Banks told to prepare for extreme stress cases

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) will require all banks to develop a concrete and reasonable recovery plan that will help  ensure continuity of operations during periods of extreme stress scenarios.

In a draft circular, the regulator said it expects all banks to undertake recovery planning linked to their risk management framework, internal capital adequacy assessment process or capital planning as well as contingency plan.

“The recovery plan shall set out the governance arrangements, recovery options, and communication strategies in periods of extreme stress scenarios to maintain or restore the viability of banks and ensure continuity of operations,” the BSP said.

According to the central bank, recovery planning is an important process to reduce the risks posed by a bank’s distress or disorderly failure to the stability of the financial system and the economy.

“Banks are expected to adopt a recovery plan that is commensurate to their size, nature and complexity of operations, overall risk profile, and systemic importance,” the BSP said.

The proposed amendments to the guidelines on recovery plan as well as internal capita adequacy assessment process and supervisory review process would cover all banks, including government-owned banks.

On the other hand, foreign bank branches may draw on the recovery plan developed by their head office that are consistent with the applicable provisions in the guidelines with respect to their operations in the Philippines.

The BSP would require banks to submit their recovery plans to the appropriate supervising department of the BSP every end of June of each year.

It said the recovery plan shall be distinct and separate from the internal capital adequacy assessment process document.

“In cases of breach of internally-set trigger level, the bank shall notify within 24 hours from the discovery of said breach the appropriate supervising department of the BSP,” the central bank said.

Banks should disclose, at the minimum, the nature of the breach and the business functions or specific systems involved.

“On the activation of the recovery plan, the bank shall inform within three banking days the appropriate supervising department of the BSP of the activation or implementation of recovery measures identified under its recovery plan,” the regulator said.

The banks should explain to the BSP the events and circumstances leading to the breach of the recovery threshold, and management actions that have been taken and/or intended to be taken, including the implementation of recovery options drawn from the preferred recovery strategy.

The regulator will review the recovery plan, at least annually, as part of the overall supervisory process, focusing on assessing the recovery plans’ robustness, credibility, and feasibility to be effectively implemented.

“Banks shall be required to adopt appropriate measures should the BSP find the submitted recovery plan inadequate. The activation of the recovery plan earlier than planned may be required by the BSP when warranted, as approved by the Deputy Governor of the Financial Supervision Sector, depending on the circumstances at the time,” the BSP said.