By Shannon Harris, Senior Research Executive, Center for Financial Professionals. Recovery and resolution planning is fast becoming one of the most significant and critical regulatory hurdles within modern day financial institutions, with its reaches spreading to FBO’s. The financial crisis highlighted how a number of institutions were inadequately prepared and equipped for a crisis scenario. The critical scenarios leading up to 2008/2009 are now lessons for future risk professionals aiming to mitigate against another financial downturn. Recovery and resolution professionals now play the vital role in planning and preparing for the worst to mitigate against another crisis and their potential systemic impact, even for those FBOs with little systemic impact to the US system.
The recovery and resolution landscape is actively developing as the regulating bodies push for more enhanced and sustainable recovery and resolution plans (RRP). Understandably each firm is at a different stage of progression with uncertainty around requirements and submission dates, and delays increasing the uncertainty and progression. To investigate this further The Center for Financial professionals conducted extensive research with a range of financial institutions, including global players and FBOs operating in the US. This research provided an industry consensus on potential opportunities and constraints surrounding RRP. Below are the top three challenges raised by a collective group of leading recovery and resolution professionals.
Several senior industry professionals highlighted a main obstacle being the requirements surrounding critical services and vendor and the expectations thereof. There remains a level of uncertainty and ambiguity around identification of critical services and vendors, proving a challenge to institutions from an early stage. In theory, the concept appears straight forward, highlighting any service or vendor with the potential to cause critical damage to the business, but what constitutes critical damage, and how can this be measured and unified across the industry? The variation has caused a range of institutions to interpret the word ‘critical’ in a range of ways, meaning some institutions will be managing and monitoring vendors differently based on their classification. The industry is calling for a more unanimous consensus on what the term critical should mean, led by regulators to clarify their intentions to enhance comparability across the industry and a smoother identification process. Another key concern within critical services and vendors remains as the ability to create sustainable resolvability contracts. In light of the latest RRP requirements critical service and vendor contracts must be amended to account for potential crisis scenarios and promote future resolvability. However, amending pre-existing contracts appears to be a leading area of frustration for many FI’s, especially larger players with corporate governance and management processes to pass. Adjusting such contracts has the possibility to lead to concessions which result in an increased financial cost to amend the contract terms across all critical services and vendors. Finally, comes the management and identification of fourth and fifth party outsourcing, with little guidance surrounding un-mediated contracts financial institutions are grappling with the level of oversight required to manage the risk of vendor outsourcing. At the root of all surrounding critical services and vendors is a lack of understanding around the expectations from regulators, the industry is calling for a more informed guidance on the definition of critical and the level of oversight required to conform to RRP requirements in this area.
Another main topic highlighted from research was the interconnectivity of recovery and resolution planning with capital and liquidity requirements. Understanding these connections now, may be the key to successful recovery and resolvability in future crisis events. A main discussion point across the industry is the implementation of the TLAC rule, and understanding the impacts of this and co-existence alongside RRPs. TLAC remains a concern for financial institutions to understand the rule and implement the changes, feedback suggested many industry professionals are actively seeking more information on implementation approaches, timelines and global variations. Recovery and resolution professions must now look to understand the TLAC requirements and consider under their plans in order to prepare for future implementation and impacts. In relation to liquidity requirements, many suggested the main area of focus across the industry being the ability to assess liquidity needs in a resolution scenario. Open questions regarding best practice, implementing RRP and liquidity frameworks and impacts on minimum requirements are at the top of many agendas. Capital and Liquidity requirements are similar in the fact that they relate and connect with RRP but both require greater understanding and discussion in order to implement into RRP and account for future changes and variations on results.
Lastly and undoubtedly one of the largest areas raised was the regulatory uncertainty around the level of expectation for Foreign Banking Organizations (FBOs). FBOs operating in the US arguably have an increased work load as they must comply with RRP regulations in both their home and host nation, even those without a systemic impact to the US. The requirements require all FBOs operating with an IHC in the US must submit recovery and resolution plans regardless of their size in the US. Therefore, FBOs have a unique set of issues surrounding RRP as many do not have the capability to produce the numbers required and remain increasingly uncertain around what is expected of them. FBOs are grappling with maintaining funding to produce the reports required, often with little benefit to them given some of the unique sizes and situations. Requirements remain uncertain around treatment of IHCs and non IHCs, alongside the requirements to comply with home nation requirements, and the US rigorous requirements for their US operations. Many are calling for a change in criteria for FBOs of different sizes, many should be considered low risk institutions but are still subject to the same level of rigor. The feedback received called for more industry wide discussion between FBO’s and regulators to tailor the approach, rather than taking a one size fits all approach. The sharing of opportunities, constraints and experience would allow for improved knowledge on RRP requirements for those operating in the US.
The issues highlighted above were identified as the top 3 challenges facing RRP professionals over the coming twelve months. This exclusive insight allowed a viewpoint into multiple FI’s and how they are complying with the ever growing RRP requirements. As the requirements surrounding recovery and resolution planning continue to grow and develop it is now essential FI’s collaborate and share ideas on industry best practice.
In light of these developments The Center for Financial Professionals will be hosting the highly anticipated Recovery & Resolution USA on March 20-21, 2018 in New York. The two day Congress will explore advances within recovery and resolution plans as institutions prepare and plan for the next round of submissions. This will be a fantastic opportunity to link with like-minded professionals and discuss viewpoints on the RRP landscape. This year’s congress boasts insight from leading professionals including CROs, Global Heads, Managing Director and more. For more information and to register for the upcoming Recovery & Resolution USA please visit – www.cefpro.com/rrp-usa Alternatively for more information please feel free to email me at firstname.lastname@example.org or call us on +1 888 677 7007