Recovery and resolution planning for financial institutions

The Great Financial Crisis exposed vulnerabilities across the financial sector, highlighting the need for structured mechanisms to manage potential failures. While the banking sector experienced high-profile cases such as Northern Rock, Anglo Irish Bank, and later Credit Suisse, the insurance sector faced challenges with firms like AIG, underlining the need for more structured mechanisms to manage potentially failing institutions.

In response, the European Union has developed frameworks such as the Bank Recovery and Resolution Directive (BRRD) for banks and the Insurance Recovery and Resolution Directive (IRRD) for insurers. These directives require institutions to develop actionable recovery plans and resolution strategies to minimize societal and financial market impacts during crises. While similar in structure, these frameworks are specifically adapted to the unique characteristics of each type of institution.

The objective of recovery planning is to prepare financial institutions to address and overcome financial stress, ensuring stability and operational continuity. Resolution planning, on the other hand, is focused on mitigating the broader societal impact when an institution fails or is likely to fail, safeguarding critical functions, policyholders, depositors, and the financial system as a whole. 

The purpose of recovery planning is to develop comprehensive plans detailing measures to restore financial stability during periods of significant stress.

To effectively assess situations that might cause significant financial stress, institutions need to identify possible stressors, identify quantifiable indications, and assess the variety of recovery techniques or corrective measures that could be used to mitigate these stressful situations. For banks, this may include liquidity generation, asset sales or for instance restructuring measures. For insurers, recovery options could include e.g., capital adjustments, portfolio rebalancing, or renegotiating reinsurance arrangements. Institutions are required to measure the impact of these recovery options and remedial actions on critical functions and core business lines. In addition to this, scenario analysis must be used to evaluate the practicality and usability of these recovery options, as mandated by the regulator.

Additionally, institutions are required to plan for roles and responsibilities in the case of a recovery situation, and plan for communication strategies.  

Resolution planning is activated when:

1. An institution is deemed failing or likely to fail.
2. No private sector or supervisory measures can restore its viability within a short timeframe.
3. Resolution is necessary in the public interest.

For banks, resolution plans focus on maintaining critical financial services, protecting depositors, and minimizing systemic risks. For insurers, the emphasis is on ensuring policyholder protection and preserving critical insurance functions.

Resolution plans determine the institution’s critical functions, identify and address any impediments to its resolvability, and prepare for its possible resolution. Resolution plans detail the characteristics of institutions and describe the preferred resolution strategies for the institution in question, including which resolution tools to apply. These strategies include tools such as bail-ins, portfolio transfers, or mergers, depending on the nature of the institution. Banks must work closely with the Single Resolution Board (SRB) or National Resolution Authorities (NRAs) to align with regulatory expectations and address sector-specific challenges. Insurance institutions on the other hand work closely together with EIOPA (European Insurance and Occupational Pensions Authority) as well as national authorities.

Our experienced professionals bring hands-on expertise in developing and maintaining recovery plans as well as maintaining resolution capabilities, having successfully supported financial institutions in Finland and throughout Europe. Whether you need assistance with recovery planning, resolution planning, or both, KPMG leverages proven methodologies and practical experience to provide comprehensive and effective solutions.

Recovery planning:

• Conduct a gap analysis to evaluate the institution's existing risk management processes and their readiness for recovery planning
• Provide templates, tools, and support in the development and operationalization of recovery plans
• Translation of recovery plans into playbooks 
• Preparation and execution of dry-runs

Resolution planning:

• Identification and operationalization of resolution tools 
• Addressing institute specific requirements (e.g. based on priority letters)
• Assessment of the resolvability 
• Transfer of resolution planning to business-as-usual processes 

KPMG has successfully supported numerous institutions in various aspects of recovery and resolution planning. In recovery planning, we have provided assistance with e.g., strategic analysis, assessment of recovery indicators, recovery scenarios and options (remedial actions), and ensuring the feasibility and effectiveness of proposed recovery options.

On the resolution planning side, we have assisted institutions in maintaining their resolution capabilities, e.g., helping in preparation of planning operations around regulatory requirements, preparation of resolution plans, implemented technical solutions to ensure data availability and integrated resolution governance into the broader governance framework. Additionally, we have contributed to the conception, preparation, and operationalization of complete bail-in playbooks, performed initial separability analyses, and developed proven concepts for business reorganization plans following open-bank bail-ins.