On the Road to Recovery: Phasing in Your Bank’s Recovery Plan06.19.2017
In September 2016, the Office of the Comptroller of the Currency (OCC) released final guidance for recovery planning that covered a broad range of financial institutions: insured national banks, federal savings associations and federal branches of foreign banks with more than $50 billion in assets. The deadline for an initial plan depends on the bank’s size; the largest banks must have plans in place by July 1, while smaller ones must comply in 2018, either January 1 or July 1.
Besides the federal mandate, why are these plans important? Simply yet crucially, recovery plans address how to stabilize a bank under severe financial stress and include detailed descriptions of remedial measures to avoid failure. Crafting a viable recovery plan involves elements of stress testing and gaming-out scenarios that could at some point threaten the bank. At its core, recovery planning consists of three facets:
- Scenarios (economic stresses that cause the bank’s financial condition to deteriorate)
- Triggers (quantitative and qualitative thresholds that, when breached, activate the plan
- Options (a menu of possible actions to address the economic stress)
Developing the bank’s first recovery plan from scratch may seem overwhelming. However, dividing the process into phases can make the process more manageable and help produce a well-written, thought-out plan.
Phase One: Set Up the Plan Project
Drafting an initial recovery plan marks a significant undertaking for any organization, no matter the size. Establishing a working group or steering committee can centralize who’s assigned to complete specific plan pieces and meet deadlines. The steering committee should include representatives from the bank’s treasury, legal, finance and risk management units—which in turn should encompass a range of senior members—to marshal the right resources and confirm that the plan meets regulators’ expectations. The OCC guidance also requires an oversight role for the board of directors.
Phase Two: Collect the Right Data
Financial institutions already have significant information available to leverage for creating bank recovery plans. To gather and assemble such information during the project initiation phase truly means time well spent.
The steering committee will need to assemble three key components:
- General information: a business overview, complete overview of the legal entity structure, and a description of the bank’s existing risk management framework
- Financial information: historical and forecasted financial statements, along with funding/liquidity plans
- Operational information: descriptions of shared services functions, an inventory of key agreements, and key performance indicators
On the surface, developing a recovery plan might seem like a mere copy-and-paste job that rehashes existing plans to check off another regulatory requirement. But that is not the case, and here’s why: Building an effective recovery process presents an opportunity to identify any gaps or weaknesses in a bank’s existing risk management program.
Additionally, a bank can use its recovery plan as a forum to relate its story to regulators—and strategically position the recovery analysis as part of the bank’s overall risk management framework. Telling hat story well will prove critical in times of financial stress.
Phase Three: Identify Recovery Triggers and Create a Playbook
Recovery planning should develop triggers that indicate a crisis scenario and the need for action. The list of triggers should include both quantitative and qualitative factors. For a plan to best serve its intended purpose, stakeholders must account for macroeconomic and bank-specific stressors. A recovery plan aligned with existing risk metrics means banks can rely on information they already monitor and thus mitigate the need for new processes.
Developing “playbooks”—detailed lists of possible recovery options and the steps to implement them—can help when management and the board think through their options in stress. The playbook should emerge as a dynamic document that guides, but does not bind, senior management during a stress event.
Governance and communications processes should also be included so that each part of the bank can stay abreast of what is happening and its role in the recovery process, as well as how key stakeholders outside the bank will get appropriate information.
Putting It All Together: A Recovery Play Discovery
The thought of setting up yet another governance plan may seem redundant or daunting. But viewed in another light, the recovery plan process can align risk governance throughout the bank and show regulators how the bank will handle stress. A dynamic, transparent process will also mean that management can respond effectively and efficiently in returning the bank to business as usual.
A phased approach to planning makes this process manageable. What’s more, it will help avoid deficiencies from showing up at the worst possible time—which is, in the final analysis, the kind of added stress no bank needs, and why all smart banks need to stress planning now.
This article is a collaboration between Ernst & Young LLP and Covington & Burling LLP. For more information, see the joint report “The OCC’s final guidance for recovery planning.” Reprinted by permission from BAI Banking Strategies, a publication of BAI, a Chicago-based financial services association and a leading industry partner for breakthrough information and intelligence.