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.
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.
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 ECB has observed that the usability of recovery plans in stressed scenarios could be limited due to their size and the amount of detailed information within the plan. For instance, the ECB claims that if a bank's recovery plan exceeds 1,000 pages, it is not considered practical or useful during stressed scenarios, particularly in a short period of time.
A playbook offers a potential solution to this issue as a concise implementation guide that summarises key information from banks' recovery plans and clarifies the escalation process needed to manage a potential crisis.
In cases where a playbook is necessary due to the complexity of a bank's recovery plan, we suggest considering the following aspects:
We have generally seen playbooks of around 35-40 pages, which are tailored to bank specifics and structured according to the principle of proportionality, and include tables and graphics that present among other things the overview and impact of each of the recovery options.
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:
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:
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.
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.
Partner, Financial Services
KPMG in Germany
KPMG in Ireland