Strengthening crisis preparedness for financial services

Globally, over the past decade, foreign regulators such as the Single Resolution Board (SRB) and the Bank of England have strengthened their supervision on resolution planning.

As part of its architecture for ensuring bank resilience in Australia, APRA has released new prudential standards for contingency planning and resolution planning for consultation. These consultations close in April 2022 and the standards will come into force from January 2024.

Contingency planning aims to ensure financial entities can rebuild financial resilience or achieve an orderly exit in the event of severe stress.. Resolution refers to APRA’s crisis management powers as a last resort to resolve the entities with minimal disruption.

The financial system is not without risk and it is impossible to guarantee that a financial entity won’t encounter severe stress that threatens its viability. Entities must be appropriately prepared to recover from these events, but also have a credible plan to exit at the point of failure. Financial entities must work closely with APRA to plan for resolution in an orderly manner should an event arise.

The process extends beyond financial resilience and the experiences from the global financial crisis and the pandemic of the past 18-24 months should be leveraged. Navigating a crisis requires a combination of capital, funding and liquidity management, business continuity management, scenario planning, investor relations and communication. Critical systems, staff, stakeholders, data, and playbooks must all be identified and aligned for the business to even begin troubleshooting.

Identifying barriers to resolution is the first step in designing and understanding the feasibility of resolution strategies. Often, these can arise from loss of access to Finance Markets Infrastructure, lack of loss absorbing capacity and legal barriers to separation.

Testing the plan is just as important as having a plan. There is considerably less progress in confirming the viability of the contingency and resolution plans once developed. Contingency and resolution plans should be integrated within cyclical procedures. These include Board ‘fire-drills’ through to collaboration with Internal Audit on business-as-usual processes and controls.

Our global experience in contingency and resolution planning has identified common questions for organisations to ask themselves to identify barriers to resolvability.

Questions to ask of your contingency and resolution planning now:

  • What resolution strategies have been considered?
  • Have you got operating structures or third-party contracts that facilitate a viable separation of legal entities?
  • How robust is your plan in considering the variety of options and scenarios that can occur?
  • How have you assessed the capability to implement your plan?
  • Who are the accountable individuals and decision-making authorities and what are the governance arrangements from invocation of the contingency plan and resolution plan?
  • How have you embedded the contingency plan and resolution plan within your risk management and business as usual processes?
  • Do you know what the key interdependencies and assumptions are for your plan to be successful?
  • What stress scenarios or triggers have you considered?
  • What communications have you had with the regulators (local and global)?
  • Do you have the assurance you need to ensure that your plan is set up for success?

As APRA has released their new prudential standard, organisations can get a head start with the planning and organisation needed to successfully develop and embed their recovery and resolution planning. Globally, these practices have begun, and Australian financial institutions can use the benefit of their experience as they begin their own process.

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