The Bangko Sentral ng Pilipinas (BSP) has approved changes to the guidelines on the submission of banks’ recovery plans and other “prudential measures” to prevent a bank’s collapse.

BSP Deputy Governor Chuchi G. Fonacier, who signed BSP Circular No. 1158 or the “Guidelines on Recovery Plans of Banks” last Tuesday, Oct. 18, said they also amended the rules on the Internal Capital Adequacy Assessment Process (ICAAP) and the supervisory review process.

“Recovery planning is an important process to reduce the potentially significant risks posed by a bank's distress or disorderly failure to the stability of the financial system and the economy,” said Fonacier in the circular memo.

She said recovery planning, which is a fundamental element of a risk management framework, allows banks to “respond quickly, effectively, and credibly to situations of financial stress to protect depositors and other customers as well as to promote viability and maintain shareholder value.”

The revised circular applies to all banks including government-owned banks, while foreign bank branches may use their parent banks’ recovery planning strategies so long as these are matched to the scale of their Philippine operations.

Fonacier said the BSP expects all banks to develop “concrete and reasonable” recovery planning that is linked to their risk management framework, internal capital adequacy assessment process or capital planning, liquidity plans, and business contingency plans.

A bank’s recovery plan should be the results of its stress testing and supported by its 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 Fonacier.

“Banks are expected to adopt a recovery plan that is commensurate to their size, nature and complexity of operations, overall risk profile, and systemic importance,” she added.

The circular highlighted the domestic systemically important bank’s or D-SIBs capital adequacy guidelines on data requirements and reports. Banks considered as D-SIBs are those whose “distress or disorderly failure” would cause significant disruptions to the wider financial system and economy.

The BSP allowed transitory provisions in which non D-SIBs including subsidiary banks of D-SlBs that are required to submit the recovery plan for the first time, will have at least two years to develop it.

However, the first recovery plan of said banks will be submitted to the BSP on or before June 30, 2024.

For D-SlBs that are already required to submit a recovery plan, they have until June 5, 2023 to make it consistent with Circular No. 1158.

With the new rules, the BSP basically wants all banks to report within 24 hours if triggers in their recovery plans are breached. If they detect risks and vulnerabilities, they are to activate recovery measures within three days.

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, 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.

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.