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Playbooks and dry-runs: How to improve recovery planning across Europe

Recovery planning: playbooks and dry-runs

A new ECB report on banks' recovery plans concludes that there is room for improvement to ensure quick and efficient action in times of crisis.

Richard Hobday

Director, Advisory

KPMG in Bermuda


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On 3 July 2018, the European Central Bank (ECB) published a report presenting their findings of a comprehensive benchmarking analysis of recovery plans of Significant Institutions (SIs) for the three previous cycles of recovery plan assessments.

The report focuses on the complexity of recovery plans from a multitude of banks that could face difficulty when under pressure in a stress situation. According to the ECB, the complexity of the plans inhibit the ability of the banks to implement or better activate recovery plans quickly and effectively. Therefore, the ECB has concluded that the usability of complex recovery plans should be improved to ensure that banks are able to make the right decisions in times of crisis. The report re-iterates that one of the main measures in order to improve the recovery planning usability and provide evidence for this purpose are developing so-called “playbooks” and performing “dry-runs” of recovery plans.

Below, we summarise the objectives and findings of the report, share the lessons learnt and introduce our approach to support banks by improving the effectiveness of their recovery plans.

Key objectives of the report on recovery plans infographic

Key findings of the report on recovery plans:

  1. Recovery options
    The ECB observed that the requirements concerning recovery options are still not met (for example, the required level of detail for selecting and presenting recovery options in line with the bank´s business nature and size). A target structure for recovery options was given that focused on the impact of capital, liquidity, profitability and operations, within a realistic implementation timeline.

  2. Overall recovery capacity
    Another finding from the ECB was that banks tend to overstate their overall recovery capacity (ORC) despite the relevant Commission Delegated Regulation defining how banks should report a credible overview of their ORC in their recovery plan. The limited capacity of the banks to quantify, for example, the mutual exclusivity of recovery options, the interdependencies, and operational capabilities could explain why banks tend to overestimate their ORC.

  3. Recovery indicators
    The ECB's assessment showed that several banks still do not comply with the EBA Guidelines on recovery plan indicators, which include the minimum list of 15 qualitative and quantitative indicators. The report elaborates on how banks could select their set of recovery indicators without limiting these to the EBA minimum list. It also sets out how to calibrate their capital and liquidity indicators, integrating the recovery indicator framework into the bank´s risk management framework including the management information system.

  4. Usability
    Finally, the report presents two ways that the ECB considers useful for making recovery plans more effective: playbooks and dry runs.

Since aspects 1-3 are well known and need to be improved individually, the concept of playbooks and dry-runs are new to the market and are worth taking a closer look at.

The use of dry-runs for testing recovery plans

While dry-runs are not a supervisory requirement, they are seen as one option to test key parts of a banks' recovery plan in `live' exercises of potential crises. As well as a test of IT systems and the continuity of business as usual, dry-runs also:

  • involve all relevant stakeholders in the organisation,
  • are performed with limited information available, and
  • test the usability of recovery plans and where relevant a recovery plan playbook in a crisis situation.

Though the overall goal of a dry run is obvious, actually performing a dry-run is often a challenging task for banks due to their size and complexity. Some of the questions that we have helped to address for dry-runs include for example: What should banks test? Who should be involved? How long does it take to prepare a dry-run?

Usually, we approach the task by:

  • first focussing on recovery plan governance and escalation processes, followed by recovery options and communication measures
  • involving both internal and external stakeholders (not only board members and leadership teams) in order to test the reaction-time and communication flows with supervisors
  • involving at least all material subsidiaries and third party observers (e.g. internal audit function or an independent consultant) to assess the outcome of the dry-run exercise, address objectives, ensure adequate and timely follow-up and remediation actions
  • defining the scenario focussing on one or more of the key parts of the bank´s recovery plan (for example the calibration of triggers under both capital and liquidity scenarios).
    In our experience, a solid preparation time has to be between three to six months, depending on the size and complexity of the bank.

To ensure a successful design and implementation of a dry run, we recommend a three phase approach, where the preparation and implementation phases are key in order to identify possible gaps to be included in the recovery plan and improve the level of implementation of it in the overall bank management.

Dry-run - a three phases approach infographic

In summary, it can be said that even though recovery planning is not a new topic, it still remains a continued focus and a key concern for the banking industry as well as for supervisors and regulators. Banks are spending time and effort to prepare properly for times of crisis. Aside from recovery plans, playbooks and dry-runs are evolving as best practice and this ECB report demonstrates the continued interest of supervisors in the topic as well as demonstrating supervisory expectations. In addition, the recent EBA Guidelines on the revised common procedures and methodologies for SREP and supervisory stress testing released in July 2018 and the ECB Guide on ICAAP and ILAAP are encouraging banks to integrate recovery plans into their daily banking management. Our recommendation is to not only continue to ensure regulatory compliance of updated recovery plans but also appropriately integrate them in bank management as well as develop and improve effective playbooks and practical dry-runs.

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