The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

A recent Dear CEO letter reinforced that the PRA remains focused on ensuring compliance. 

The letter of 17 May sent to more than 70 non-systemic firms (including international subsidiaries in the UK) highlighted areas for improvement. The PRA identified that many firms understood the concepts of recovery planning but not the required detail to define appropriate scenarios. The calculation of recovery capacity was also identified as an area requiring focus.

Recovery scenarios

In our experience of working across all the RRP capabilities, we would expect firms to have developed a suite of artefacts to demonstrate compliance. 

The first are the recovery scenarios that the recovery plans are executed against. These scenarios provide the context for the failure (or near failure) of the firm. The cause for failure may be driven by internal or external factors and must be both plausible and suitably severe. The regulator is very clear that this as an area to improve for non-systemic firms. 

We would also expect an integrated set of playbooks which cover the entire firm’s activities and the delivery of resolvability outcomes: operational barriers; financial barriers; and co-ordination and communication. 

Firms are also required to have a test strategy setting specifically for RRP. This strategy is supported by additional testing artefacts, demonstrating that a firm is capable of testing its RRP capabilities.  Test execution can be undertaken in multiple ways including fire drills, desk based or dry runs. Firms should also be aware that testing, especially where the board is required, takes time to organise and execute. For non-systemic firms this may be three months’ work for one week of execution. 

Scenario plans can be applied in the testing of other areas such as operational resilience. 

Calculation of recovery capacity 

Alongside recovery planning the regulator also identified the calculation of recovery capacity as an area for improvement. This involves understanding recovery scenarios and then calculating the financial impact during a period of extreme stress. Firms are expected to be able to calculate impacts across multiple areas in compressed periods of time. 

Scenarios and calculations are specific to each firm, but they should consider reputational effects, operational capability, business model impacts and capital and liquidity optimisation. 

• Reputational effects: Credit downgrades – revised and likely higher cost of borrowing during a resolution period; updated value of assets in a period of stress 
• Operational capability: What can staff be reasonably be asked to do; if there are multiple recovery options in flight, can the firm and staff support this?
• Business model impacts: Is there a viable go-forward business; will parts of the business be sold-off as part of a recovery plan and do firms have the capabilities to undertake the necessary valuations?
• Liquidity optimisation: raise capital or increase liquidity

Across both areas in the Dear CEO letter there is another layer of complexity that must be considered. Executing the plan for one recovery option may have a detrimental effect on another option that the firm is planning to execute. It is difficult to reflect such constraints but must be considered where plausible conflict exists. Plans should not always assume unrestricted actions to all options without reviewing and considering compromise.

Firms looking to action the Dear CEO letter should take time and consideration to: a) develop scenarios relevant to their business and then; b) plan how to calculate recovery capability capacity in these scenarios in compressed timeframes with potentially imperfect information. Supporting artefacts will need to be updated e.g. playbooks can then be tested with the board to demonstrate the embedding of these capabilities. 

At Be UK, we have helped multiple banks meet their regulatory obligations that relate to recovery scenarios and recovery capacity. We can help firms ensure that recovery scenarios are robustly tested to ensure sufficient severity as well as ensuring that all relevant artefacts are created.

For more information on how we can help with your RRP requirements, please get in touch directly or visit our website – www.beshapingthefuture.co.uk