In its most recent publication 'Recommendation on the development of recovery plans' published on on 23 January 2013, the European Banking Authority (EBA) recommends major EU cross-border banking groups to develop recovery plans by the end of 2013.

The recommendation follows its previously published discussion paper on recovery plans in May 2012 and  is pending the completion of the EU's Crisis Management Directive ("CMD") that will set out a consistent framework across the EU for recovery and resolution of credit institutions and investment firms.  

The purpose of the recommendation is to make sure that at least the major EU cross-border banks, develop group recovery plans by the end of this year. The plans are required to be submitted to the respective competent authorities and discussed within 'colleges of supervisors'. The recommendation is intended to fill the interim period before the EU adopts a legislative framework based on its proposal for the CMD.

The EBA has provided a template for the preparation of the recovery plans which covers the following aspects:

  • General but comprehensive information on the institution and its governance structure;
  • The list and description of options available in a crisis situation and an assessment of their execution and impact; and
  • The measures which the institution plans to implement to facilitate, in the future, the update of the recovery plan or its implementation in crisis times.

The impact of the recommendation on credit institutions and investment firms

A few EU banks will find it necessary to complete two recovery plans. For example, for a large UK institution which prepares recovery and resolution plans as per FSA's FS12/1, the EBA compliant recovery plan will require mainly the same analysis, however with fewer components than those required by FSA modules 3, 4 and 5, i.e. group structure diagrams, Economic Function Identification Analysis, Critical Function Contingency Analysis and Information Management Processes. The EBA has also introduced a requirement for institutions to complete an "Operational Contingency Plan" which sets out the contingency details of how a firm's operations and its access to market infrastructure will be preserved at the implementation of a firm's recovery option.  

Potential challenges presented by EBA's recommendations

As mentioned above, an integrated cross-border recovery and resolution regime is currently being considered and would be supported by 'Resolution Colleges' set up by the Group Resolution Authority (with the participation of EBA). Its objective would be to assist the Consolidating Supervisors and other relevant Competent Authorities to develop group resolution plans, and to assess the resolvability of groups. In addition, there are further steps being taken at EU level to harmonise the resolution rules for complex cross-border banking and investment services groups. Exploring how bank insolvency regimes can be further harmonised is one such initiative which would enable banks to resolve and liquidate under the same substantive and procedural rules.

Yet, the most pronounced challenge may be the practical impact on major cross-border institutions that will result from the lack of firm agreement between the different national regulators in terms of what recovery and resolution plan (RRP) data they require. This may be felt by firms when attempting to generate information that support their RRP. The slightly diverging sets of RRP data within the EU may also present a global challenge for some major institutional groups that also exist outside the EU; one example being banks with a presence in Hong Kong. This is despite the fact that the Hong Kong Monetary Authority ('HKMA') is a member of the FSB Cross-Border Crisis Management Group (CBCMG), responsible for giving guidance to, and overseeing implementation of the relevant FSB principles by the individual CMGs. A contributing factor to the divergence of RRP data in this example is that significant firms in Hong Kong's securities market are subsidiaries or branches of overseas financial firms; hence the Securities and Futures Commission ('SFC') would not be establishing supervisory colleges.

The chances of uniformity among cross-border institutions within the EU with respect to RRP data may be progressing, however there is yet some way before firms can avoid reinventing RRP data for each national regulator across all global financial centres.

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