The Prudential Regulation Authority (PRA) has reviewed the recovery planning capabilities of approximately 70 non-systemic UK banks and building societies over the past 18 months. On 15 May 2024, the regulator issued a Dear CEO letter, giving industry feedback, identifying areas for improvement, planned next steps and effective practice examples.
While many firms understand the basics of recovery planning – read our guidance here – the PRA’s review found there are significant areas requiring improvement. Most notably, these related to the development of recovery scenarios and the calculation of recovery capacity.
The PRA recognises considerable overlap with recovery planning and solvent exit planning. Non-systemic firms will be aware that from October 2025, they must meet the rules and expectations introduced in policy statement 5/24 Solvent exit planning for non-systemic banks and building societies, as well as the related supervisory statement (SS2/24). The findings of this thematic review are therefore relevant when considering solvent exit planning. Firms should leverage their work on recovery planning when implementing their solvent exit approach.
Areas for improvement
Recovery scenarios
The PRA highlights that a number of firms didn't use scenarios of sufficient severity in their scenario testing, meaning testing will only be of limited effectiveness and value. This is something we often see in our work across the financial services sector helping firms with their recovery, solvent exit or wind-down planning.
Choosing appropriate scenarios under a wide range of stress levels and types should test how different elements of the plan (ie, indicators, calibration, governance and deployment of plan) would interact and work.
In designing their recovery scenario testing, banks should consider the following:
- Quality and calibration of the indicator framework
- Clarity and timeliness of governance processes leading to deployment of the recovery plan
- Recovery strategy and optionality available in each scenario
- Ability to recovery from a variety of severe stresses
Recovery capacity
The PRA’s review found that firms are not calculating their recovery capacity effectively, and are also not adequately showcasing it in an understandable and usable way. This reduces the accuracy and reliability of the recovery capacity calculations.
When considering recovery indicators, the PRA notes that not being limited to fixed point-in-time indicators is good practice. For example, firms should use forward-looking indicators based on their financial projections and deviations from business plan. This can aid firms to develop and implement their recovery or solvent exit plan while there's still a chance of success.
Another useful indicator is the movement-type indicator. This flags fast movements in metrics that may not necessarily breach indicator or risk management levels, but nonetheless could still highlight impending stress.
What should banks do?
The PRA will be engaging collectively with firms and trade associations in the second half of 2024. It expects firms to have considered the actions outlined in the Dear CEO letter and to meet all expectations outlined in SS9/17. Banks should therefore reflect and consider what improvements may need to be made to their recovery plans based on this thematic review, and how any changes will feed into their solvent exit planning preparations.
A common mistake we see is where banks view recovery and solvent exit planning as a regulatory exercise that can be done by the chief risk officer's (CRO) team, without engagement from the whole team. Our experience shows that this won't suffice. It will require input from, and impact upon, risk management frameworks, liquidity planning, governance structure and management responsibilities and accountabilities. Management often finds it becomes much more aware of the strengths and vulnerabilities in the business, improving both financial and operational resilience as a result.
We recognise that implementing this regulatory feedback can be onerous and time-consuming. It can also be difficult for management teams to know what ‘good’ looks like from a regulatory perspective. Our experienced team understands what the regulator is looking for, as well as the practical operational aspects of both recovery planning and solvent exit planning.
For more insight and guidance, contact Russell Simpson, Kantilal Pithia or Sonam Nawani.
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Camilla Fawkner
