One of the lessons learned from the recent 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 looming insolvency or resolution is short. This is why it is necessary to develop adequate measures that will ensure a bank’s viability and to document those measures in a recovery plan before a crisis event may materialize.
Developing recovery plans became mandatory for banks operating in Austria with the Austrian Banking Intervention and Restructuring Act (effective from 2014; later replaced by the Bank Recovery and Resolution Act). In line with the principle of proportionality, groups of banks may produce group-wide recovery plans, and banks that participate in an institutional protection scheme (IPS) may produce IPS-wide recovery plans. The principle of proportionality also implies that more complex institutions need to develop more detailed recovery plans whereas 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 and scenarios: What indicators are to be monitored? What are typical risk scenarios? Which indicator values trigger recovery measures? And what kind of measures should be taken?
- Recovery measures: 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?
To support banks in developing recovery plans, the OeNB and the FMA have issued guidelines, provided templates and held information workshops. 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 bank or to a less significant bank. While plans for significant banks will be analyzed together with the ECB, the analysis of plans for less significant banks operating in Austria is the sole responsibility of the OeNB. Given that Austria’s major banks have had to develop recovery plans since 2012, the OeNB was able to build up relevant expertise in analyzing such plans at an early stage. As a result, the OeNB was able to share and preserve the Austrian approach within the Single Supervisory Mechanism (SSM) in many instances.
The process for analyzing the recovery plans of significant banks has been harmonized at the European level, thus making it possible to compare the quality of those plans across the SSM. The plans are analyzed by the joint supervisory teams set up for individual banks in close cooperation with horizontal ECB divisions managing the EU-wide crisis response. Identified deficiencies are reported to banks in writing, which subsequently receive requests for improvement from the ECB on which they must act within the period defined by the responsible joint supervisory teams. In the case of all significant banks operating in EU countries, the national authorities are involved closely in the ongoing supervisory process, and in case a bank is beyond recovery, it is the national authorities that are responsible for resolution matters. In Austria, the Financial Market Authority (FMA) is the competent resolution authority, and at the European level a common approach is ensured by the Single Resolution Board (SRB). Resolution plans are compiled by the competent resolution authority based on findings from the analysis of recovery plans.
The recovery plans developed by less significant banks are analyzed by the OeNB. Any official requests for improvement will be issued by the FMA, based on the OeNB’s findings. These plans are to be improved further or finetuned during the regular reviews and adjustments, which are to be made at annual or two-year intervals, depending on the size of a bank.
The recovery plans of significant and less significant banks 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 balance sheet indicators and financial indicators) plausible?
- 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?
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?
What are typical issues in the analysis of recovery plans?
Key aspects in assessing recovery plans include a bank’s capitalization and the measures that can be adopted to maintain or restore an adequate level of capitalization. In this respect, the timeframe is also an important factor.
The chart below shows what recovery measures banks typically consider and which impact banks expect these measures to have on their available capital should they execute some or all of their recovery options. In their analysis, supervisors need to assess whether these options appear feasible in the respective scenarios in terms of scope and timing, and whether they are likely to have the intended effect in order to bring the bank’s capital position back to an acceptable level.