Big banks to submit updated recovery plans

The country’s “too big to fail” banks will submit updated recovery plans by the first week of June in compliance to the enhanced rehabilitation requirements of the Bangko Sentral ng Pilipinas (BSP) to ensure problematic banks can restore operations as soon as possible.

Known as domestic systemically important banks or D-SIBs, these banks whose “distress or disorderly failure” could disrupt the financial system and economy, are required to comply to an October 2022 rule or Circular No. 1158 to submit a recovery plan by June 5 this year to remain consistent with the amended circular.

The BSP in a report said the enhanced recovery planning requirements will further strengthen the “ability of banks to restore their operations as quickly and efficiently as possible, while also minimizing the impact of disruptions on customers, stakeholders, and the broader financial system.”

The BSP has expanded the recovery planning rule to include non-DSIB banks. The first recovery plan of said banks will be submitted to the BSP on or before June 30, 2024.

The BSP explained banks’ recovery planning as a “critical aspect of a bank’s enterprise-wide risk management system.”

“This process prepares a bank for unexpected situations that could harm the business and helps to restore a bank to financial soundness within the shortest possible time,” said the BSP.

Basically, a recovery plan is a document that contains the guidelines and measures that a bank will take in response to “stress events and in restoring itself”. It will also include a bank’s risk management framework, business continuity and contingency plans.

The BSP requires banks to have early warning signals such as yellow and red lights to alert the central bank for the need for “early-stage” preventive or corrective actions. In this case, a yellow light is a signal that a trigger point has been breached while a red light means activation of the recovery plan. When all is said and done, a green light will indicate that a bank has been fully restored after the adoption of corrective actions.

One of the reasons why all banks have been required to craft recovery plans, not just DSIBs, is because the BSP considers the financial system as being the whole of the banking sector. Therefore all banks “should have the ability to restore themselves to financial soundness in an orderly manner.”

The circular requires what it called a “realistic and reasonable recovery plan” that is commensurate with the bank’s size, nature, complexity of operations, overall risk profile and systemic importance.

Guided by the BSP’s existing stress testing measures, the BSP wants banks to carefully assess the impact of stress scenarios on their financials and their capability to handle or even buck market shocks.

“Banks are expected to include stress scenarios that are bank-specific or those that are internal to them, system-wide or those that are marketwide and systemic, or a combination of both. These provide important context in refining the recovery options or step-by-step measures that must be implemented in case a stress event materializes,” explained the BSP.

It added that banks should regularly test their recovery plans for its effectivity through desktop exercise or a live simulation that will be conducted at least once every five years. The BSP also wants a regular independent review of the recovery planning process.

BSP Deputy Governor Chuchi G. Fonacier has said that banks’ 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.

She said the 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.

The BSP has allowed transitory provisions in which non-DSIBs including subsidiary banks of DSlBs that are required to submit the recovery plan for the first time will have time to develop it.

With the new rules, the BSP is requiring 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.