What is a bank recovery plan? Components and credibility

What a recovery plan actually is#

A bank recovery plan is a board-owned document setting out the actions an institution would take to restore its capital and liquidity position under severe stress, without relying on extraordinary public support — together with the indicators that signal when to act, and the governance that would carry those decisions at speed.

It is a plan for surviving as a going concern. That last phrase is what distinguishes it from every neighbouring document: a recovery plan assumes the institution still exists, still has management in control, and still has choices worth making.

The documents it is confused with#

It is worth separating it from the documents it is routinely confused with.

• A business continuity plan addresses the loss of premises, systems or people, and its concern is operational capability rather than financial viability.
• A contingency funding plan addresses a liquidity shortfall specifically, over days and weeks, and it is properly a component of the recovery plan rather than a rival to it.
• A resolution plan addresses what happens after the institution has failed and is not, in the main, written by the institution at all.

The recovery plan sits between the ordinary stress-testing cycle and the point of non-viability, and it is the only one of these documents whose subject is the survival of the whole institution as a financial entity.

The six parts of a complete plan#

A complete plan has six parts.

1. A strategic analysis describing what the institution actually is — its core business lines, the functions whose interruption would matter beyond its own walls, its legal entity structure, and the internal and external interconnections that determine what can be separated from what.
2. An indicator and escalation framework.
3. A menu of recovery options with their quantified effects.
4. A set of scenarios against which those options are tested.
5. A communication plan.
6. A governance playbook that says who decides what, in which forum, within what timeframe.

The proportions vary with the institution; the parts do not.

The strategic analysis the rest depends on#

The strategic analysis is treated as boilerplate more often than any other section, and it is the foundation of the rest. Identifying core business lines and critical functions determines which options are available: an institution cannot sell a business it has not established is separable, and cannot wind down an activity whose shared dependencies it has never mapped.

The work is unglamorous — which entity holds which licence, which systems and staff are shared, which service contracts survive a change of control, which intragroup exposures would unwind and in what order — and it is what turns a list of possible actions into a list of executable ones.

Institutions that skip the strategic analysis discover during the first serious rehearsal that half their option menu is theoretical.

What makes an option credible#

What makes a recovery option credible is answerable in five parts, and an option missing any of them is an aspiration.

1. How much capital or liquidity does it generate, quantified rather than described.
2. How long does it take from decision to effect, measured in the calendar time the institution would actually need including approvals.
3. Is it executable under the conditions of the scenario in which it would be used, which is the question that eliminates most option menus.
4. What does it depend on — a counterparty willing to transact, a market that is open, an authority that must consent, a buyer with funding.
5. What does it cost, not only in price but in permanent damage: an option that restores a ratio by selling the franchise that generates future earnings has bought time at a price the board should have to see.

Options that fail independently#

The menu also has to be diverse in a specific sense: the options must not all depend on the same thing being true.

A plan whose capital options are an equity issue, a subsidiary sale and a portfolio disposal has three options on paper and one in substance, because all three require a market willing to buy bank assets at a reasonable price — precisely the condition a severe scenario removes.

A usable menu spans categories that fail independently:

• actions that generate capital
• actions that generate liquidity
• actions that reduce risk-weighted assets
• actions that conserve resources through retention and cost
• structural actions

It should also be ordered, from those that are reversible and cheap to those that permanently change what the institution is, so that escalation has a sequence rather than a scramble.

Testing the options against scenarios#

Options are then tested against scenarios, and this is where the recovery plan connects to the stress-testing programme rather than sitting beside it.

The scenarios should be severe enough to threaten viability — a recovery plan tested only against the scenarios the institution comfortably survives has demonstrated nothing — and should include a fast liquidity path as well as a slow capital erosion, because the two demand different options at different speeds.

Reverse stress testing is the natural source here: it produces the scenarios drawn from this institution’s own structure, which is exactly what recovery options need to be sized against. The output of the testing is not a pass mark but a gap analysis: which scenarios the current menu cannot answer, and what would have to be arranged in advance to answer them.

The governance playbook#

The governance playbook determines whether any of the preceding work is usable, and it is the section most often written in the language of ordinary committee process. Recovery decisions are taken under time pressure, with incomplete information, quite possibly outside business hours, and possibly by people who are not the ones named in the document.

A usable playbook therefore states:

• who is authorised to convene the recovery forum and how quickly
• what decisions that forum may take without further approval
• what happens when a named individual is unreachable
• which decisions require an authority to be notified or consulted and at what point
• how the outcome is recorded when the normal minute-taking machinery is not running

Delegations that require a full board meeting to activate an option with a two-day execution window are not delegations.

Communication#

Communication belongs in the plan because silence is itself a decision, and usually the wrong one. The plan should identify the audiences — supervisors, large depositors and counterparties, staff, rating agencies where relevant, and the market — establish who speaks to each, and recognise that the sequence matters: a supervisor learning of a recovery action from the market has been told something about the institution beyond the action itself.

Drafting holding statements in advance is worth more than it appears, not because the wording will survive contact with events but because writing them forces the institution to decide, calmly, what it is prepared to say and what it is not.

Recovery plans decay quietly#

Recovery plans decay quietly, which is why maintenance is a component rather than an afterthought. Options expire: the subsidiary earmarked for sale is sold for other reasons, the facility assumed available is withdrawn, the portfolio identified as disposable becomes the institution’s best-performing book.

Indicators drift as the balance sheet changes, until thresholds set three years ago no longer sit where they were meant to. Named individuals leave.

The disciplined response is an annual refresh tied to the planning cycle, an immediate review after any material structural change, and at least one rehearsal in which people who would actually make the decisions work through a scenario against the clock — the exercise that most reliably reveals which parts of the plan exist only on paper.

What a credible plan looks like#

The difference between a credible plan and a template with the institution’s name inserted is visible without reading the whole document.

• A credible plan describes this balance sheet’s concentrations rather than a generic bank’s.
• Its options carry quantities, timeframes and named dependencies.
• Its indicators sit at levels that would fire while options still exist.
• Its governance would function on a Sunday.
• Someone in the institution has been through it against the clock and found something wrong — which is the strongest single indicator that a plan has been treated as a capability rather than a submission.