Resolution Plans. Arab Banking Association

Transcription

1 Recovery and Resolution Plans Arab Banking Association 3 May 2012

2 The costs of the crisis raise big questions for banks to answer The FT, 12 October UK to inject 39bn into banks IMF puts total cost of the crisis at 7.1 trillion Enough to finance a 1,779 handout for every man, woman and child on the planet The Telegraph, 08 August US forces nine major banks to accept partial nationalisation TOO BIG TO FAIL New York Times, 14 October 2011 Bloomberg Business Week 24 January 2008 Resistance to living wills could prove futile Alastair Darling: The banks are to blame for this crisis The FT, 23 August 2011 The Independent, 10 February 2009 Can one bank bring down a country? Mounting fears shake world markets as banking giants rush to raise capital New York Times, 1 September 2010 The Wall Street Journal, 18 September

3 What UK regulators want Key supervisory tool to: Identify options to recover financial strength and viability under severe stress Extends the current processes for managing capital and liquidity under stress Ensures the business model and risk appetite incorporate a Plan B Framework Elements Bring transparency to operating structures: Legal entity structure The financial and operational dependencies between significant legal entities The financial and operational dependencies between critical banking products/services The iterative approach is designed to create recovery optionality and resolution flexibility (i.e. removing structural, financial and operational dependencies that prevent legal entities and/or critical products/services being unplugged from the failed bank). 2

4 UK Regulatory timetable For firms whose parent entities will be submitting group RRPs to overseas regulators slightly after the UK deadlines, there is likely to be some leeway on these deadlines. For all other firms, the UK deadlines will apply. Source: FSA CP11/16 3

5 Integrating recovery planning into existing risk management and governance Preservation of franchise value Franchise risk/profit deterioration Franchise destruction BAU risk management Risk management framework Defined risk appetite Risk monitoring Stress testing ICAAP Capital buffer and management actions to maintain buffer Recovery options Core Option Tier 1 Liquidity 1 Stress builds from B.A.U. - to severe to fatal ILAA Liquidity buffer 2 x 3 x 4 x x CFP Management actions to maintain liquidity buffer and relieve funding pressure Resolution options (authorities in control) Unplug significant legal entities and/or critical products/services then wind-down the rest Current requirements for business model to release capital and liquidity New business model requirements (i.e. recovery optionality and resolution flexibility) 4

6 Creating the recovery plan document Options long list Filtering assessment criteria Short list material key options Recovery options grid Provide full list of options Core tier 1 capital impact Liquidity impact Amount must move the dial: Exco paper on options Summary Option Capital Funding Movement Option 1 X a No movement Option 2 a X No movement Option 3 - a +ve movement Option 4 a a +ve movement How much do you write-up on the move the dial options? 5

7 Key insights recovery plan critical success factors Recovery plan Agree Board ownership of recovery planning Recognise that recovery plans will become a key supervisory tool and integrate with ICAAP, ILAA and stress testing Create as broad a menu of recovery options as possible and understand your position compared to your peer group Construct a comprehensive early warning indicator framework and agree a recovery trigger which meets expectations Demonstrate that governance is effective when preparing, maintaining and communicating the plan Ensure consistency with the broader regulatory dialogue and reporting 6

8 What UK regulators want Key supervisory tool to: Identify options to recover financial strength and viability under severe stress Extends the current processes for managing capital and liquidity under stress Ensures the business model and risk appetite incorporate a Plan B Framework Elements Bring transparency to operating structures: Legal entity structure The financial and operational dependencies between significant legal entities The financial and operational dependencies between critical banking products/services The iterative approach is designed to create recovery optionality and resolution flexibility (i.e. removing structural, financial and operational dependencies that prevent legal entities and/or critical products/services being unplugged from the failed bank). 7

9 Legal entity structure analysis Legal entity structure Financial dependencies Operational dependencies Questions you may need to consider: Legal entities and activities what legal entities are supplying banking products/services into the UK economy and are these entities within the scope of the SRR? How does this fit with the ICB/Volker principle i of ring-fencing? i Use of branches and subsidiaries What overseas branches are supplying banking products/services into the UK economy and where might the UK need to cooperate with foreign regulators? Use of centralised support functions how would you continue to get access to these vital support services in resolution? Consider the story you are telling in presenting this information Is the legal structure complex? What comes within direct control of the UK? What is outside the UK and does this inhibit the application of the SRR? Where are there jurisdictional uncertainties or the need for cross border cooperation? 8

10 Typical barriers to separating legal entities/functions in resolution Financial dependencies Legal entity structure Financial dependencies Operational dependencies Are intra-group financial dependencies: Resulting in capital, income or assets being inappropriately transferred from the regulated entity, or resulting in intra-group creation of capital resources (ie double or multiple gearing)? Acting as a substitute for financial resources (eg using a guarantee or loan rather than capital held at the subsidiary)? Being implemented on terms or under circumstances which third parties would not accept? Adversely affecting the solvency, liquidity and profitability of individual entities within the group? Resulting in contagion risk, thereby precipitating knock-on effects on financially sound entities when one entity within the group experiences stress? Complicating group structures and therefore obscuring the supervisor s view of the group and/or legal entities that operate within their jurisdictions, thus affecting both the ability to supervise on an ongoing basis, and resolution and recoverability? Being used as a means of regulatory arbitrage to evade capital or other regulatory requirements altogether? Legal entity structure Financial dependencies Operational dependencies Operational dependencies Do operational dependencies prohibit the authorities from maintaining: Access to and continuity of, operational support where required (eg. IT systems, data, infrastructure, people). Access to, or continuity of, market infrastructure (eg. payment, clearing and settlement) 9

11 Final thoughts For multinational groups, there is a need to recognise that: Drivers vary across jurisdictions encompassing political, cultural, fiscal and legal aspects Commonly agreed principles do not mean common scope, common application or common decisions by resolution authorities managing the college of regulators is key Much still remains uncertain, for example: Resolution frameworks eg. EU Crisis Management Legal frameworks eg. Enhancements to the SRR Bail-in Nature and impact of payments and market infrastructure reform eg European Market Infrastructure Regulation Final requirements on ring-fencing eg. UK Independent Commission on Banking proposals How much systemic risk will the authorities accept? (A) (B) (C) 10

12 What is required from your Board

13 Questions 12

14 Iain Cummings Partner, Financial Services Risk Consulting KPMG LLP 15 Canada Square London E14 5GL Tel: +44 (0) Mobile: +44 (0) Office: +44 (0)

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