On 19 December 2013, the Prudential Regulation Authority (PRA) issued Policy Statement PS8/13 together with two Supervisory Statements, SS18/13 on recovery planning, and SS19/13 on resolution planning. Together, this guidance details the PRA’s final RRP rules for UK banks, building societies and UK designated investment firms. Their publication follows on from the FSA’s original consultation paper (CP11/16) and Feedback Statement (FS12/1). The final rules are set out in the PRA Rulebook Recovery and Resolution Instrument 2013 (PRA 2013/37), which is annexed to PS8/13 and come into force 1 January 2014.
Policy Statement PS8/13: Recovery and Resolution Plans
As the title suggests, PS8/13 addresses both recovery planning and resolution planning. There is a general recognition that regulatory requirements will have to evolve over time so as to ensure continued consistency with the Financial Stability Board’s (FSB) ‘Key attributes of effective resolution regimes’ and the EU Bank Recovery and Resolution Directive (RRD). Despite this, recovery planning information requirements have not been amended significantly from FS12/1, except that:
- Supervisory Statement SS18/13 emphasises that firms should identify actions necessary to improve the credibility and effectiveness of a recovery plan; and
- The requirement to automatically submit a remediation plan on meeting recovery triggers pre-agreed with the PRA has been removed.
In contrast, resolution planning data requirements have been revised in light of the PRA’s experience over the previous 18 months with a view to being more targeted in nature and proportionate to the size and complexity of the firm in question.
Supervisory Statement SS18/13 Recovery Planning
The purpose of a recovery plan is to enable a firm to recover from a range of severe financial stresses caused by idiosyncratic problems, market-wide stress or both. Under SS18/13, the key elements of a recovery plan include:
- Confirmation that the firm’s Board (or other appropriate committee) has reviewed and approved the recovery plan;
- A summary of the complete list of recovery options and an overview of further possible options; A description of each recovery option using a consistent framework;
- Ensuring that the recovery plan is embedded into the firm’s risk management framework;
- Identification of a range of plan activation triggers;
- Clear escalation and decision-making processes;
- Operational plans for accessing central bank liquidity; and
- A communication plan.
In all material respects, these requirements mirror Module 2 (Recovery Plan) of FS12/1. However, some changes have occurred with respect to more detailed data requests, including:
- “Plan for accessing central bank facilities” - previously, firms were required to “consider” the appropriate amount of assets to pre-position within a central bank facility whereas now they are required to actually ensure that an appropriate amount are pre-positioned;
- “Disposals” – firms are now required to consider fair valuation of the balance sheet, data room capabilities and how these impact recovery option creditability in the event that a merger or sale of the whole firm is a relevant recovery option;
- “Remediation measures” - a new subsection 5 is included, requiring firms to identify actions which should be taken to improve recovery plan credibility.
Supervisory Statement SS19/13 Resolution Planning
Broadly, resolution planning requires firms to submit ‘packs’ of information which allow authorities to identify appropriate resolution strategies and work to identify and remove barriers to resolution.
SS19/13 is organised in two “phases”. Phase 1 requires baseline information to be provided by all firms on group structure, significant legal entities[Footnote 1] and a firm’s business model which is used to establish a preferred resolution strategy. In this sense, it mirrors Modules 3 and 4 of FS12/1. It is split into two Parts (A and B), with the possibility of ad hoc information requests if required. First submissions of Phase 1 information must be made within 15 months of the publication of SS19/13. Thereafter, the PRA will request resubmission of Phase 1 information every two years or following a material change to the firm’s structure or business activities.
Phase 2 applies in circumstances where authorities require further information in support of the preferred resolution strategy. The exact nature of the information requested will depend on the preferred strategy and the particular circumstances of the firm in question.
