. d. Initiatives to reduce average funding costs where feasible, consistent with the bank’s risk appetite and risk management frameworks. 49. Where feasible, each category of recovery action should include estimates of the contribution that the initiatives in question are likely to make to increased profitability, the timeframe expected to achieve this and the steps required to achieve it. Recovery options for asset quality 50. Recovery actions in respect of improving asset quality need to meet the standard tests of being realistic, practicable and credible. By their nature, recovery actions relating to asset quality improvements will tend to be somewhat longer term than the more immediate needs of restoring the bank to sound capital and liquidity positions. Nonetheless, recovery actions should be achievable within timeframes that are likely to be seen as credible and realistic by financial markets, rating agencies, depositors and other stakeholders – they need to assist in restoring market confidence in the bank. 51. Recovery actions should be classified into categories, such as initiatives relating to: a. the restructuring of loans to enhance recoverability – e.g. by elongating the term of the loan, suspending interest payments, etc; b. transferring impaired loans into an asset management company owned by the bank; c. selling impaired loans to other parties; d. write-off loans considered to be irrecoverable; e. strengthening the quality of lending policies and procedures, and associated credit risk management arrangements, in order to enhance asset quality for new loans. 52. In the case of each recovery action, the plan should identify expected impacts on asset quality and the timeframe required to achieve the desired outcomes. Implementation steps should be specified in detail. Issues to be assessed by supervisors 53. Indicative questions that supervisors should consider in reviewing the recovery actions (in general terms) are: a. Does the recovery plan contain a comprehensive suite of recovery actions in respect of capital, liquidity, asset quality, profitability, maintenance of critical functions and services, and communications with stakeholders? b. Are the recovery actions credible and realistic? 19 c. Have the recovery actions been set out by priority of action (i.e. sequence of implementation) and in the relevant categories? d. Have the impacts of the recovery actions been quantified (e.g. in terms of contribution of the bank’s capital, liquidity, etc)? e. Can the recovery actions be implemented in a timely manner (e.g. within 1 week for near-term liquidity recovery, within 1 month for longer-term liquidity recovery, and within 3 to 6 months for capital recovery)? f. For each recovery action, is there comprehensive and detailed guidance on step-by- step implementation procedures? g. Have the responsible persons and delegated authorities been identified for each recovery action? h. Have any legal or regulatory obstacles to recovery actions been identified and the solutions to those obstacles set out in the recovery plan? i. Is there supportive documentation for recovery actions – e.g. capital issuance term sheets, indicative capital offer documents, liquidity standby facility documentation, etc? j. Does the recovery plan adequately differentiate between idiosyncratic and system- wide scenarios in terms of the impact these would have on: i. the selection of recovery actions; ii. the implementation process for recovery actions; iii. the likely success or failure of recovery actions; iv. the amount of funds obtained (or saved) by particular recovery actions; and v. the timeframe for implementation of recovery actions? Capital recovery actions 54. Indicative questions that supervisors should consider in reviewing the capital-related recovery actions include: a. Do the recovery actions include sufficient capital-raising options? b. Have the capital-raising options been prioritised in terms of the sequence in which they would occur? c. Have the capital-raising options been quantified, indicating a maximum plausible amount of capital that could be raised (or capital savings that could be made)? d. How long would it take to raise capital? Does the recovery plan provide sufficient detailed information to determine whether capital can be raised within (at most) a 3 to 6 month period from the time that the recovery plan activation has been triggered? 20 e. Does the recovery plan identify in detail the implementation steps required to implement particular capital-raising recovery actions? f. Does the recovery plan identify all regulatory approvals needed for capital-raising recovery actions? g. Has the bank prepared the necessary legal documentation, or at least terms sheets, for capital-raising recovery options? h. For bail-in debt (if any), is the process for contractual bail-in documented? i. Does the recovery plan adequately differentiate between idiosyncratic and system- wide scenarios in terms of the types of capital recovery actions that could be used, the amounts likely to be raised, the probability of successful implementation and the timeframe required for implementation? j. Have other recovery actions for capital restoration and