Topic Recovery/resolution Recovery and resolution plans: BaFin's experience
Article from BaFin's 2017 annual report
During the year under review, BaFin evaluated more than 30 individual and group recovery plans (see info box "Results of the 2017 benchmark comparison"), mainly of significant institutions (SIs) from Germany, but also of institutions from other member states of the SSM and less significant German institutions (LSIs). This involves BaFin checking, among other things, whether the plans comply with the regulatory requirements and whether they meet the objective of recovery planning, which is to further improve the institutions' resilience so that they are better able to overcome possible difficulties from their own resources.
Definition:Results of the 2017 benchmark comparison
As in previous years, BaFin carried out a benchmark comparison of the recovery plans submitted in 2017 as well. The primary focus of the benchmark comparison was on the core elements of a recovery plan, the possible courses of action, the indicators and the stress scenarios.
The benchmark comparison shows that the possible courses of action fell mainly under the headings "risk reduction", "capital increase", "disposals" (of investments and assets) and "access to high-volume funding". On average, the institutions had around 20 possible courses of action open to them. The institutions rated the viability of around half of their possible courses of action as "high".
The benchmark comparison also showed that the recovery indicators used in the recovery plans did not yet comply fully with the requirements of the EBA guidelines on the minimum list of qualitative and quantitative recovery plan indicators1. The most frequently used indicators included – as in previous years – the Tier 1 capital ratio, the total capital ratio and the liquidity coverage ratio. Indicators from the EBA minimum list that were used only in isolated cases or not at all were the return on assets, the stock price variation, the cost of wholesale funding, the coverage ratio and credit default swaps of sovereigns.
The benchmark comparison of the events triggering stress scenarios showed that the institutions are not so much testing individual events in the scenarios, but rather combinations or sequences of several events. At the same time, the stress scenarios are most frequently based on the risk of a new financial crisis.
A primary component of a recovery plan is therefore represented by the possible courses of action that the institution can take in a recovery situation in order to restore its financial viability on a sustainable basis. The institutions are also required to define indicators enabling them to identify crises in good time so that they can initiate appropriate recovery measures. In addition, they must perform stress analyses based both on serious idiosyncratic stress scenarios and on those affecting the market as a whole, and which cover both sudden developments and those arising over a longer period of time.
In addition, in its role as the national competent authority and because of the statutory duties of cooperation, BaFin is consulted by the competent resolution authority on the resolution plans of specific institutions, both via the SSM and via the resolution colleges forming part of the Single Resolution Mechanism (SRM).
The plans come into effect in the event that an institution cannot overcome its financial difficulties on its own and therefore has to be resolved. BaFin gave its opinion from a supervisory point of view on more than 15 resolution plans of German and foreign SIs and LSIs during the year under review. It also reviewed the results of the evaluation of a large number of additional resolution plans of SIs in preparation for meetings of the Supervisory Board of the ECB. Furthermore, BaFin is currently represented in more than 20 supervisory colleges in its capacity as the supervisory authority for the German deposit protection system.2
Moreover, BaFin has also been the national resolution authority (NRA) since 1 January 2018, and as such part of the SRM. The NRA prepares resolution plans for institutions and assesses their resolvability. For larger institutions, this is carried out jointly with the SRM. If it becomes clear that an institution is running into difficulties, the NRA prepares resolution actions and, if necessary, implements them. From 2015 to 2017, the Financial Market Stabilisation Agency (FMSA) acted as the NRA.3
Footnotes:
- 1 EBA/GL/2015/02.
- 2 As at 31 December 2017.
- 3 See chapter VI 3.
