Recovery and Resolution Planning

The requirement for recovery and resolution planning arises from the EU Directive establishing a framework for the recovery and resolution of credit institutions and investment firms (BRRD) as well as the national implementations (e.g. Recovery and Resolution Act (SAG) in Germany) and accompanying delegated regulations and EBA guidelines at European level. The regulatory requirements are aimed on the one hand at preventive measures to strengthen the resilience of financial service providers and on the other hand at preparing for effective crisis management. In addition to the regulatory requirements for credit institutions, recovery and resolution planning is also gaining importance for insurance companies and central counterparties.

At the core of a recovery plan are the restructuring options to be specifically designed that are suitable for restoring the financial stability of the credit institution in the event of a crisis, as well as the definition of appropriate indicators and governance structures to indicate potentially life-threatening developments at an early stage and to initiate corresponding decision-making processes on the use of recovery measures. Suitability and appropriateness of measures, indicators and escalation and governance structures are to be proven by stress scenarios to be described in detail. Here, scenarios must be taken into account in which the cause of the crisis situation lies with the credit institution itself, in the market environment or in a combination of both, and which in each case quickly or slowly lead to a situation that threatens the existence of the credit institution.

In contrast to the recovery plan, which is prepared by the credit institutions themselves, the resolution plan is prepared by the competent resolution authority. The credit institutions have a comprehensive duty to cooperate in this respect. This includes providing information to enable resolution authorities to, inter alia, identify critical functions and ensure financial and operational continuity in the event of resolution through a pre-determined preferred resolution strategy, including the application of resolution tools. Based on this preferred resolution strategy, the resolution authority sets a minimum requirement of own funds and eligible liabilities (MREL) so that the participation of private budgets in the financing of resolution is limited. In addition, possible impediments to resolvability are identified on the basis of the operational and legal structure, the requirements for operational continuity in a resolution and the loss absorption capacity. Identified impediments to resolvability must be removed by the credit institutions at the direction of the resolution authorities within a specified period.

In general, the regulatory requirements entail much operational effort, since the preparation of the recovery plans as well as the provision of information for the generation of the resolution plans spans the entire credit institution or the entire group of institutions, and the responsible persons are dependent on the contributions of many different organisational and legal units. The key challenge in both of these areas is the availability and quality of the required data and information, as these often go beyond the key figures available in risk reporting and regulatory reporting and require a higher level of granularity that is not included in the existing information systems.

For recovery planning, which has been an integral part of crisis management in the financial industry for several years, the focus of further development is currently on ensuring effective applicability in the event of a crisis as well as the final integration into overall bank management. This is also reflected in recent government publications. For example, applicability is supported by the ECB's published expectation to produce playbooks and conduct dry runs. In parallel, the authorities are constantly furthering the improved quality of the recovery plans – mainly by further refining the scenarios and options for action, including the indicators, and by progressively integrating the recovery plan indicators into the “normal” bank management processes. The focus here is more on practicability than on a purely ineffective increase in the level of detail.

For resolution planning, credit institutions must be able to provide granular data on various circumstances on a regular and ad-hoc basis. The focus is on the EBA and SRB templates as well as on further information on liabilities (e.g. MREL reporting, creditor identification) and initial valuation-relevant information. This capability has been – and will be more frequently in the near future – tested by the authorities during dry runs. Often, this requirement of the resolution authorities requires adjustments to the IT infrastructure as well as the reporting processes of the respective institutions. In addition to pure data availability, the operational and financial continuity in the event of a resolution is also critically questioned by the authority in the resolution planning process. As a result of the resolution planning, the authorities identify impediments to resolvability from their point of view, which must be eliminated within a specified period of time in order to ensure resolvability. Since the resolution authorities have not yet finalised the detailed requirements for a resolution plan and thus for the institutions' duty to cooperate – for example, discussions on the topics of valuation in resolution and funding in resolution are still ongoing – the challenges cannot be fully assessed.

For the preparation of recovery and resolution plans, an analysis of the individual recoverability and resolvability with a view to core business areas and critical functions should be carried out at an early stage. The business and operating model must be examined in the dimensions of strategy, corporate structure (including legal structures) and organisation, as well as financial and risk positions and IT/data infrastructure.

KPMG's clearly structured approach to developing institution-specific recovery and resolution plans is based on the identification of core business areas and critical functions as well as the relevant risk drivers. By using already proven analysis templates and result formats that comply with supervisory requirements and can be flexibly adapted to the specifics of the institution, the project activities are geared towards a consistent and efficient process from the very beginning.

In addition to proven project approaches and analysis and results templates, KPMG has staff with practical experience in designing recovery and resolution plans for banks in Germany and in other countries in Europe and elsewhere.

We have been looking after this topic in the German market since 2012 and are the market leader in the field of recovery and resolution planning. With our teams, you receive national and international expertise with regard to the regulatory requirements for recovery and resolution planning and benchmark know-how from a large number of similar projects so that we ensure efficiency and help you save resources in the process. For specific questions, we are happy to support you with specialists in the respective fields. In addition, we can draw on the broad expertise within the German and international KPMG network, in particular the KPMG ECB Office and the Recovery and Resolution EMA network, for all relevant issues.