Friday Dec 13, 2024
Friday Dec 13, 2024
Friday, 18 June 2021 00:25 - - {{hitsCtrl.values.hits}}
The Central Bank has made a formal ‘Recovery Plan’ mandatory for all commercial and specialised banks from next year.
In a directive issued this week, the Central Bank said the Recovery Plan (RCP) should identify the full range of recovery options available to a licensed bank to deal with shocks to capital, liquidity and all other aspects that may arise from institution-specific stresses, market-wide stresses, or a combination of both. Banks should have an RCP in place and the RCP shall include the following: (a) Scope of RCP formulated considering the nature, scale, complexity, and interconnectedness of the licensed bank.
(b) Entities of the banking group covered under the recovery framework.
Critical functions and critical shared services must be clearly identified and defined in RCP. Critical functions and critical shared services must be organised in a way that ensures the continuous availability of shared services to the entire bank under the possible recovery and resolution options.
Banking sources told the Daily FT that most entities follow business continuity planning or Internal Capital Adequacy Assessment Process (ICAAP) risk management processes but the Central Bank’s latest directive means it becomes mandatory and such process must be institutionalised and formalised.
Commencing 2022, licensed banks with assets above Rs. 1 trillion should formulate and submit RCPs to Director of Bank Supervision (DBS) annually, by 30 June of each year or whenever the recovery plan is significantly amended. Commencing 2022, licensed banks with assets below Rs. 1 trillion should maintain RCPs from 30 June 2022 and such RCPs will be subjected to review during the statutory examination of the respective bank.
Banks should immediately inform the Director of Bank Supervision when a bank reaches a trigger point activating RCP actions or when a licensed bank is experiencing a high level of stress.
As per the Central Bank directive, banks must identify recovery indicators, recovery triggers, recovery actions and conditions for activation of resolution measures. (a) The recovery plan shall include appropriate indicators, triggers, and procedures to ensure the timely implementation of recovery actions. (b) Identified indicators and triggers shall comprise a range of quantitative and qualitative triggers. (c) Quantitative indicators and triggers should be set at levels above the associated supervisory requirements, wherever applicable. (d) In addition to such triggers, early warning indicators shall be used to identify negative trends for monitoring.
An RCP shall identify the full range of credible and flexible recovery options available to a bank to deal with shocks to capital, liquidity and all other aspects that may arise from institution-specific stresses, market-wide stresses, or a combination of both, and shall include the following as a minimum: (a) The anticipated impact or result of the option in terms of capital, liquidity and/or any other area, if any. (b) Time and resources required to implement the option. (c) Potential impediments to implementation of the option. (d) Actions being taken to remedy the impediments. (e) Details on costs of implementation. (f) Details on option‑specific communication planning. Recovery options of a bank shall be capable of being executed within a reasonable timeframe and sustainability and viability of the options must be evaluated intensely.
RCP should take into account any legal, reputational, and operational impediments on recovery and formulate processes to ensure timely implementation of recovery options. Each licensed bank should appropriately include Business Continuity Planning (BCP) arrangements when formulating RCPs.
Banks are required to appoint a member of the senior management to oversee its RCP process and must put in place a robust governance structure and sufficient resources to support RCP process.
The roles and responsibilities of each person involved in the RCP process should be clearly assigned within the bank and specified in RCP.
Furthermore, the RCP should be approved or endorsed by the Board of Directors for a locally incorporated licensed bank and the regional/ global head office for a licensed bank incorporated outside Sri Lanka.
RCP must be a dynamic process and be updated at least annually and must be integrated with the existing risk management framework and processes. Clear responsibilities of key management personnel, respective departments/divisions, and other relevant officers for formulating, maintaining/regularly reviewing, executing, and activating the RCP must be assigned and documented. Licensed banks incorporated outside Sri Lanka shall inter alia include the following in their RCP: (a) The manner in which the local operations are integrated to the recovery and resolution framework of the parent bank. (b) Brief description of the submissions made to the home regulator on RCP, if any.
A copy of the written undertaking supported by a resolution of the Board of Directors of the head office or parent body, under section 3 (2) (c) (i) of the Banking Act No. 30 of 1988 as amended, stating that such bank as the case may be, shall on demand by the Central Bank, provide funds as may be necessary to meet all obligations incurred in or in connection with its business in Sri Lanka.
Each licensed bank must maintain information within the prevailing management information systems that are capable of producing information necessary for recovery process of the bank. Each licensed bank shall maintain up to date information on following arears, but not limited to: (a) List of depositors including, account number, deposit type, deposit balance, contact details and any other relevant details. (b) Information on all contracts of the licensed bank. (c) Information on intra-group transactions. A communication plan shall be in place to ensure timely communication with internal and external stakeholders on RCP.
Central Bank has provided the banks with a model format containing a broad template to draft RCPs. However, a fair degree of variation in the depth and presentation of RCPs is expected, based on the size, banking business model, complexity, interconnectedness, risk profile and systemic importance of each bank.
Central Bank defined critical functions as those performed for third parties where failure would lead to disruption of services vital for the functioning of the real economy and for financial stability due to size or market share, external and internal interconnectedness, and complexity or cross-border activities of the banking group. Critical shared services mean activities performed within the firm or outsourced to third parties, where failure would lead to the inability to perform critical functions and, therefore, to disruption of services vital for the functioning of the real economy or for financial stability. Third parties include all entities or individuals that have entered into a business relationship with the licensed bank.
