BSP sets rules on banks’ recovery plans

Published July 4, 2022, 7:10 PM

by Lee C. Chipongian

The central bank will require all banks to report within 24 hours if triggers in their recovery plans are breached, and to detect risks and vulnerabilities and activate recovery measures within three days, according to a proposed circular.

The Bangko Sentral ng Pilipinas (BSP) on Monday, July 4, released its proposed guidelines on the recovery plans of banks which are expected to be commensurate to their size, nature and complexity of operations, overall risk profile, and systemic importance.

BSP building and logo/Reuters

Once the circular is approved, banks will submit a recovery plan every June 30. Banks have until July 15 to post feedback or suggestions to the BSP on the guidelines of the recovery plans.

The guiding principles set by the BSP provide rules on internally-set trigger levels or points for each banks as warning signals. It orders banks to provide governance arrangements in the preparation, maintenance, and activation of the recovery plan according to their risk management framework, Internal Capital Adequacy Assessment Process (ICAAP), and contingency plans, as well as critical functions and systems.

Banks’ recovery plans depend on these triggers for invoking recovery measures and associated early warning indicators, and the restoration points for key levels of financial soundness, including capital and liquidity, said the BSP.

Also included in the plans are recovery options, and stress scenarios. These stress tests include entity-specific and system-wide scenarios and recovery strategies for each scenario. Banks also need to have the following: detailed preparatory measures, setting out the operational and legal prepositioning needed to implement recovery options; testing and simulation exercise; and review of the recovery plan.

“Recovery planning is an important process to reduce the risks posed by a bank’s distress or disorderly failure to the stability of the financial system and the economy,” said the BSP.

The BSP said it expects all banks to establish a “concrete and reasonable” recovery plan linked to their risk management framework, ICAAP or capital planning, and contingency plans.

“The recovery plan will set out the governance arrangements, recovery options, and communication strategies in periods of extreme stress scenarios to maintain or restore the viability of banks and ensure continuity of operations,” said the BSP.

The draft circular will cover all banks, including government-owned banks. They can maintain a recovery plan on both solo and group-wide bases covering all of the bank’s subsidiaries and affiliates.

Foreign bank branches, meantime, will refer to their head office’s recovery plan but this should be consistent with BSP provisions.

“The recovery plan will serve as a guide of a bank in taking preemptive actions at an early stage of stress to avoid breach of minimum regulatory requirements,” said the BSP.

A recovery plan will be activated when a bank breaches any one of triggers relating to capital, liquidity, asset quality, profitability, and credit rating, said the BSP. “Triggers for the recovery plan will be at a more severe level of risk deterioration than the triggers applicable in activating the capital and liquidity contingency plans,” it said.

Banks’ early warning indicators will have specific levels relating to each trigger and will include early-stage indicators of stress which will not necessarily cause the recovery plan to be activated, said the BSP.

“These will enable a bank to take remedial actions outside of the scope of the recovery plan, such as adjustments to minimum risk tolerance, modifications of risk behavior, tightening of risk controls and preparation for the possible future activation of recovery options,” explained the BSP.

The central bank said banks’ early warning indicators will be regularly calibrated to alert the bank of stress or adverse circumstances and to allow sufficient time to prepare for a potential triggering event.

Last month, credit watcher Fitch Ratings revised its outlook on the Philippine banking system to “stable” from “negative” on expectations of sustained loan demand, higher central bank rates, and a recovering economy this year.

The revised outlook is due to the government’s containment of the Covid-19 pandemic and continued GDP expansion. In the first quarter, the economy grew by 8.3 percent from 5.7 percent in 2021, higher than what the government and the market expected.

Fitch said Philippine banks are also expected to take advantage of loan growth and the recovering loan demand.

The BSP, in its own reports, said the industry has maintained its positive growth in terms of assets, loans, deposits, net income, money and capital market exposures.

Based on central bank stress tests, with local banks’ level of capital and liquidity buffers, most banks are capable of absorbing losses under scenarios of assumed credit impairment since credit risks are sufficiently funded.