conservation been identified in sufficient detail, such as: i. selling assets; ii. selling subsidiaries; iii. reducing the average risk weight of assets by changing the composition of assets to lower-risk assets; iv. reducing new lending; v. suspending distributions to shareholders; vi. reducing expenditures, etc? k. Have these options been prioritised and quantified? l. Have the implementation procedures for each option been documented adequately? Liquidity recovery actions 55. Indicative questions that supervisors should consider in reviewing the liquidity-related recovery actions include: a. Have the liquidity-raising/saving recovery options been prioritised? b. Are the recovery options practicable? Can they be implemented in sufficient time to meet liquidity needs? c. Are they quantified? d. Do they contain detailed implementation guidance? e. Do the recovery actions include sufficient options for reducing cash outflows – e.g. via reduced new lending, reduced expenditures, suspension of dividends, etc? 21 f. Do the recovery actions include sufficient options for increasing cash inflows – e.g. via access to standby facilities, liquid asset injections from shareholders, acceleration of loan repayments? g. Does the plan contain sufficient initiatives to increase High Quality Liquid Assets? h. Does it contain sufficient measures to attract new deposits and retain existing deposits, and to lengthen the maturity of funding where feasible? i. Has draft documentation been developed to facilitate liquidity recovery actions, such as draft liquidity injection documentation, standby documentation, terms sheets for such documentation, etc? j. Do the recovery options identify potential sources of borrowing – e.g. particular banks, securitisation vehicles, or a borrowing facility with shareholders? Profitability recovery actions 56. Indicative questions that supervisors should consider in reviewing the profitability- related recovery actions include: a. Do the recovery actions include adequate initiatives to restore the bank to an acceptable level of profitability, and within a reasonable period of time? b. Are cost reduction actions adequately identified and quantified? Would cost reduction options weaken the ability of the bank to continue to perform critical functions and services? c. Are actions to increase revenue and margins adequately identified and quantified? d. Would revenue-enhancing recovery actions be consistent with maintaining prudent risk management or create excessive risks? e. Have the recovery actions been prioritised and quantified? f. Have the procedures required to implement them been adequately documented? Asset quality recovery actions 57. Indicative questions that supervisors should consider in reviewing the asset quality- related recovery actions include: a. Do the recovery actions include adequate initiatives to identify impaired assets? b. Do the recovery actions include undertaking an asset quality review (if needed)? If so, have the procedures been adequately identified and documented? c. Does the recovery plan identify how impaired assets would be managed in ways that maximise recovery value? 22 d. Does it contain measures to address the problems that created asset impairment – e.g. measures to strengthen the credit risk management process? e. Does it contain initiatives to prevent further deterioration in asset quality – e.g. ceasing to extend credit to poor quality borrowers, etc? Critical functions/services recovery actions 58. Indicative questions that supervisors should consider in reviewing the critical function/service-related recovery actions include: a. Does the recovery plan identify all material critical functions and services, including the legal entities that perform each category of function and service and the legal jurisdiction in which it operates? b. Does the recovery plan identify how the bank will maintain critical functions and services with no or minimal interruption? c. How realistic are these recovery actions? d. Have the recovery actions been prioritised? e. Are the recovery actions supported by detailed implementation processes and IT arrangements? f. Are they consistent with the bank’s business continuity plan, where consistency would be expected? Scenarios for recovery plans General guidance 59. BSP’s regulation on recovery planning requires banks to include three types of scenario in their recovery plans: a. an idiosyncratic scenario – i.e. a scenario in which the bank has been impacted by financial shocks, such as major loan losses, liquidity events or operational risk losses, but where the financial system remains stable; b. a market-wide scenario – i.e. where the financial system is in stress, such as in a severe recession, with many banks sustaining capital and liquidity pressures, and with the bank in question being similarly affected; and c. a combined scenario, combining elements of the idiosyncratic and market-wide scenarios which occur simultaneously – e.g. where the financial system is under stress and the bank in question sustains major losses. 