Recovery planning

One of the lessons learned from the 2007/08 financial crisis was that many banks were not adequately prepared to deal with weakening market conditions. When a bank becomes distressed, the time window for taking countermeasures to prevent a possible insolvency or resolution is short. This is why it is necessary to develop adequate measures that will ensure or restore a bank’s viability and to document those measures in a recovery plan before a crisis event may materialize.

Under the Austrian Bank Recovery and Resolution Act (BaSAG), banks operating in Austria are obliged to develop recovery plans. Both the BaSAG and the Bank Recovery and Resolution Directive (BRRD) provide for the principle of proportionality, which is specified in the FMA’s Bank Recovery Plan Regulation (BaSaPV). In line with this principle, groups of banks may develop group-wide recovery plans, and banks that participate in an institutional protection scheme (IPS) may develop IPS-wide recovery plans. The principle of proportionality also implies that more complex institutions need to develop more detailed recovery plans. Smaller banks may provide less comprehensive recovery plans in particular areas.

For banks with foreign subsidiaries or banks that are themselves subsidiaries of a foreign parent institution, supervisory matters are dealt with by “recovery colleges.” In other words, analysis of the group recovery plans is a joint effort by a team of analysts representing all national supervisors involved. The key components of recovery plans are:

  • Recovery plan indicators: What indicators are to be monitored? Which indicator values trigger recovery measures? And what kind of measures should be taken?
  • Recovery measures and recovery scenarios: What are typical risk scenarios? What measures can a bank adopt under what scenarios? What will be the impact of those measures (in particular on the bank’s capital and liquidity situation)? And how fast can those measures be implemented?
  • Overall recovery capacity: Is the recovery capacity of the proposed recovery measures adequate to restore the financial soundness of a bank in a crisis situation?

To support banks in developing recovery plans, the OeNB and the FMA have provided templates and held seminars. These measures served to communicate supervisory expectations to banks in a clear manner and to significantly increase the comparability and the meaningfulness of the recovery plans.

How does the analysis of recovery plans work?

The process of analyzing recovery plans differs depending on whether the plans relate to a significant institution (SI) or to a less significant institution (LSI). While plans for SIs will be analyzed together with the ECB, the analysis of plans for LSIs operating in Austria is the sole responsibility of the OeNB.

The process for analyzing the recovery plans of SIs has been harmonized, thus making it possible to compare the quality of those plans across the Single Supervisory Mechanism (SSM). The plans are analyzed by the responsible Joint Supervisory Teams (JSTs) in close cooperation with the ECB crisis management specialists. Identified deficiencies are reported to banks in writing. The banks subsequently receive requests for improvement from the ECB on which they must act within the period defined by the responsible JSTs. Throughout this process, there is close cooperation with the national authorities responsible for resolution matters. In Austria, the Financial Market Authority (FMA) is the competent resolution authority; at the European level, a common approach is ensured by the Single Resolution Board (SRB). Resolution plans are compiled by the competent resolution authorities based on findings from the analysis of recovery plans.

The recovery plans developed by LSIs are analyzed by the OeNB. Any official requests for improvement will be issued by the FMA, primarily based on the OeNB’s findings. These plans are to be improved further during regular reviews and adjustments, which are to be made at annual or two-year intervals, depending on the size of the bank.

The recovery plans of SIs and LSIs are analyzed at a micro level and at a macro level. In other words, supervisors analyze all banks on a standalone basis as well as within the context of the banking sector as a whole. The macro perspective is important, because banks do not operate independently of each other on the market, as a result of which the distress of one bank may cause a chain of distress in connected banks.

Questions addressed at the micro level include:

  • Are the data reported by a given bank (such as indicators) consistent with its balance sheets and financial statements?
  • Are the recovery plan indicators and the calibration of indicator values triggering recovery measures adequate?
  • Are the proposed recovery measures adequate for maintaining or restoring the viability and financial position of the bank (or group) and is the estimated timeframe for executing those measures realistic?
  • Does the bank meet the requirements for executing particular recovery measures (such as market access)?
  • Are the scenarios outlined relevant for the bank and do they reflect the bank’s business and funding model?
  • Is the bank’s overall recovery capacity adequate with respect to its risk situation?

Questions addressed at the macro level include:

  • What measures have peer banks developed?
  • Does activating the proposed measures make sense in a particular scenario? For instance, asset sales will not make sense in a systemic crisis because they are likely to involve massive haircuts.
  • Do the measures have a significant negative impact on the financial system in scenarios in which other banks also activate recovery measures?