PRA’s introduction of simplified obligations for recovery planning

Which firms are eligible for Simplified Obligations?

Simplified Obligations are most likely of particular interest to smaller and non-systemic firms that do not perform critical functions.

Under Article 4 of the Bank Recovery and Resolution Directive (BRRD), the PRA has discretion to apply Simplified Obligations to firms where failure is not expected to have a ‘significant negative effect on financial markets, on other institutions, on funding conditions, or on the wider economy’, taking account of other criteria set out in Article 4(1) of the BRRD.

Global systemically important institutions (G-SIIs) and other systemically important institutions (O-SIIs) are not eligible for Simplified Obligations. For all other firms supervised by the PRA that are neither a G-SII or a O-SII, the PRA performs an assessment before advising the firm of its outcome and whether it is eligible or not.

For credit institutions, the PRA’s assessment process comprises a quantitative and qualitative assessment. There is no precise threshold available due to the number and nature of the metrics the PRA is required to calculate in order to determine the total score.

For PRA designated investment firms, the decision would be taken in line with the qualitative assessment process for investment firms set out in Commission Delegated Regulation (EU) 2019/348, published with regard to regulatory technical standards (RTS).

A firm cannot apply Simplified Obligations before being informed by the PRA that it is eligible to them.

Which obligations are simplified?

Under the Simplified Obligations:

• The number of required stress scenarios is reduced to at least two (where it is at least three or four for other institutions). These scenarios should be sufficiently severe and relevant to their business model so firms demonstrate that they can face periods of financial stress, stabilise their financial position and recover for financial losses. The PRA expects firms to include a scenario of a combined capital and liquidity stress induced by a combination of system-wide and idiosyncratic events. For additional guidance, firms should refer to the EBA’s guidelines for designing scenarios
• The preparation and submission of the recovery plan information template is not required 

Other aspects of recovery planning that still need to be fully considered are:

• Recovery options and recovery capacity
• Indicators
• Scenarios testing
• Fire drills
• Playbook and recovery plan structures
• Governance
• Communication plan
• Relevance of the recovery plan to the firm
• Group considerations (interactions group/subsidiary plans, approach when ring-fenced body)
• Interactions with other regime and requirements

PRA considers that the changes to the SS9/17 are not significant and recognises that the cost savings arising from the proposals may be limited.

Proportionality

As stated in previous version of SS9/17, the degree of detail and analysis in recovery plans should reflect the complexity and size of firms. Therefore, it is understood that small firms with simple business models are likely to have fewer legal entities, a smaller range of recovery indicators, a more limited number of recovery options, simpler governance arrangements, and shorter recovery plans than large complex firms.

The PRA highlighted that the status of being a new and growing bank under the proposals in CP9/20 is not determinant to become eligible to Simplified Obligations as the key criteria is whether a firm performs a critical function or not.

Review frequency

Recovery plans should be updated at least annually or if a firm faces a significant change in their circumstances. The PRA does not intend to change this requirement for firms eligible to Simplified Obligations.
In the event key prudential metrics have not changed materially year on year, firms’ governing body may decide at its annual review that the information, plans and triggers from the previous year continue to be appropriate.

Background

In December 2020 the PRA published the policy statement PS25/20 - Simplified Obligations for Recovery Planning in the form of an update to the supervisory statement SS9/17 – Recovery Planning. PS25/20 included feedback to the responses to the consultation CP10/20 closed late October 2020 and additional changes to SS9/17. CP10/20 proposed to allow certain firms to benefit from simplified obligations for recovery planning based on their systemic importance and at the PRA’s discretion. The updated SS9/17 took effect when published, on 7 December 2020.

References

• Consultation paper CP10/20 on Simplified Obligations for recovery planning
• Policy statement 25/20 on Simplified Obligations for recovery planning
• Supervisory statement SS9/17 on recovery planning
• EBA’s regulatory Technical Standards on Simplified Obligations
• PRA’s CP9/20 on new and growing banks
• PRA’s approach to supervision of new and growing banks
• EBA’s guidelines on recovery plan scenarios