## 1geoea2023001 - Preface ## Source details **Canonical URL:** [1geoea2023001 - Preface](https://www.imf.org/-/media/files/publications/cr/2023/english/1geoea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1geoea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1geoea2023001.pdf.json) --- ### Mission scope and participants - A Monetary and Capital Markets (MCM) Department mission provided offsite Technical Assistance (TA) between March 17 and April 20, 2022 to assist the authorities in operationalizing the new bank recovery and resolution framework. - Mission team: Alessandro Santoni (Mission Chief, MCM), Antonio Carrascosa, and David Scott (external experts). - Engagement methods: virtual meetings, workshops, and seminars with officers of the NBG, the Ministry of Finance (MoF), and the Deposit Insurance Agency (DIA), including presentations by the NBG and the DIA. - Additional meetings: senior officers of the MoF, DIA Board members, officials of the Insurance State Supervision Service (ISSA), and senior management of the Bank of Georgia, TBC Bank, and Liberty Bank. - A second mission targeted for September 2022 will focus on: - Development of resolvability assessments. - Preparation of playbooks for bail-in and sale of business tools. - Development of resolution plans and strategies and other elements of the resolution regime. ### Executive summary — priorities identified with the authorities - Reinforce the Resolution Authority (RA) function within the NBG and define internal guidelines for engagement and escalation processes. - Introduce objective and quantitative criteria for triggering escalation processes for supervisory measures, early intervention, failing-or-likely-to-fail (FOLTF) determinations, and resolution. - Further develop guidelines for banks to prepare recovery plans and advance the NBG assessment and feedback process. - Start setting loss-absorbing capital (LAC) targets to enable the use of the bail-in tool and ensure banks can provide necessary information to: - determine capacity to absorb losses; - monitor build-up of that capacity; - ensure compliance with resolution function requirements. - Analyze alternatives to current temporary public funding (TPF) arrangements, including: - scope to deploy all TPF through the Resolution Fund; - potential use—subject to strict safeguards—of the deposit insurance fund (DIF) to finance resolution actions. - Pursue further resolution planning to ensure implementability of resolution tools, operational continuity and liquidity in resolution, and separability. - Perform stock taking of contractual clauses in current subordinated and senior debt issuances to determine bail-in-ability recognition. - Adopt a medium-term program to inventory existing playbooks, set priorities, fill gaps, and commence agency-wide contingency plans. - Adopt an annual playbook and contingency plan testing program planning cycle. - Redraft the Interagency Financial Stability Committee (IFSC) Charter, considering inputs of this TA mission. ### Recent legislative and regulatory developments (as summarized) - 2017: Deposit Insurance System Law adopted to protect deposits of natural persons when a bank fails and is liquidated. (Footnote: From January 2022, deposits of legal entities are insured as well.) - 2019: NBG and Banking Laws amended to provide powers to resolve banks that might have been deemed too big to fail. - September 2020: New comprehensive legal framework for bank resolution (triggers, legal powers, safeguards) brought into force. - 2020: NBG published rules specifying policies and procedures for new powers and, jointly with MoF, published regulations addressing use of TPF to mitigate systemic implications of bank failures. - 2021: FSAP focused on financial safety nets, particularly resolution and crisis management frameworks, and made numerous recommendations. ### Key findings and operational recommendations - Recovery planning - NBG introduced recovery planning requirements for all banks. - Recommendation: establish a small team of senior supervisors to lead and coordinate review of all recovery plans. - Provide more guidance to banks for preparing and maintaining up-to-date recovery plans. - Escalation, early intervention, and FOLTF - Current escalation process lacks sufficient objective triggers. - Recommendation: introduce internal guidance clarifying triggers and logical progression of increasingly intrusive actions. - Clarify Article 30 of the Banking Law regarding EIMs and integrate activation of recovery plans into supervisory framework. - Adopt a formal communication policy for EIMs and FOLTF determinations. - Introduce clear quantitative and qualitative standards/guidelines or indicators of nonviability. - Resolution function and institutional arrangements - Key recommendation: strengthen the NBG’s resolution function by repositioning the Resolution and Liquidation Division (RLD) into the Financial Stability Department reporting directly to the governor. - Independence depends on sufficient human and technical resources; currently no increase in resources is planned. - RLD should develop policies and processes for drafting resolution plans and enable sound resolution decisions; robust legal advice and a specialized internal legal team are needed (some outsourcing feasible). - Ensure formalized arrangements and procedures for exchange of information between supervisory and resolution authorities. - Operationalization of resolution tools and playbooks - Playbooks