60. The recovery plans should provide reasonably comprehensive descriptions of the scenarios used for the recovery plan, including detailed information on the magnitude of 23 impact on capital, profitability, asset quality and liquidity, together with all material assumptions made. It is particularly important that the scenarios used include severe impacts on both capital and liquidity, where the bank’s minimum regulatory requirements for capital and liquidity are breached. 61. It is important that banks do not design recovery plans on the basis of particular causes of an adverse impact on their capital and liquidity position. The cause of the impact on capital and liquidity is much less important than the magnitude of the impact. The recovery planning process risks becoming overly complicated if plans are developed on the basis of detailed macroeconomic analysis and with overly specific narratives. Moreover, recovery plans tend to be less useful if they are overly scenario-specific. Therefore, it is generally preferable for a recovery plan to have broad-based, high-level scenarios that do not involve detailed storylines, but that provide relevant details for impacts on: a. loan losses; b. operation risk losses (if the scenario involves these – e.g. a fraud or money laundering event); c. profits; d. capital; e. cash inflows and outflows; f. liquidity position; g. losses (or gains) arising from market risks as a result of assumed changes in asset prices, interest rates and exchange rates. 62. Scenario analysis should include an identification of all material assumptions made for the scenario, including in respect of macroeconomic variables and the state of the financial system. Financial projections for each scenario should generally extend for two years from the point of initial impact. The projections should incorporate the financial impacts of recovery actions taken in the scenario. The selection of recovery actions should take into account the nature of the scenario. For example, initiatives to raise capital and to access liquidity from other banks are likely to be much more challenging in a market-wide or combined scenario than in an idiosyncratic scenario. The recovery strategy should reflect these types of considerations. Issues to be assessed by supervisors 63. Indicative questions that supervisors should consider in reviewing the scenarios for recovery plans are1: 1 See also the guidance provided by other supervisory authorities on recovery plans. The Bank of England’s guidance Supervisory Statement SS9/17 Recovery Planning , December 2020 is a good example. This can be accessed at: 24 a. Does the recovery plan contain credible and severe scenarios, with clearly specified and quantified impacts on capital, liquidity, asset quality and profitability? b. Do the scenarios include impacts on capital and liquidity that are severe enough to cause the bank to breach its minimum capital and liquidity regulatory requirements? c. Are the scenarios based on the bank’s stress testing (especially reverse stress tests)? If so, are the assumptions and model parameters for the stress tests identified (either in the recovery plan or by reference to another document)? d. Do the scenarios include financial projections for the bank and banking group extending out two years? e. Are the financial projections supported by clearly identified assumptions? f. Do the scenarios clearly differentiate between an idiosyncratic scenario (in which the financial system is operating normally and only the bank in question has sustained major losses) and a market-wide scenario (in which many banks are experiencing very adverse economic and financial shocks)? g. Does the recovery plan identify the assumptions made as to the different impacts that idiosyncratic and market-wide scenarios have on the nature, feasibility, timeframe and success of recovery actions? h. Does the recovery plan adequately identify the recovery actions taken for each scenario and the incorporate the financial impacts of these actions into the financial projections? i. Does the recovery plan differentiate between recovery actions needed for fast-moving events and slow-moving events, especially as regards impacts on liquidity and the likely recovery strategies needed to respond to these? Communications General guidance 64. Communications aspects of recovery plans are important. In particular, recovery plans need to identify all stakeholders (internal and external), the information needs of each stakeholder category and the means by which those needs can best be addressed. Communications actions should include proactive and reactive communication initiatives, including: a. call centre communications arrangements and upscaling for high volumes of calls; b. web-based communications; https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/supervisory- statement/2020/ss917update-december- 2020.pdf?la=en&hash=7EE218D863A63481884C23BD12C17AA72C147F81 25 c. Question and Answer material; d. communications with correspondent banks and other counterparties on matters relating to scheduled payments and settlements; e. communications with credit rating agencies and the financial news media; f. information and processes to facilitate news media briefings; and g. guidance for communications via social media. 