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Preparing better for crisis, also for smaller banks
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The Financial Services Authority (OJK) recently announced that it planned to issue a guideline on internal recovery planning for 12 systemic banks as part of its efforts to shield the economy from a major bank failure. (JP/File)
T
he Financial Services Authority (OJK) recently announced that it planned to issue a guideline on internal recovery planning for 12 systemic banks as part of its efforts to shield the economy from a major bank failure.
A recovery plan sets out actions that a bank will take to restore its viability in the case of significant deterioration of its financial condition. The OJK rule on this subject — expected to be issued in April — is a supporting regulation mandated by the 2016 Financial System Crisis Prevention and Mitigation (PPKSK) Law.
The law effectively gives clarity and space to authorities handling a banking crisis or the threat of one. Nonetheless, despite the improved legal protection and clearer protocols, the PPKSK committee is unlikely to have a comfortable time when a situation calls for its resolution authority to be exercised.
To reduce the likelihood of intervention by the authorities being called for, a clear and credible recovery plan is necessary: When near-default scenarios happen, what actions will a bank take? Where will it raise capital and liquidity? What businesses would it rein in or sell? How does it test its recovery options and does it set and monitor early warning signs? What are the triggers to invoke certain recovery actions? How and when will the bank’s management communicate to key stakeholders?
A recovery plan contains special case contingency plans, such as funding contingency plans, a business continuity plan and disaster recovery. A recovery plan differs from these plans in that it focuses on severe scenarios when the bank is at the near default zone, just before the point where a resolution tool like bail-in bonds is activated. Bail-in bonds are a debt instrument converted to equity when the capital ratio falls to a certain threshold.
Obviously, to support the recovery planning process, the banks’ directors and top management should deploy dedicated resources. In some countries, the banks’ chief executives, main commissioners and controlling shareholders must sign the recovery plan to demonstrate their commitment to it.
Hence, the initiative might cause apprehension in bank executives as many concurrent and related regulations are already at work, for example in relation to required submissions of annual business plans, risk-based bank rating and stress testing results.