required for main resolution tools: bail-in, sale of business, and bridge bank. A playbook exists for bank liquidations. - Playbooks should specify allocation of responsibilities and necessary interactions among relevant NBG staff. - Creditor hierarchy - Authorities proposed revisions to creditor hierarchy to meet 2021 FSAP recommendations; mission generally supports revisions but suggested examining DIA status when subrogated for insured depositors under DIS Law. - Contingency planning and interagency coordination - Guidance provided on architecture of intra- and interagency contingency plans: departmental and scenario-specific plans, whole-of-agency plans, and bilateral plans. - Agency-specific and bilateral playbook recommendations provided for NBG, MoF, DIA, and interagency coordination. - Testing program: periodic testing of key playbooks and plans, annual planning cycle for exercises, reporting of test results and remediation actions to senior management. - Suggested medium-term work program (e.g., next three years): inventory playbooks to identify gaps to be completed in 2022; priorities set by agency management and incorporated into 2022 and 2023 workplans; agency-wide contingency plans contemplated for 2023 and 2024. - Oversight: work program to be endorsed and overseen by senior management within IFSC agencies, with high-level oversight by the IFSC; recommendation to redraft IFSC Charter and form a standing working group. *Italic: Source: IMF staff summary of chapter content from the provided PDF excerpt.* ### Table 1 — Georgia: Key Recommendations (extract) - Strengthen supervisory measures and EIM regime by clarifying internal triggers (quantitative) for gradual escalation process. — Priority: M; Timeframe: MT - Clarify escalation process of supervisory measures and EIM adoption and engagement with resolution function. — Priority: M; Timeframe: MT - Adopt a formal communication policy addressing the use of EIMs. — Priority: M; Timeframe: MT - Introduce clear standards or indicators of nonviability to help guide FOLTF determination. — Priority: H; Timeframe: MT - Adopt a clear separation of responsibility for recovery and resolution planning between the supervisory and resolution functions. — Priority: H; Timeframe: NT - Invest in recruiting and training of resolution function staff. — Priority: H; Timeframe: NT - Establish a small team of senior supervisors to lead and coordinate the review of all recovery plans. — Priority: H; Timeframe: NT - Provide more guidance to banks for preparing and maintaining up-to-date recovery plans. — Priority: M; Timeframe: MT - Start setting LAC targets (in line with the 2024 time horizon) and ensure banks can provide the information necessary to monitor LAC build-up and to ensure progressive compliance. — Priority: M; Timeframe: MT - Analyze alternatives to current TPF policies, especially to consider deployment of all TPF through the Resolution Fund and use the DIF to finance resolution transactions. — Priority: M; Timeframe: MT - Undertake further work in resolution planning to ensure tool implementability, operational continuity and liquidity in resolution, and separability. — Priority: H; Timeframe: NT - Perform stock taking of contractual clauses in banks’ current subordinated and senior debt issuances to determine bail-in-ability recognition. — Priority: M; Timeframe: MT - Adopt formal work programs inventorying key playbooks and initiating whole-of-agency financial crisis management plans. — Priority: H; Timeframe: NT - Introduce formal playbooks and plan testing programs on an annual cycle. — Priority: M; Timeframe: NT - Redraft the IFSC Charter with sections on its role in normal times and in crisis times. — Priority: M; Timeframe: NT ### Financial sector structure and concentration (end-December 2021) - TBC Bank (TBC) and Bank of Georgia (BOG) held 77 percent of total deposits and total insured deposits as of end-December 2021. - TBC and BOG are deemed systemically important banks (SIBs) by the NBG; Liberty Bank is also designated a SIB. - Liberty Bank market shares: - 5 percent share of assets - 6 percent share of deposits - 13 percent share of insured deposits - Banking sector composition: 12 other commercial banks (including 2 locally owned banks; 8 subsidiaries of foreign banks or financial groups; 2 foreign-owned banks). - Ownership and cross-border presence: TBC and BOG are subsidiaries of parent nonfinancial legal entities listed on the London Stock Exchange and operate in Azerbaijan, Uzbekistan, and Belarus; Liberty Bank is a subsidiary of a Georgian company controlled by three individuals and has no significant subsidiaries. ### Banking system soundness — key indicators (end-December 2021) - Average capital adequacy ratio (CAR): 19.6 percent of risk-weighted assets - Liquid assets to total assets ratio: estimated to be over 20.7 percent - All banks have capital well above the minimum CAR of 8 percent - Nonperforming loans (NPLs), net of provisioning: 5.2 percent of total loans - Profitability: - Return on equity (ROE): 30.7 percent - Return on assets (ROA): 3.6 percent - Financial Soundness Indicators — Assets of banks (in percent): - Loans/total assets: 71.15 - Net NPLs/total loans: 5.23 - FX Loans/total loans: 50.88 - Securities/total assets: 8.88 - Financial Soundness Indicators — Liabilities of banks: - Liquid Assets/Total Assets: 20.67 - Total deposits/total liabilities: 71.92 - Capital adequacy breakdown: - CET1: 13.48 - Tier 1: 15.58 - Total capital ratio: 