65. Recovery plans should also address the need for synchronized communications, especially the ability of a bank to announce, with credibility, the recovery actions it plans to take at the same time as it announces the adverse impact that prompted such actions. This is especially important for banks listed on the stock exchange or with other regulatory arrangements that require the banks to announce material developments that could impact on investor decisions as soon as the information becomes available. In that situation, it is critical that a bank has a well-developed strategy to enable it to announce the ‘good news’ (i.e. the recovery actions) at the same time as the ‘bad news’. 66. The recovery plan should identify the responsibilities of the Board, CEO, CFO and other key officers in the communications strategy. The plan should set out the means by which communications will be coordinated within the bank, within the group and with the relevant agencies (e.g. BSP and the stock exchange). Issues to be assessed by supervisors 67. Indicative questions that supervisors should consider in reviewing the governance arrangements for recovery plans are: a. Does the recovery plan identify all internal and external stakeholders? b. Does the recovery plan set out stakeholder information needs in sufficient detail? c. Does it set out how and when the information will be provided to each category of stakeholder? d. Does the recovery plan cover communications via different processes and are these adequate, including communications via: i. news media statements; ii. news media conferences; iii. social media; iv. call centres; v. web-based information; vi. automated emails; and vii. telephone banking messaging? e. Does the recovery plan contain communication process steps in sufficient detail? f. Does the recovery plan identify who would be the lead communicators within the bank (including at Board and senior management levels)? g. Does it include draft material for news media releases, call centre scripts, etc? 26 h. Does the bank have a strategy to escalate call centre capacity for high-volume calls? Preparatory measures General guidance 68. To improve the feasibility of recovery actions, a bank needs to consider the key inter- dependencies for implementing each recovery action and identify the preparatory measures that should be taken in advance to alleviate operational barriers and complexities. Such preparatory measures might, for example, include possible changes to organisational or legal structures in the bank and group, the separation of critical functions and services so that they can be self-supporting, and the preparation of documentation and procedures to facilitate recovery actions (especially those involving capital issuance, securitization, asset sales and accessing liquidity via standby facilities). 69. The recovery plan should describe the preparatory measures to be taken to improve the effectiveness of recovery options, with work program to implement the measures. 70. Examples of common preparatory measures include: a. Share issuance terms sheets, documentation and issuance procedures – for ordinary shares, preference shares and hybrid instruments (e.g. subordinated debt capable of conversion to equity). b. Subordinated debt terms sheets, documentation and issuance procedures, including tier 1 subordinated debt and tier 2 subordinated debt. c. Terms sheets and documentation for equity and debt underwriting agreements. d. Identification of potential underwriters. e. Identification of potential institutional investors. f. Identification of potential merger partners and indicative procedures for merger. g. Documentation and operational pre-positioning for securitization of loans. h. Documentation and operational pre-positioning for asset sale and repurchase arrangements. i. Procedures and arrangements needed to sell subsidiaries if required. j. Indicative shareholder resolutions and Board resolutions for particular recovery actions. k. Terms sheets and documentation for liquidity standby facilities. 27 l. Draft indicative news media statements and Q and A material. m. Documentation of service-level agreements for all outsourced services and critical shared services. Issues to be assessed by supervisors 71. Indicative questions that supervisors should consider in reviewing preparatory measures for recovery plans are: a. Has the bank identified potential impediments to recovery actions that could be addressed through preparatory measures? b. Has the bank identified the preparatory measures it intends to put in place? c. Is the list of preparatory measures complete and comprehensive? d. Does the bank have a work program to implement preparatory measures? Is the work program adequately structured and resourced? e. What progress has been made in implementing preparatory measures? f. Have the preparatory measures been approved by the Board? g. Has internal audit assessed the progress made in implementing preparatory measures? h. Has there been any testing of the preparatory measures? Testing of recovery plans by banks General guidance 72. It is critical that recovery plans are subject to rigorous testing. Testing can be done in a number of ways, depending on objectives and