EBF welcomed the EBA draft RTS specifying the range of scenarios to be used in recovery plans under the draft directive establishing a framework for the recovery and resolution of credit institutions and investment firms.
Recovery plans will play a major role in the supervisory toolbox, and their appropriate development is crucial for global banks. These plans could contribute to enhancing cooperation and restoring confidence among supervisors, banks and supervisors, and as a result could limit the pressure to protect domestic financial systems while reducing the risk of ring-fencing.
However, regarding the design of scenarios proposed in this regulatory technical standard (RTS) EBF has several comments:
The credibility of a recovery plan relies first on a large and diversified list of options addressing a wide range of cases. This often comes from a diversified business model that many (if not most) G-SIFIS have. The emphasis on stress testing does not sufficiently reflect this point. It is not possible to predict what the next crisis will be. The most serious crisis in the past were those that had not even been imagined.
For this reason, stress testing against scenarios remains a theoretical exercise and as such should not contain too many details, nor become an additional process to identify risks (identification of vulnerabilities is more the usual risk management business). As a consequence, stress-testing should remain rather high level (global impacts and applicable tools). Nevertheless, EBF acknowledges that scenarios can be useful to assess the financial soundness of banks within specific and likely stress situations (which can be updated according to macroeconomic developments).
In EBF’sview, scenarios developed with the purpose of assessing the feasibility of recovery options are very different from those used in other supervisory tools such as ICAAPs or stress-test. The EBF believes more flexibility should be given to banks to determine to what extent these (recovery) scenarios will coincide with other plans (e.g. liquidity stress testing and ICAAP). Since the bank owns the recovery plan, it is important that the bank is able to formulate the plan in the manner deemed most appropriate.
Additionally, to be useful in a recovery plan, more emphasis on qualitative than on quantitative aspects of scenarios is needed. In this way, scenarios will become a more useful tool to identify in which circumstances, the institution may activate specific recovery measures, instead of focusing on identifying if the institution could enter in recovery over the following months. Scenarios in a recovery plan are not aimed at forecasting the next crisis but at identifying which actions could be implemented by an institution in order to cope with an extreme adverse situation and at assessing the final impact of the feasible measures in such a situation.
Therefore, the interaction and differences among scenarios for ICAAP or stress test exercises and for recovery plans requires further clarification in the RTS.
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