The Bangko Sentral ng Pilipinas (BSP) has issued the guidelines for the recovery plan submission of thrift, rural and cooperative banks by June 30 this year.

The memo (BSP Memorandum No. M-2024-017), signed by BSP Deputy Governor Chuchi G. Fonacier on May 30, contained the guidelines on the preparation of the small banks’ recovery plan. These are for banks with “simple and non-complex operations.”

The memo included the suggested format of the recovery plan for thrift, rural and cooperative banks which “outlines the essential principles, components, and supervisory expectations for its preparation.”

“Banks are expected to consider the suggested format as a starting point, and customize it in accordance with the institution’s size, nature of operations, and overall risk profile,” according to the BSP.

It added that banks with simple and non-complex operations “are encouraged to elaborate on specific elements or provisions to enhance the credibility of their recovery plan as the suggested format is general in nature.”

Last June 2023, the big banks or those considered as domestic systemically important banks (DSIBs) have already submitted their updated recovery plans to the BSP.  DSIBs are banks whose “distress or disorderly failure” could disrupt the financial system and economy.

Based on Circular No. 1158 issued in October 2022, banks are required to submit a recovery plan. The submission of a recovery plan was in compliance to the BSP’s enhanced rehabilitation requirements to ensure problematic banks – big or small -- can restore operations as soon as possible.

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.”

Basically, a bank’s recovery planning is 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.

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.

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.