scope. For example, tests can be structured to evaluate: a. the ability of the bank to detect emerging stress, such that the triggers for the recovery plan are able to be invoked as and when required; b. the ability of the bank to implement recovery actions relating to particular categories of recovery – capital, liquidity, asset quality, profitability, etc; c. the ability to communicate effectively with stakeholders (role-played); d. the performance of senior management in terms of its responsibilities in a recovery process; 28 e. the performance of the Board in terms of its responsibilities in a recovery process – especially high-level approvals and communication with external stakeholders and the financial news media; f. the data systems required for recovery; g. the legal documentation required for certain recovery actions; h. the ability to implement recovery actions within the specified timeframes, especially for time-critical actions; i. the degree of integration of the recovery plan with the bank’s risk management framework, ICAAP, business continuity plan and governance arrangements. 73. There are several different forms of testing for recovery planning purposes. The options can include ‘walk-through’ tests of processes and procedures for particular scenarios, live simulation exercises for particular elements of the recovery plan (e.g. capital, liquidity or communications), and full-scale live simulations to test the entirety of the recovery plan. For any substantive testing, it is imperative that the members of senior management are involved in the tests, especially for live simulation exercises, with each member of senior management playing his/her own role. For some tests, it will also be appropriate for members of the Board to be included in the exercise – e.g. to test the Board Chairperson’s ability to communicate effectively with external parties (role- played). Of particular importance is the testing of senior management and Board members’ capacity to communicate with role-played news media and financial markets, including under realistic time pressure. 74. The recovery plan should set out the framework for the regular testing of the plan. This should include the objectives and scope of testing, the parties responsible for organizing and conducting the tests, the processes and procedures for conducting the tests, and the means by which the test results will be documented and reviewed by the Board, and by internal audit. Issues to be assessed by supervisors 75. Indicative questions that supervisors should consider in reviewing the testing arrangements for recovery plans are: a. Has the bank identified the proposed arrangements for testing the recovery plan on a regular basis? Has the bank specified clear objectives for testing? b. Is the scope of testing sufficient? Does it cover all elements of the recovery plan? c. Does testing include members of senior management team (including CEO) and Board? d. Is Internal Audit involved in the testing process? e. Is the frequency of testing sufficient? 29 f. Has an ‘owner’ for the testing process been identified? g. Is the testing process adequately resourced? h. Are external parties be involved in the testing process? i. Are the results of tests reported to the Board and integrated into future revisions of the recovery plan? Review and update of the recovery plan General guidance 76. A bank’s recovery plan needs to be subject to comprehensive and regular review – generally annually. The recovery plan should identify the internal review processes that will be applied by the bank, including in respect of reviews by the risk management unit and internal audit. Reviews should be undertaken in respect of all aspects of the recovery plan, including the scenarios, triggers, recovery actions and governance arrangements. The reviews should be informed by the testing of the recovery plan. 77. Although reviews of recovery plans can generally be undertaken by a bank’s own staff, occasional external reviews by independent experts can also be helpful. This is especially helpful if external, independent experts are present at regular tests of the recovery plan, given that they will be able to use their insights into the testing process and results of the tests to assess the adequacy of the recovery plan. External reviews are also important in relation to reviewing the adequacy of the bank’s management and Board in relation to their respective responsibilities in the recovery plan, given that internal staff reviews might be less well placed to conduct such reviews freely and impartially. Issues to be assessed by supervisors 78. Indicative questions that supervisors should consider in assessing the processes for reviewing and updating recovery plans are: a. Has the bank set out the proposed arrangements for the regular review of recovery plans? Are the arrangements adequate? b. Has an ‘owner’ for the review process been identified? c. How frequently is the recovery plan reviewed? d. How will the review be integrated with the bank’s review of its risk management framework, risk appetite, ICAAP, BCP, etc? e. What is the involvement of the CEO, EXCO, Board Risk Committee and Board in the review process? 30