The European Banking Authority (EBA) has published the results of a review of the recovery plans of 23 European banking groups, with the parent banks located in 12 EU countries.
The EBA findings provide a valuable checklist of good practice against which banks can assess their own recovery options. European banks are required to produce recovery plans under the Bank Recovery and Resolution Directive (BRRD). The EBA has been undertaking a series of reviews of aspects of these plans – the latest review focuses on recovery options. The BRRD requires recovery plans to contain sufficient plausible and viable recovery options which make it reasonably likely that the bank would be able to counter different scenarios of financial distress quickly and effectively.
The EBA found that all the recovery plans reviewed provided a reasonably good overview of recovery options, with the number of recovery options ranging from 8 to 52 across the sample of banks. The most frequently included recovery options were (i) disposal of subsidiaries, (ii) sale of assets/loan portfolios, (iii) liquidity improvement measures and (iv) capital raising. Based on this sample of recovery plans, the EBA’s main concerns on recovery options were:
Lack of detail
- Recovery options were not sufficiently specific to allow a review of the feasibility of the options;
- The governance, decision making and implementation procedures for each option were too general, so again the feasibility of each option was not clear; and
- Many plans lacked sufficient detail to enable the feasibility of the option under each stress scenario to be assessed; and
- Where recovery options were identified for subsidiaries they usually relied on a general assumption of parental capital or liquidity support.
Limited impact assessments
- Although all the plans provided at least an estimation of the financial impact of the options with regard to capital and liquidity, only half estimated the impact on profitability and funding positions;
- Valuation assumptions could be further improved;
- The impact of the implementation of specific recovery options on critical functions, core business lines and IT systems was not always fully considered. For example, more than half of the recovery plans did not provide a comprehensive assessment of the likelihood of continued access to financial market infrastructure upon execution of recovery options; however
- More than half of the recovery plans did take account of the combined effects of executing different recovery plan options in response to the same stress scenario.
- Many banks referred to their past experiences of executing similar recovery options, although it was not always clear how banks had used these experiences to estimate execution timelines and valuation assumptions in their recovery plans;
- All banks estimated timeframes for executing recovery options, but many did not provide sufficient explanation to enable an assessment of whether such timelines were realistic and conservative; and
- The majority of banks identified potential risks and impediments to the execution of options and, to a lesser extent, outlined potential mitigating actions to remedy them. But many plans contained only a limited suite of preparatory measures and mitigating actions to facilitate the implementation of options.