Big banks to submit "living wills" by end of June as FSA publishes draft approach

Publishing a draft of the core rules (8-page / 119KB PDF) to be followed by banks in the event of potential failure the Financial Services Authority (FSA) said it did not anticipate a "loss in momentum" due to the delay, which it said reflected "significant international developments" since its plans were announced. Recovery plans aim to reduce the risk of failure by requiring banks to identify the actions they will take when a crisis occurs, while resolution packs will assist the authorities in winding down a firm which fails for any reason.

The FSA also published a feedback statement (15-page / 774KB PDF) which it said would provide firms with clarity regarding what they are expected to do while the final rules were being drafted to take into account international concerns, in particular an expected proposed Directive by the European Commission on recovery and resolution. Final rules will be published in autumn.

FSA director of banks and building societies Andrew Bailey said that the 2008 banking crisis highlighted that firms did not have effective plans in place to deal with financial stresses and potential failure, with the result that taxpayers around the world had had to "foot the bill" to support the banking sector.

"Major reforms have been taken forward both nationally and internationally to increase the strength and resilience of our banking sectors but we need to maintain the momentum," he said. "Recovery and Resolution Plans (RRP) require firms to think ahead and plan for the worst. We will be building on what has been put in place since last year and firms must continue to develop their plans."

Large firms involved in the pilot exercise will submit recovery plans and resolution packs to the regulator by the end of June, as originally agreed with their supervisors, the FSA said, while other large firms will be expected to provide enough information to their supervisors to meet the timetable set by the Financial Stability Board (FSB). However smaller firms will be given a new submission date by their individual supervisors.

The Special Resolution Regime (SRR) put in place in 2009 following the banking crisis requires all UK deposit-taking banks, as well as "significant" investment firms with more than £15 billion in assets, to develop recovery plans and provide information that will enable the authorities to develop resolution plans without the need for publicly-funded support. The rules could be extended to UK branches of firms from outside the European Economic Area (EEA) without UK subsidiaries at a later date.

The regulator said that the actions outlined in recovery plans should enable a firm to return to a stable and sustainable position. The plans should be developed and maintained by individual firms in coordination with the FSA, it said, but should contain options to cope with a range of scenarios. Included scenarios could be firm-specific, such as capital shortfalls and profitability issues, or market-wide such as liquidity stresses. Firms should also consider more severe options such as the disposal of the whole or part of the business or raising equity capital not provided for as part of a business plan, the regulator said.

Firms should identify significant barriers to potential resolution as part of the data and analysis provided to the FSA, it said. The information provided will be used by the FSA, Treasury and the Bank of England under the SRR in the event of a failure to reduce the risk that taxpayers' funds will need to be used in the winding up or sale of a bank. The resolution plan devised by the authorities will seek to minimise the impact of the bank's failure on depositors and consumers as well as overall financial stability, and allow decisions to be taken in a short space of time.