Phase 1, Part A: Corporate structure and significant legal entity information
In the main, Part A mirrors Module 3 (Group structure and key legal entity information) of FS12/1, although some minor changes have been made with respect to:
- “Group structure” - including a requirement to provide group consolidated P&L and balance sheet data;
- “Core business lines” – including a new requirement on firms to “highlight material participation in specific markets e.g. banking services provided to UK local authorities or particular industries” as well as geographic concentration of lending and deposits;
- “Capital allocation and mobility” – the previous requirement to provide a summary of capital securities in issue being replaced by a new requirement to provide details of material holdings in other financial institutions;
- “Funding” – enhanced data requirements regarding group funding relationships;
- “Intra-group guarantees” – a new requirement for firms to list the entities that use or are sighted in guarantees, as well as the underlying amounts of contracts that contain “Specified Entity” or similar clauses;
- “Encumbrances” – a new requirement to analyse encumbrances on an intra-group or external basis;
- “Activities and Operations” – a new section which seems to replace the information required in FS12/1 regarding FSCS Deposits, Booking practices, Interbank exposures, Derivatives/securities financing, Non-financial interdependencies between legal entities, and Analysis of key issues in separation of legal entities and requires firms to provide information on:
> Access to Financial Market Infrastructure (FMI);
> Cash services;
> Risk management practices;
> Counterparty risk management; and
> Critical shared services.
Footnotes for this section:
 Larger firms only - as a guide, this should capture approximately 90% of total balance sheet.
 PS19/13 Phase 1, Part A1.1 (previously Module 3.1.1 of FS12/1)
 PS19/13 Phase 1, Part A2.1 (which seems to have replaced Module 3.1.3 (“Support Functions”) of FS12/1)
 PS19/13 Phase 1, Part A3.1
 Although this requirement was largely covered by Module 5a of FS12/1 anyway
 PS19/13 Phase 1, Part A3.3
 PS19/13 Phase 1, Part A3.4
 PS19/13 Phase 1, Part A3.6
 PS19/13 Phase 1, Part A4
 FS12/1 Module 3.4
 FS12/1 Module 3.5
 FS12/1 Module 3.6
 FS12/1 Module 3.7
 FS12/1 Module 3.8
 FS12/1 Module 3.9
 This largely mirrors the requirements of FS12/1 Module 3.5 (“Booking practices”)
 This seems to replace and expand upon the requirements of FS12/1 Module 3.8 (“Non-financial interdependencies between legal entities”)
Phase 1, Part B: Economic Functions
Part B of Phase 1 requests information on firms’ economic functions in order to enable authorities to identify those functions which are critical, need to be protected in resolution and retained in post-resolution restructuring.
Although an exact mapping of changes between PS13/8 and FS12/1 is difficult, broadly, there is an increased emphasis on the provision of granular data with respect to retail and SME deposit taking and lending activities, reflecting a desire to protect taxpayers and the real economy. Informational requirements in relation to “Trade Financing” activities, “General Insurance” and “Life insurance, pensions, investments and annuities” have also increased. More minor amendments have been implemented with respect to corporate deposit and lending requirements. Trading Portfolio data requirements now demand the reporting of outstanding notional amounts of derivatives by asset class and RWA usage also becomes a required field. New forms are provided for reporting note flow statistics and infrastructure in relation to Cash services and for summarising economic functions performed by each legal entity[Footnote 18]. Finally, some activities previously classified as Economic Functions under FS12/1 no longer appear - including Research, Corporate advisory services, Brokerage, Exchange services and Central clearing services.
[Footnote 18] See “Table on economic functions split by legal entities” – broadly this table seems to be a simplified version of that previously required under FS12/1 Module 4.1.2
Phase 2, Part A: Strategy-specific information requests
The requirements of Phase 2, Part A are driven by the preferred resolution strategy for the firm in question. They are divided into three main categories:
- Partial transfer and bridge bank; and
- Bank Insolvency Procedure.
Information requests regarding bail-in are clearly informed by recent developments in thinking regarding ‘single point of entry’ versus ‘multiple point of entry’ approaches to resolution and the impact this may have on loss-absorbing capacity. Broadly, they replace Module 5a of FS12/1. In addition, more robust information requirements have been implemented with respect to:
- Intra-group exposures;[Footnote 19]
- Contract documentation; and
- Operational shared services.