19.56 - Profitability (repeated): - ROA: 3.59 - ROE: 30.72 - Source: Central Bank of Georgia. ### Risks to asset quality and funding structure - Corporate sector vulnerabilities: high share of short-term debt among large enterprises; large exposure to foreign financing; debt rollover risks heightened by the pandemic. - Currency and credit risk: dollarization remains a major challenge; most borrowers are unhedged; local currency depreciation increased credit risk and raised the NPL ratio for foreign currency loans. - Wholesale financing (2021): - Wholesale financing share: 26.0 percent of total funding of the sector in 2021 - For the two largest banks combined: 18.3 percent - Banking sector funding composition: - Total deposits represent 62.8 percent of total assets - Insured deposits represent 7.5 percent of total assets and 12.0 percent of total deposits - Senior and subordinated debt represents 22.0 percent of total assets (sector-wide) - TBC: 19.5 percent (senior and subordinated debt as percent of total assets) - BOG: 22.3 percent - Most TBC and BOG debt is issued in foreign jurisdictions, notably the United Kingdom and Ireland; significant investors include multilateral international financial institutions. ### Sanctions-related actions (March 3, 2022) - NBG instructed Georgian financial sector representatives to fulfill obligations under financial sanctions imposed by the United States, Great Britain, the European Union, and other countries on the Russian financial system. - Sanctions applied to VTB Bank Georgia JSC operating in Georgia. - Agreed transfers involving VTB Bank Georgia JSC: - Transfer of deposits and loans of individuals from VTB Bank Georgia JSC to Basisbank JSC. - Transfer of a certain portion of the deposits and loans of legal entities from VTB Bank Georgia JSC to Liberty Bank JSC. ### Recovery and resolution regime — progress and outstanding tasks - NBG drafted extensive amendments to modernize resolution and crisis management: strengthen supervisory powers; designate the NBG as the resolution authority; provide resolution objectives; introduce recovery and resolution planning. - Outstanding tasks include: - Define resolution triggers around nonviability. - Operationalize resolution tools (e.g., bridge bank). - Set up a resolution funding framework combining TPF and DIF resources. - Reinforce RLD staffing and capacity to mobilize additional staff for actual bank resolution actions. - Finalize clear separation of responsibilities between NBG supervisory and resolution functions. ### Recovery planning — status, shortcomings, and recommendations - Legal requirement: 2019 amendments require all banks to prepare recovery plans. - Implementation status: - NBG issued guidance in June 2020. - As of March 2022, NBG received 14 recovery plans from the three SIBs and other less significant banks. - BSD leads the review with input from specialist units including RLD; written feedback provided within three months of receipt. - Identified shortcomings in banks’ recovery plans: - Absence of clear governance structure. - Few quantitative and qualitative indicators (e.g., lower than EBA’s minimum list). - Inadequate attention to implementation risks and impediments and potential mitigation actions. - Absence of idiosyncratic and market-wide stress, strategy and scenario analysis. - Lack of correlated stress scenarios and combined impact analyses. - Recommendations to NBG: - Issue further guidance and iterate reviews over several years until recovery planning is embedded. - Establish a small team of senior supervisors to lead and coordinate review of all SIB recovery plans. - Provide banks with templates covering early warning and escalation triggers, recovery options, and scenarios. - Extend recovery planning requirements to all banks after pilot reviews. ### Early intervention, FOLTF, and supervisory escalation - Current issues: - Escalation process not clarified; lacks sufficient triggers for early mitigation. - No formal communication policy guidance for supervisory measures or EIMs. - No clear internal standards or indicators of nonviability. - Recommendations: - Develop internal guideline describing escalation process and RA’s direct involvement. - Clarify Article 30 of the Banking Law and retitle Article 30¹ to “temporary administration”. - Introduce clear quantitative and qualitative indicators of nonviability and forward-looking FOLTF methodology. - Ensure triggers permit action before insolvency and include checks and balances to protect property rights. ### Resolution planning and LAC - RLD responsibilities: drafting resolution plans; requires bank cooperation on information systems, operational continuity, liquidity arrangements, and governance. - Recommendations: - Start constructive dialogue with banks to improve resolvability and information quality; RLD should assess information quality annually. - Develop templates for provision of core information by banks, especially on liabilities. - Issue policies and guidelines to progress resolution plan chapters (operational continuity, separability, liquidity in resolution). - Set specific LAC targets for each bank that might be subject to bail-in, with a deadline following FSAP recommendations of 2024. - Issue liabilities data report requirements for banks to monitor LAC compliance. - Implement analytical framework to oversee asset encumbrance and anticipate liquidity needs in resolution; consider role of NBG ELA in resolution. - Market concentration challenge: sale