The unprecedented COVID-19 crisis has brought about many challenges for the financial sector, and regulators and supervisors continue in their efforts to ensure banks can focus on core operations and effective crisis management and preparedness. A key element hereto are recovery plans, which aim at restoring banks’ financial and economic viability under stress. Following the ECB’s announcement on 12 March of temporary capital and operational relief in response to the pandemic, the EBA published a series of expectations on 22 April, which clearly indicate to banks that alongside monitoring all their recovery indicators, they must enhance their focus on understanding which recovery options are necessary and available under the current stressed conditions. The message is clear: information on recovery planning can quickly become outdated and time is of the essence for prompt reporting to competent authorities. It is also the banks’ intrinsic interest in having up-to-date KPIs and KRIs for effective bank management.
Regulators and supervisors have recently published expectations for recovery planning. This includes monitoring and reporting obligations in times of stress. In this article we discuss what this means for banks and how best to respond.
These immediate and ongoing expectations are further complemented by the ECB and EBA indicating requirements for the usual recovery plan update for 2020, taking into account the current crisis. These include the following:
The main challenges for banks: recovery options and recovery plan scenarios
Given all the above statements, we have observed the following main challenges for banks in the figure below.
From our recent discussions with banks, it seems that the requirements concerning recovery options and recovery plan scenarios are the two main areas which will be challenging for banks in the short to mid-term. This may partly be due to the fact that some key stakeholders will be faced with a multitude of tasks, given the pandemic, that require their immediate focus, as well as the complexity of the changes in many banks’ recovery planning that these requests will trigger. Prioritisation will continue to be a major challenge for banks.
While we have seen that some banks have made their first steps towards (or even achieved) a fully flexible recovery planning framework capable of responding to any ad-hoc requests at any time, for most banks the current crisis and related regulatory expectations on the topic of recovery planning will continue to present a larger challenge.
Banks have been asked to focus on the availability, credibility and feasibility of recovery options in the current crisis and update their own assessment on a quarterly basis. Institutions should estimate their overall recovery capacities for liquidity and capital and identify primary recovery options that can be quickly implemented.
However, the current crisis is likely to have significant impact on the breadth and depth of recovery options. Several banks have had their ability and capacity to implement a number of loan book actions curtailed as central banks and governments have urged them to continue to lend and provide appropriate credit facilities to their customers. In addition, securitisations and other market-based actions have also been impacted creating further difficulty for banks to generate capital and/or liquidity.
It is clear that banks can take a series of actions now, in order to put them in the best position to meet these requirements:
In addition to the above, banks have also been asked to establish a specific COVID-19 system-wide scenario which could be capital, liquidity or combined (whichever is most relevant for the institution) which complies with regulatory requirements, especially in terms of severity, i.e. reaching the institution’s near-default point.
It should be noted that where several scenarios are deemed relevant, banks are encouraged to use more than one scenario, and on this note banks could take the following actions:
Since the financial crisis of 2007-08, there has been momentum for banks to amend and enhance their crisis management frameworks via the introduction of playbooks and dry-runs as appropriate tools. The COVID-19 pandemic now allows banks to turn these documents and tools into living and usable frameworks, according to lessons learnt. As mentioned in our recent blog, banks have an opportunity to take key first steps to setting a secure foundation for post-crisis transformation, and any enhancement to their recovery planning processes now should mean a stronger-than ever flexible approach to meet the needs of internal and external stakeholders in any future crisis scenarios.