15 June 2012

EBF response to EBA Discussion Paper on a template for Recovery Plans

Globally harmonised rules are of key importance. While EBF welcomes the EBA leading in the debate on Recovery and Resolution Plans (RRPs), EBF is concerned that the current work might deviate from the future designs for a globally harmonised framework as pursued by the Financial Stability Board. A globally aligned approach should ensure that there is a common tool box and understanding that can be deployed by all crisis management groups, facilitating the cooperation among different resolution authorities and ensuring internationally consistent outcomes.

EBF believes that the group recovery plan has to be the base, and that plans for subsidiaries/branches should be a part of that plan. Globally active banks take advantage of optimal pricing and distribution of investments across borders. Initiatives designed to protect local jurisdictions risk creating trapped pools of capital and liquidity which impair the group wide operational model for internationally active banks.

Information contained in RRPs will be highly commercially sensitive for the financial institution and potentially provide a “take-over blueprint”. It must be absolutely clear that the information in a recovery plan is confidential and strictly only accessible to the firm and authorities within its core college of supervisors. Special care needs to be taken with regard to the flow of information across borders.

Recovery plans should not contain elements that should be left to the resolution plans. There should be a clear separation between the recovery and resolution plan. Having to identify the systemically significant functions is therefore not relevant in a recovery plan, and should be left for the resolution plan. Nevertheless, a mapping of the main activities/operations across the different jurisdictions would give an overview on the functioning of the institution, which would be important, both for the institution (which needs to propose coherent recovery options) and for the supervisor (who will evaluate the appropriateness of the measures).                       

The particular set of actions chosen from the recovery plan should be decided by the management. A recovery plan should therefore be flexible, consisting of a list of mechanisms available to the management to be used according to the circumstances of the particular case. Detailed stress scenarios should therefore not be a part of a recovery plan.                     

A transfer of control away from management before the point of non-viability risks disenfranchising shareholders, and opens the supervisor up to moral hazard and criticisms of acting as shadow directors if disproportionate and premature action is taken. At the same time however, EBF expects the supervisor will be employing a gradated approach intensifying its supervisory engagement as the bank moves further along the continuum from going to gone concern based on one (or probably more) early warning signals.           

The EBF believes that the failure of small as well as large banks may have potential systemic consequences. Therefore the framework for recovery plans should be applied to all banks, respecting the principle of proportionality, according to the nature, scale and complexity of the financial institutions.

Full response

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