of a whole bank may be infeasible for largest banks; bail-in remains preferred tool for SIBs but poses contagion risks; consider complementary tools. ### Bank crisis management — operational needs - Special managers: no progress on defining desired skills and presumption that NBG staff serve only in extraordinary circumstances; need to identify qualified independent professionals. - Moratorium: law allows up to 90 days; long moratoria can adversely affect viability. - No-creditor-worse-off safeguard: requires conduct of a liquidation valuation (“valuation 3”); RLD needs preselected valuers, draft contracts and templates, and an effective process for the right to be heard before final resolution decisions. ### Pari passu deviations and legal certainty - RLD should issue a policy limiting deviations from pari passu treatment when executing resolution actions; proposed permitted situations include: - (i) it is not possible to impose a resolution tool within a reasonable time; - (ii) strictly necessary and proportionate to ensure continuity of critical functions and core business lines; - (iii) strictly necessary and proportionate to avoid widespread contagion; and - (iv) losses borne by other creditors would be higher. - NBG should assess measures to minimize legal uncertainty and prepare legal analyses in each relevant jurisdiction regarding likely outcomes of investor challenges to bail-in decisions. ### Temporary Public Funding (TPF), Resolution Fund, and ELA - Procyclicality concern: current Resolution Fund based on ex post contributions can be more procyclical than ex ante contributions. - Alternatives to analyze (MoF, NBG, DIA): - Effectively manage timing of required ex post contributions. - Use the DIF to finance resolution operations with strict safeguards (long-term alternative requiring legal changes). - Policy on timing of ex post contributions: - Adopt a policy considering idiosyncratic and systemic factors affecting timing of repayment requirements. - Current regulation: allows a bank, in exceptional circumstances, to defer payment of ex post contributions for no longer than one year, with possible extension upon appropriate justification. - Collateral for state funding: need a rule clarifying circumstances when collateral is required for state funding provided through a loan; regulation authorizes MoF to request collateral. - Grants vs loans/guarantees: clear rule needed on provision of grants, especially if grants must be reimbursed ex post by banks. - Calculation of ex post contributions: NBG should provide further guidance on computation of risk elements with weights: - asset quality (20 percent of the total weight); - business model and profitability (20 percent); - capital (40 percent); - liquidity (20 percent). - Institutional implications: - MoF and NBG should develop an internal contingency policy framework to facilitate rapid decision making. - MoF should prepare templates for parliamentary documentation required to secure approval for TPF and assess budgetary implications. ### Creditor hierarchy (proposed order preserved) - Authorities proposed a tentative revised creditor hierarchy (order preserved): - a) Claims secured by financial instrument collateral (proposed Banking Law Article 10.1). - b) Claims secured by nonfinancial collateral (Article 10.2). - c) Other claims as follows (Article 10.3). - d) Expenses arising from the liquidation process (costs of the liquidation estate). - e) NBG (unsecured) claims, as well as any commercial bank claims arising from a loan to the liquidation estate. - f) MoF and the Resolution Fund outlays for resolution funding (i.e., excluding tax liabilities). - g) Insured deposits. - h) Deposits above the insured limit but less than GEL 100,000. - i) Pension Agency claims. - j) Deposits above the insured limit in excess of GEL 100,000, and deposits ineligible for deposit insurance. - k) Deposits of bank managers and 5 percent or greater shareholders, and their family members and agents, and deposits of financial institutions. - l) Tax liabilities. - m) Other claims. - n) Liabilities to direct and indirect owners arising from non-deposit (e.g., loan) instruments. - o) Subordinated debt not qualifying as regulatory capital. - p) Debt instruments with contractual bail-in clauses. - q) Capital instruments qualifying as Tier II capital. - r) Other capital instruments (i.e., AT1 instruments). - s) Equity capital. - Mission suggestions: examine status of DIA when subrogated for insured depositors and reconsider special status of the Pension Agency. ### Inter-agency crisis preparedness, playbooks, and testing - Playbook architecture guidance: - Departmental-level playbooks. - Scenario-specific playbooks involving two or more departments. - Internal whole-of-agency contingency plans. - Joint interagency playbooks (e.g., NBG-MoF). - Ultimate goal: IFSC national financial crisis preparedness plan. - NBG action items: - Ensure departmental-level playbooks for key functions; prepare playbooks for supervisory early intervention, FOLTF determination, ELA, and individual resolution tools (bail-in, sale of business, bridge bank). - Prepare an integrated Resolution Handbook consolidating tool playbooks and addressing valuations and resolution funding. - MoF action items: - Ensure departmental-level playbooks for financial stability and crisis management functions, including use of TPF. - Develop a Resolution Fund playbook. - Prepare a bridge bank playbook as owner of a bridge bank. - DIA