The U.K.'s Financial Services Authority has delayed until fall the release of final rules that would require large banks to develop appropriate recovery plans and resolution packs in the event of insolvency, the agency noted in a feedback statement.
The FSA said it is delaying the rules due to “various significant international developments.” Specifically, the FSA is waiting for an expected directive by the European Commission on the matter of recovery and resolution plans.
The FSA said that delaying the final rules will “not result in a loss of momentum,” as large firms involved in the pilot exercise must still submit recovery plans and resolution packs by the end of June, as initially planned.
Other large firms are expected to provide sufficient information to their supervisors to meet the timetable set by the Financial Stability Board. For all other firms, supervisors will agree the timing and content of their materials bilaterally.
The FSA's feedback statement, nonetheless, sets out its approach to ensure firms develop appropriate recovery plans and resolution packs. The feedback statement clarifies what the banks are expected to do while final rules are being adjusted to take into account developments in the international arena.
“The 2008 banking crisis highlighted that firms failed to have effective plans in place to deal with financial stresses and potential failure,” the feedback statement said. “If firms had put plans in place prior to the advent of the crisis, they may well have been able to cope better with the stresses that developed and those failures might have been avoided.”
The feedback statement is relevant to all U.K.-incorporated deposit takers and significant U.K. investment firms with assets exceeding 15 billion £ ($24.24 billion). In addition, the FSA intends to consult at a later date on applying recovery and resolution plan rules to the U.K. branches of non-EEA (European Economic Area) firms without U.K. subsidiaries.
Recovery plans aim to reduce the likelihood of failure by requiring firms to identify options to achieve recovery, to be implemented when a crisis occurs. The plans must be developed and maintained by the firm, in coordination with the FSA, but they should all include a sufficient number of material and credible options to cope with a range of scenarios, including both firm-specific and market-wide stresses.
Recovery plans must also have options that address capital shortfalls, liquidity pressures, and profitability issues, and they should aim to return the firm to a stable and sustainable position. Finally, they must also have options that the firm would consider in more severe circumstances, including:
- Disposals of the whole business, parts of the businesses, or group entities;
- Raising equity capital that has not been planned for in the firm's business plan;
- Complete elimination of dividends and variable remuneration; and
- Debt exchanges and other liability management actions.
Resolution packs will assist the authorities with winding down a firm if it fails. The resolution data and analysis to be provided by firms, in part, is intended to identify significant barriers to resolution. The information provided to the authorities will help to prepare a resolution plan with the following aims:
- Ensure that resolution can be carried out without public solvency support exposing taxpayers to the risk of loss;
- Seek to minimize the impact on financial stability;
- Allow decisions and actions to be taken and executed in a short space of time;
- Identify those economic functions that will need to be continued because the availability of those functions is critical to the U.K. economy or financial system;
- Identify and consider ways of removing barriers which may prevent critical economic functions being resolved successfully;
- Isolate and identify critical economic functions from non-critical activities which could be allowed to fail; and
- Enhance cooperation and crisis management planning for global systemically important financial institutions with international regulators.
“Major reforms have been taken forward both nationally and internationally to increase the strength and resilience of our banking sectors, but we need to maintain the momentum,” Andrew Bailey, FSA director of banks and building societies, said in a prepared statement.
“Recovery and resolution plans require firms to think ahead and plan for the worst,” Bailey added. “We will be building on what has been put in place since last year, and firms must continue to develop their plans.”
The FSA also has published an FAQ with more information on the implementation timetable.