[Footnote 19] In form, this is not too dissimilar to the interbank exposure reporting under FS12/1
Partial transfer and bridge bank
Information provided in relation to this section will enable authorities to assess the feasibility of grouping and separating a firm’s functions into viable business units. It is sub-divided into 3 sections:
- Effecting a transfer: involving a strategy and business model analysis, asset valuations and identification of barriers to separation;
- Operational shared services – partial transfer/bridge bank: an analysis of critical internal or external operational shared services; and
- Continuity: an assessment of the level of continuity of critical functions provided when executing a transfer of assets and liabilities to a private sector purchaser or bridge bank.
Bank Insolvency Procedure
Most of the information required to assess the feasibility of executing a Bank Insolvency Procedure is already provided to authorities through business as usual regulatory reporting and the information provided in Phase 1.
Phase 2 Part B: Critical function information requests
Any requirements for further information pursuant to this section will depend on the complexity of the individual firm and its preferred resolution strategy. Tables are provided with respect to the following potential areas of enquiry:
- Payments, clearing and settlement: focussing on critical FMIs;
- Trading book analysis: focussing on the firm’s booking model, trade documentation and operational continuity;
- Cash services: focussing on the scope, scale and operational continuity of cash services;
- Custody services: focussing on the scope, scale and operational continuity of custody services.
Phase 2 Part C: Additional information requests
To facilitate resolution planning, authorities may require firms to prepare additional information on:
- Business reorganisation plans: restructuring options considered in advance in order to facilitate the timely production of an effective reorganisation plan in the event of resolution;
- Operational continuity: a breakdown of high level costs, split by legal entity and business line as well as an analysis of any group service company model;
- Liquidity: an analysis of funding requirements by and across legal entities and by currency together with information on intraday liquidity;
- Valuation: identification of equity value, quantum of losses or an insolvency counterfactual valuation.
Chapter 3 – Contingent information requests
As they become more stressed or approach resolution, firms should expect to receive requests from the PRA to provide, at short notice, additional or refreshed information relating to:
- Deposit-taking activities;
- Bail-in loss-absorbing capacity;
- Collateral assessment; and/or
- Cash services.
In PS8/13, the PRA has clearly both learned the lessons from the first generation of RRPs and raised the bar in terms of informational demands. Data requirements are more granular and focussed, but also more flexible in nature, reflecting the need to create a consistent benchmark between firms whilst recognising that there is no ‘one size fits all’ policy to the production of a living will.
However, despite the obvious progress, it remains questionable whether as an industry, European banks are any closer to being truly resolvable. At a macro level, resolution decision making processes under the Single Resolution Mechanism look set to be cumbersome and time-consuming, involving up to 9 committees and 143 votes[Footnote 20]. At a micro level, the requirement under SS19/13 to submit data in (essentially) paper form every two years does nothing to enhance basic resolvability. Moreover, the RRD, set to be finalised later this month, seems unlikely to address the root cause of the problem.
Fundamentally, resolvability is not about a firm’s ability to muster resource in an effort to meet a bi-annual request for information. Rather, it is about a firm’s innate ability to generate and refresh new and existing resolution data on request and with minimal effort. Whilst the result is fundamental system redesign, the trigger will require firms to embrace a culture which places data at the heart of the business, emphasising data integrity, security and flexibility. Only then will it be possible to aggregate and generate the various view of data necessary in order identify the most appropriate resolution plan, execute it at speed and adapt it as and when necessary, all within the context of the market stress and instability that is likely to accompany the resolution of any global systemically important bank. The Basel Committee’s recent progress report on the adoption of the Principles for effective data aggregation and risk reporting is arguably a better barometer of bank resolvability. Even though this is a case of banks marking their own homework, it would suggest that there is a significant amount of work remaining before it is really possible to say that the question of ‘too big to fail’ has been adequately addressed.
[Footnote 20] See the FT, EU ministers set to define banking union
 See SS19/13, page 5, paragraph 13
Copyright © Derivatives Risk Solutions LLP 2013
Michael Beaton is a lawyer and managing partner of Derivatives Risk Solutions LLP.