action items: - Prepare playbooks for liquifying investment portfolio and borrowing if DIF requires replenishment. - Develop a Crisis Management Plan for crises beyond single-bank payouts. - Bilateral interagency playbooks recommended: - NBG-MoF: coordination for bridge bank tool and resolution funding. - NBG-DIA and DIA-MoF: joint playbooks for liquidation, DIF replenishment, and borrowing scenarios. - Testing program: - Departments should undertake periodic testing of key playbooks in cooperation with other departments. - Adopt an annual planning cycle identifying priority exercises and report test results and remediation actions to senior management. ### Medium-term work program to strengthen crisis preparedness - Suggested horizon: over the next three years. - First step: in each agency, inventory key departmental-level, scenario-specific, and bilateral playbooks and quantify documented policy, procedures, and coordination frameworks. - Suggested stocktaking completion timeframe: 2022. - Prioritization: agency management to set priorities and incorporate into 2022 and 2023 workplans. - Development timeline: agency-wide financial crisis contingency plans could be contemplated for 2023 and 2024. - Testing: incorporate testing of playbooks into annual workplans. - Governance and oversight: - Senior management endorsement and oversight required within each IFSC member agency. - IFSC to oversee implementation and consider redrafting charter to articulate roles in normal and crisis times. - Mission recommended creation of a formal standing working group to support IFSC members. ### Next steps ahead of the second mission (scheduled for September 2022) - Tasks recommended: - a) Stocktaking on missing/incomplete playbooks and contingency plans; - b) Operationalizing the bail-in tool from the authorities’ point of view; - c) Operationalizing the bridge bank tool (MoF and NBG); - d) Operationalizing the sale of business tool with steps, templates, and drafts; - e) Initiating the inventory of key playbooks and identifying missing or incomplete playbooks; - f) Establishing a formal standing Working Group to support the IFSC; - g) Preparing a new draft of the IFSC Charter; and - h) Further revising the creditor hierarchy as appropriate. - Staffing guidance: - RLD/NBG and MoF should review long-term staffing needs, appoint and train a small core of permanent staff, and establish arrangements to enable quick staffing increases. - Tasking: RLD to develop playbooks for bail-in and sale of business; RLD and MoF to develop playbooks for the bridge bank tool. ### Appendix I — Guidance for supervisors on recovery plans (scope and structure) - Recovery plan elements to cover: - Executive summary of the recovery plan; - Governance of recovery plans; - Integration with risk management framework; - Overview of the bank and group, and critical functions and services; - Triggers for activation of the recovery plan; - Restoration points to achieve financial soundness; - Recovery options; - Scenarios; - Communications; - Preparatory measures; - Testing of the recovery plan; and - Review of the recovery plan. - Proportionality: guidance focused on larger banks; small SFIs require a proportionate approach. - Executive summary guidance and checklist provided for supervisory assessment. - Governance expectations: - Recovery plan should enable restoration generally within three months of trigger breaches, and no more than six months. - Identify a senior-level “owner” (often the Chief Risk Officer). - Regular (generally annual) review and testing expectations (annual desk-top tests; live simulation every three years). - Integration with risk management: - Linkages with stress testing, EWIs, ICAAP, ILAAP, RAS, liquidity contingency planning, and BCP. - Critical functions and services: comprehensive identification and mapping required (examples and FSB definitions provided). - Triggers for activation: - Typical triggers include capital ratios, liquidity ratios, asset quality, profitability, and credit rating; triggers should enable invocation well before breach of prudential requirements. - EWIs should be specified and monitored; examples provided for capital, liquidity, asset quality, and profitability. - Restoration points: - Must specify targets for CET1, Tier 1, total capital ratio, HQLA ratio, LCR ratio, ROA, ROE, and asset quality indicators. - Recovery options and required detail: - Capital recovery actions, liquidity recovery actions, profitability actions, asset quality actions, and other actions must be specific, quantified, timebound, and supported by implementation steps and documentation. - Preparatory measures and testing: - Preparatory documentation (term sheets, draft documentation, underwriter identification, templates) and rigorous testing (walk-throughs, live simulations, full-scale simulations) required. - Review and update: - Recovery plans should be reviewed generally annually with an identified owner and integrated with risk management and BCP reviews. ### Appendix II — Operationalization of resolution tools (sale of business, bridge bank, bail-in) - Sale of business preparatory items include legal advice on disclosure suspension, templates for valuations (valuation 1 and 2), lists of pre-selected valuers and advisors, draft resolution decisions, confidentiality agreements, marketing decisions, and templates for vendor due diligence, data room, and sale documentation. - Bridge bank preparatory tasks include legal advice to set up a joint stock company, clarification of ownership, licensing contacts, separability work, preselected valuers and managers, legal assessment of staff transfer and contracts, funding and FMI continuity assessments, and communication drafts. - Bail-in preparatory tasks include templates for valuations (valuation 1, 2 and 3), pre-selected valuers, updated Liabilities Data Report templates, draft resolution scheme and communications, criteria for removal/replacement of management, contacts with SCG, and business reorganization plan. - Appendix III: generic playbook content and structure provided (cover page, background, policies, procedures, maintenance responsibilities, annexes, templates, flowcharts). *Italic: Source: IMF technical assistance mission report excerpt (1geoea2023001).