Directive on recovery plans for banks

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REGULATORY DIGEST ON “DIRECTIVE No 4230/2022-0030[613] of 4/11/2022 ON MINIMUM REQUIREMENTS OF THE RECOVERY PLAN FOR BANKS”

Background

For effective resolution regimes for financial Institutions, jurisdictions should put in place an ongoing process for recovery and resolution planning, covering at a minimum domestically incorporated firms that could be systemically significant or critical if they fail (FSB, 2021).

In line with this, National Bank of Rwanda (NBR), pursuant to the Law No 48/2017 of 23/09/2017 governing the National Bank of Rwanda as amended to date especially in its articles 6, 6bis, 8, 9, 10, and 15 and pursuant to the Law No 47/2017 of 23/09/2017 governing the organization of banking especially in its articles 64 and 70; has issued a directive on minimum requirements of the recovery plan for banks. The directive aims at cultivating the culture of crisis management in banks by laying down general rules for preparing recovery plans.

Regulatory Key Highlights

This directive was issued to guide banks to develop robust recovery plans. It lays down general rules and minimum contents for a bank’s recovery plan, especially on the following: governance, integration of recovery plan into risk management framework, recovery triggers, recovery options, feasibility test, stress test scenarios, communication process and reporting.

On governance, banks are required to put in place a robust governance structure and sufficient resources to support their recovery planning process. In this perspective the Board has the responsibility of establishment, approval and oversight of the implementation of the recovery plan by management whereas management shall be responsible for preparing, testing, implementing and updating the plan.

The recovery plan shall be incorporated into a bank’s overall governance processes and risk management process. During recovery planning process, a bank shall outline recovery options to be implemented in the event of severe stress. The directive provides nine possible examples of recovery options. The bank shall further identify and develop criteria and procedures that are clearly defined and calibrated to trigger timely activation and implementation of recovery options within the recovery plan i.e. recovery triggers. These potential triggers may be quantitative or qualitative. The directive requires banks while considering quantitative triggers, to focus on the extent and changes in different indicators such as capital indicators, liquidity indicators, profitability indicators, asset quality indicators, market based indicators, operational based indicators and macroeconomic indicators.

A recovery plan shall be based on a range of clearly articulated, severe but plausible, bank-specific, market wide, and systematic stress scenarios, and combination of these.

The recovery plan should require reports that provide senior management or the board with sufficient data and information to make timely decisions regarding the appropriate action necessary to respond to a trigger breach, or monitor progress of actions taken under the recovery. This directive provides the minimum content for a bank’s recovery plan and considerations to make for its assessment. The recovery plan should also include a communication plan setting a clear communication strategy for both internal and external stakeholders.

Implications for concerned stakeholders

  •  A breach of a trigger shall not automatically lead to activation of recovery option but may lead to assessment of whether action is needed.

  •  A bank shall have clear vision of the feasibility of each recovery option in a range of stress scenarios. The stress scenario should have features of realism, variety and timescale.

  •  Where a recovery plan submitted has material deficiencies following Central Bank’s assessment, the bank shall be required to submit a revised recovery plan upon notification from the Central Bank.

  •  A bank that does not comply with the requirements of this directive is punishable by administrative sanctions provided in the regulation on administrative and pecuniary sanctions.

Important deadlines

  •  A copy of recovery plan approved by the Board of Directors shall be submitted to the Central Bank not later than the calendar year 30 June after its assessment and review. Banks shall submit their first recovery plans in accordance with this directive, not later than 30 June 2023.

Click here for more details:

https://www.bnr.rw/laws-and-regulations/banking/directives-guidelines/