40pc of World’s Largest Banks Complete Recovery Planning

Michelle Remo, “Big 4″ observer
March 05, 2012 /

Although considerable progress has been made, the approach of banks to writing their recovery and resolution plans (RRP) or ‘living wills’ varies considerably across cost, timescales, and definition of what a ‘complete’ plan looks like, according to a survey of the world’s largest banks published today by Ernst & Young.

The survey secured responses from over two thirds of the world’s largest banking organizations, and included responses from over 60% of the organizations in each of the following geographies: the UK, North America, Europe and Japan.

“With further guidance expected from the European Commission on RRP in the next few weeks and more than three years on from the first discussions around RRP, we thought it would be useful to take stock of progress made to date by the world’s largest banks. Although considerable progress has been made, the approach to living wills still varies considerably from region to region,” said John Liver, Head of Global Regulatory Reform at Ernst & Young.

Forty percent of banks have complete recovery plans but few have resolution plans

Forty percent of the banks surveyed have completed their recovery plans but this is not evenly spread. Eighty-five percent of the banks in the UK and US have completed their plans in comparison to 8% of those in Europe and Japan.

All European banks believe that they will have completed their recovery plans within 12 months. Across the world few have complete resolution plans, with a third having not yet started work on their resolution plans. The survey results also show that perceptions of the mandated timescales for completing the recovery and resolution plans vary substantially, even within countries.

Peter O. Davis, Head of RRPs, Americas, Ernst & Young, said “All of the banks surveyed have at least started to prepare recovery and resolution plans, but the gap between progress made across the regions is wide. As well as stark differences in completion levels, there appears to be considerable variation as to the depth and complexity of the living wills being developed across the world.

“The survey results raise several points for concern, namely that limited progress has been made to date on resolution plans and that there is no standard definition of what a ‘complete’ plan looks like or contains. While significant progress has been made in certain jurisdictions, we are still in the early stages of developing mature recovery and resolution plans.”

Gareth Lambert, Head of RRPs, Europe, the Middle East, India and Africa, Ernst & Young added: “Until the resolution plans are in place and regulators have agreed a harmonized approach to working on an institutional collapse, the problem of “too big to fail” will continue to haunt individual governments with tax payers standing to pick up the bill”

Cost estimates vary substantially across countries

When asked how much they anticipate spending on preparing and implementing the RRPs, answers ranged from US$1.6m to more than US$48.6m. The costs varied significantly by geography; UK-based banks estimated the cost of developing Living Wills to be US$20m, whereas banks in Europe and Japan all estimate the costs to be less than US$6m. Banks in the US occupy the middle ground with costs estimated at around US$13m.

“The considerable variation in cost cannot be attributed simply to the size and complexity of the organizations involved. The significant disparities in cost point to the fact that firms who have only just started to look at their RRP programs have probably have not fully appreciated the complexity and cost of the task,” Peter said.
“Importantly, these cost estimates do not include the costs that banks may incur to overcome barriers to resolution, such as structural or legal entity changes, which would add materially to these initial estimates.”

Real costs of RRP are higher than expected

“The qualitative feedback we have had from firms that are well advanced in their preparation for living wills, such as those who participated in the FSA pilot in the UK, is that the exercise is proving more complicated and expensive than they first envisaged. The low costs estimated by European and Japanese banks are interesting as they suggest that banks who are relatively early on in their preparation may have underestimated the true cost of this process by a factor of three or four,” added Gareth.

One bank surveyed commented on the staffing of its living will program: “You need input from every line of business, every control function… you need a lot of information from a lot of areas of the company.”

Lack of harmonization between regulators

The survey results show that to date regulators’ approaches to living will requirements have not been fully joined up. In the UK, participation in the FSA pilot exercise seems to have led to a clear understanding of requirements and an open dialogue between the regulator and the firm.

“The survey results show that regulators are working on RRP with limited coordination across jurisdictions. The publication of the European Commission’s paper on RRPs expected in the next few weeks will be welcomed by the industry. However, about half of the large banks operate across multiple jurisdictions and, in order for recovery and resolution planning to be effective, regulators will need to work together. The varied approaches to insolvency law are of particular concern as is the potential for regulatory arbitrage if regulators do not coordinate,” said Gareth.

Business benefits

Eighty percent of the banks surveyed believe they will see benefits from completing the living will and half of the banks say they have reassessed at least one element of their business as a result of the exercise.

Gareth commented: “Banks should use the exercise of developing living wills to look at opportunities within their business models. The banks surveyed are likely to have already used the process to assess their organizational and legal structures. Business strategy, the choice of host regulators and technology providers are all other opportunities which should be put under the microscope.

“From a cost and operational perspective, it is also important that firms work on living wills and other related regulation, such as Basel capital and liquidity requirements and the ICB proposals in the UK, simultaneously. If these are all approached in isolation the costs of regulatory reform for large banks stands to grow exponentially.”


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