* ### Preface................................................................................................................. ### 1geoea2023001 - Preface ### Mission scope and participants - A Monetary and Capital Markets (MCM) Department mission provided offsite Technical Assistance (TA) between March 17 and April 20, 2022 to assist the authorities in operationalizing the new bank recovery and resolution framework. - Mission team: Alessandro Santoni (Mission Chief, MCM), Antonio Carrascosa, and David Scott (external experts). - Engagement methods: virtual meetings, workshops, and seminars with officers of the NBG, the Ministry of Finance (MoF), and the Deposit Insurance Agency (DIA), including presentations by the NBG and the DIA. - Additional meetings: senior officers of the MoF, DIA Board members, officials of the Insurance State Supervision Service (ISSA), and senior management of the Bank of Georgia, TBC Bank, and Liberty Bank. ### Acknowledgements and follow-up - The mission expressed appreciation to Governor Koba Gvenetadze and staff of the NBG, MoF, DIA, and ISSA for cooperation and constructive discussions. - A second mission, targeted for September 2022, will focus on: - Development of resolvability assessments. - Preparation of playbooks for bail-in and sale of business tools. - Development of resolution plans and strategies and other elements of the resolution regime. ### Executive summary — priorities identified with the authorities - Reinforce the Resolution Authority (RA) function within the NBG and define internal guidelines for engagement and escalation processes. - Introduce objective and quantitative criteria for triggering escalation processes for supervisory measures, early intervention, failing-or-likely-to-fail (FOLTF) determinations, and resolution. - Further develop guidelines for banks to prepare recovery plans and advance the NBG assessment and feedback process. - Start setting loss-absorbing capital (LAC) targets to enable the use of the bail-in tool and ensure banks can provide necessary information to: - determine capacity to absorb losses; - monitor build-up of that capacity; - ensure compliance with resolution function requirements. - Analyze alternatives to current temporary public funding (TPF) arrangements, including: - scope to deploy all TPF through the Resolution Fund; - potential use—subject to strict safeguards—of the deposit insurance fund (DIF) to finance resolution actions. - Pursue further resolution planning to ensure implementability of resolution tools, operational continuity and liquidity in resolution, and separability. - Perform stock taking of contractual clauses in current subordinated and senior debt issuances to determine bail-in-ability recognition. - Adopt a medium-term program to inventory existing playbooks, set priorities, fill gaps, and commence agency-wide contingency plans. - Adopt an annual playbook and contingency plan testing program planning cycle. - Redraft the Interagency Financial Stability Committee (IFSC) Charter, considering the inputs of this TA mission. ### Recent legislative and regulatory developments (as summarized) - 2017: Deposit Insurance System Law adopted to protect deposits of natural persons when a bank fails and is liquidated. (Footnote: From January 2022, deposits of legal entities are insured as well.) - 2019: NBG and Banking Laws amended to provide powers to resolve banks that might have been deemed too big to fail. - September 2020: New comprehensive legal framework for bank resolution (triggers, legal powers, safeguards) brought into force. - 2020: NBG published rules specifying policies and procedures for new powers and, jointly with MoF, published regulations addressing use of TPF to mitigate systemic implications of bank failures. - 2021: FSAP focused on financial safety nets, particularly resolution and crisis management frameworks, and made numerous recommendations. ### Key findings and operational recommendations - Recovery planning - NBG introduced recovery planning requirements for all banks. - Recommendation: reinforce internal procedures by establishing a small team of senior supervisors to lead and coordinate review of all recovery plans. - Provide more guidance to banks for preparing and maintaining up-to-date recovery plans. - Escalation, early intervention, and FOLTF - Current escalation process lacks sufficient objective triggers to mitigate risks early. - Recommendation: introduce internal guidance clarifying triggers and logical progression of increasingly intrusive actions. - Clarify Article 30 of the Banking Law regarding early intervention measures (EIMs) and review internal supervisory early intervention framework to integrate activation of recovery