SPECIAL FEATURE
Recovery and resolution plans for the financial future
S
ince the global financial crisis, financial regulatory authorities
have been developing systems and regulations to ensure that
key financial institutions remain sound, thereby reducing the
need for potential future bailouts. This is required in addition to
other regulatory standards like Basel III, aimed at enhancing soundness.
The additional measures aim to prescribe regulations for either
restoration to health, or manage financial institutional failure. This
provides protection for depositors, and prevents disruption to financial
stability. It also aims to limit taxpayer funding of failed institutions.
Critical financial institutions deemed globally systemically important
(G-SIFIs) are required by the Financial Stability Board (FSB), to prepare
and implement recovery and resolution plans (RRPs). This two-step
approach identifies steps financial institutions must take to regain
viability when facing severe pressure, (the recovery element).
Additional steps regulators may take if an institution fails form the
resolution element.
The FSB has issued guidelines for the implementation of the
resolution element of the RRP, aimed at facilitating cross-border
resolution and regulatory coordination. However, countries are adopting
different approaches to building this element of the RRP.
In South Africa, major banks are not categorised as G-SIFIs, despite
representing 90% of sector assets. The South African banking sector
in turn accounts for 50% of sub-Saharan African banking assets.
Consequently these banks are considered systemically important in
South African and African markets. Given the interdependence of global
financial markets, and the potential contagion impact of a bank failure,
it remains important to critically assess bankers’ RRP plans, despite
South African banks managing the GFC relatively well.
In November 2011 the FSB released its ‘Key Attributes of Effective
Resolution Regimes for Financial Institutions’, an international standard
for introducing resolution regimes. South Africa, as a member of the
the FSB and the G20, must comply with this standard. The Registrar
of Banks released Guidance Note G3/2012, determining priority issues
for discussion with respective bank boards. Recovery and resolution
planning (living wills) features prominently on this list.
In October 2011 Ernst & Young surveyed 19 of the 29 G-SIFI banks,
and found that 40% of respondents believed that their recovery plan
was fully implemented.
The survey found that institutions face difficulties and costs in
formulating their plans where they operate across jurisdictions, due
to different protocols and differing expectations and information
requirements from home and host regulators.
Some of the benefits of RRP’s have been identified as:
• Enhanced understanding of the business and operations; and
• Reduced complexity as operations are streamlined; and
• More efficient use of capital, as legal structures and funding models
are reviewed.
These benefits were offset by concerns relating to:
• A mindset of managing failure rather than success; and
• Increased public disclosure, which has competitive
consequences; and
• Competing priorities, notably Basel III and numerous tax
requirements.
Some of the key messages emerging from the survey are:
• The preparation of an RRP is intellectually stretching, logistically
difficult and costly (many banks underestimate the effort, time and
expense required); and
• There are significant benefits. Institutions critically re-assess
strategies, operations, organisation and legal structures.
No one plan is suitable for multiple institutions, given differences
in business mix, organisational structure and operating model. As
a consequence, bank boards and senior executives must diligently
consider their unique risks. Proactive management is critical and
appropriate governance structures and senior executive accountability
is needed.
A key component for success is data quality, which requires
enhanced information systems, to allow for improved analysis and
modelling. Financial institutions should leverage already large business
continuity resources for development of RRP’s.
In South Africa, RRP requirements should ensure optimal
cost-benefits.
Both the resolution regime and the individual financial institutions’
RRPs are still in the