plans. - Adopt a formal communication policy for adoption of EIMs and FOLTF determinations. - Authorities currently have no clear internal standards or indicators of nonviability; recommendation to introduce clear quantitative and qualitative standards/guidelines or indicators of nonviability. - Resolution function and institutional arrangements - Key recommendation: strengthen the NBG’s resolution function by implementing planned repositioning of the Resolution and Liquidation Division (RLD) into the Financial Stability Department, reporting directly to the governor, to create institutional separation from supervision as recommended in the 2021 FSAP. - Independence depends on availability of sufficient human and technical resources; currently no increase in resources is planned. - RLD should develop policies and processes to facilitate drafting of resolution plans and enable sound resolution decisions; robust legal advice and a specialized internal legal team are needed (some outsourcing feasible). - Ensure formalized arrangements and procedures for exchange of information between supervisory and resolution authorities, including transmission of supervisory documentation (onsite inspection findings, EIMs taken) to resolution. - Operationalization of resolution tools and playbooks - Playbooks are required for main resolution tools: bail-in, sale of business, and bridge bank. A playbook exists for bank liquidations. - Mission provided main implementation steps; playbooks should specify allocation of responsibilities and necessary interactions among relevant NBG staff. - Creditor hierarchy - Authorities proposed revisions to creditor hierarchy to meet 2021 FSAP recommendations. - Mission generally supports revisions but suggested examining the status of the DIA when subrogated for insured depositors under DIS Law to ensure consistency with proposed hierarchy amendments. - Contingency planning and interagency coordination - Guidance provided on architecture of intra- and interagency contingency plans: departmental and scenario-specific plans, whole-of-agency plans, and bilateral plans. - Agency-specific playbook recommendations: - NBG: update emergency liquidity assistance (ELA) playbook to address potential ELA in resolution. - MoF: develop a playbook for use of TPF powers, including via the Resolution Fund; playbooks addressing contingent liabilities for NBG ELA and potential lending to the DIF; bridge-bank playbook. - DIA: playbooks for liquification of investment portfolio and borrowing if DIF requires replenishment. - Bilateral interagency plans recommended: - NBG-MoF bridge bank playbook integrating agency-specific playbooks. - Playbook addressing resolution funding and a broader joint playbook for systemic crisis scenarios. - NBG-DIA and DIA-MoF playbooks for liquidation and potential DIA borrowing scenarios. - Each IFSC member agency should adopt internal whole-of-agency financial crisis contingency plans; long-term goal is an integrated financial sector crisis contingency plan leveraging internal playbooks and bilateral plans. - Testing program: periodic testing of key playbooks and plans, annual planning cycle for exercises, reporting of test results and remediation actions to senior management. - Suggested medium-term work program (e.g., next three years): inventory playbooks to identify gaps and shortcomings to be completed in 2022; priorities set by agency management and incorporated into 2022 and 2023 workplans; agency-wide contingency plans contemplated for 2023 and 2024. - Oversight: work program to be endorsed and overseen by senior management within IFSC agencies, with high-level oversight by the IFSC; IFSC to serve in information sharing and process coordination role; recommendation to redraft IFSC Charter and form a standing working group of a small number of individuals from member agencies to support IFSC members. ### Table 1 — Georgia: Key Recommendations (extract) - Strengthen the supervisory measures and EIM regime by clarifying internal triggers (quantitative) for gradual escalation process. — Priority: M; Timeframe: MT - Clarify the escalation process of supervisory measures and EIM adoption and the engagement with resolution function. — Priority: M; Timeframe: MT - Adopt a formal communication policy addressing the use of EIMs. — Priority: M; Timeframe: MT - Introduce clear standards or indicators of nonviability to help guide FOLTF determination. — Priority: H; Timeframe: MT - Adopt a clear separation of responsibility for recovery and resolution planning between the supervisory and resolution functions. — Priority: H; Timeframe: NT - Invest in recruiting and training of resolution function staff. — Priority: H; Timeframe: NT - Establish a small team of senior supervisors with the appropriate experience and knowledge to lead and coordinate the review of all recovery plans. — Priority: H; Timeframe: NT - Provide more guidance to banks for preparing and maintaining up-to-date recovery plans. — Priority: M; Timeframe: MT - Start setting LAC targets (in line with the 2024 time horizon) and ensure banks can provide the information necessary to monitor LAC build-up and to ensure progressive compliance. — Priority: M; Timeframe: MT - Analyze alternatives to current TPF policies, especially to consider the deployment of all TPF through the Resolution Fund and to use the DIF to finance resolution transactions. — Priority: M; Timeframe: MT - Undertake further work in resolution planning; in particular, the ability to implement the resolution tools, to ensure operational continuity and liquidity in resolution, and to enable separability. — Priority: H; Timeframe: NT - Perform a stock taking of contractual clauses in banks’ current issuances of subordinated and senior debt issuances to determine whether the bail-in-ability of the instruments is recognized. — Priority: M; Timeframe: MT - Adopt formal work programs involving inventorying key playbooks to identify gaps and incompleteness, setting priorities for remedying those, and initiating work on whole-of-agency financial crisis management plans. — Priority: H; Timeframe: NT - Introduce formal playbooks and plan testing programs on an annual cycle. — Priority: M; Timeframe: NT - Redraft the IFSC Charter with sections on its role in normal times and in crisis times. — Priority: M; Timeframe: NT (Note: H: High, M: Medium. Timeframe: NT = Near term: < 12 months; MT = Medium term: 12 to 24 months.) ### I. Introduction — Overview excerpt - External vulnerabilities affecting the Georgian economy have increased compared to previous years. - Georgia’s current account deficit has been decreasing in recent years but deteriorated due to the COVID-19 pandemic and remains at an elevated level compared to similar countries. - Shares of interest payments and external debt to export earnings are high in Georgia compared to Commonwealth of Independent States (CIS) and emerging market countries, constituting an external vulnerability. - High share of foreign currency debt creates risk of a rapid rise in debt servicing costs in the event of a sudden depreciation of the exchange rate. - As of the last quarter of 2021: - Aggregate share of the European Union (EU), Russia, and Turkey in Georgia’s total exports was 44 percent. - Aggregate share of the European Union (EU), Russia, and Turkey in Georgia’s total external inflows was 52 percent. *Preface and Executive Summary, 1geoea2023001 - Preface.* ### 2. The Georgian financial sector is concentrated, with two commercial banks of equal ### 2. The Georgian financial sector is concentrated, with two commercial banks of equal size having a combined market share of 75 percent ### Financial sector structure and concentration - TBC Bank (TBC) and Bank of Georgia (BOG) held 77 percent of total deposits and total insured deposits as of end-December 2021. - TBC and BOG are deemed systemically important banks (SIBs) by the NBG; Liberty Bank is also designated a SIB. - Liberty Bank market shares: - 5 percent share of assets - 6 percent share of deposits - 13 percent share of insured deposits - Banking sector composition: - 12 other commercial banks, including: - 2 locally owned banks - 8 subsidiaries of foreign banks or financial groups (based in Russia and Germany (2); Kazakhstan, Azerbaijan, Turkey (2); and the Netherlands) - 2 foreign-owned banks (China and the United Arab Emirates) - Ownership and cross-border presence: - TBC and BOG are subsidiaries of parent nonfinancial legal entities listed on the London Stock Exchange and operate in Azerbaijan, Uzbekistan, and Belarus through subsidiaries and sister entities. - Liberty Bank is a subsidiary of a Georgian company that is a subsidiary of an unlisted Netherlands holding company controlled by three individuals; Liberty Bank has no significant subsidiaries or sister financial entities. ### Banking system soundness (end-December 2021) - System-wide positions and ratios: - Average capital adequacy ratio (CAR): 19.6 percent of risk-weighted assets - Liquid assets to total assets ratio: estimated to be over 20.7 percent - All banks have capital well above the minimum CAR of 8 percent - Nonperforming loans (NPLs), net of provisioning: 5.2 percent of total loans - Profitability: - Return on equity (ROE): 30.7 percent - Return on assets (ROA): 3.6 percent - Financial Soundness Indicators (As of December 2021) — Assets of banks (in percent) - Loans/total assets: 71.15 - Net NPLs/total loans: 5.23 - FX Loans/total loans: 50.88 - Securities/total assets: 8.88 - Financial Soundness Indicators — Liabilities of banks - Liquid Assets/Total Assets: 20.67 - Total deposits/total liabilities: 71.92 - Capital adequacy breakdown: - CET1: 13.48 - Tier 1: 15.58 - Total capital ratio: 19.56 - Profitability (repeated from above): - ROA: 3.59 - ROE: 30.72 - Source: Central Bank of Georgia. ### Risks to asset quality and channels of vulnerability - Corporate sector vulnerabilities: - High share of short-term debt in corporate liabilities among large enterprises. - Large exposure of these enterprises to foreign sources of financing. - Debt rollover risks heightened by the pandemic. - Currency and credit risk: - Dollarization remains a major challenge despite a significant decline; loan larization (de-dollarization) has been ongoing. - Most borrowers are unhedged; local currency depreciation caused by the pandemic and events in Ukraine increased credit risk and raised the NPL ratio for foreign currency loans. - Summary statement: Asset quality is exposed to potential downside risks through concentrated short-term foreign financing, dollarization, and borrowers’ currency mismatches. ### Funding structure and wholesale financing (2021) - Wholesale financing (senior and subordinated debt funds) share: - 26.0 percent of total funding of the sector in 2021 - For the two largest banks combined: 18.3 percent - Banking sector funding composition: - Total deposits represent 62.8 percent of total assets - Insured deposits represent 7.5 percent of total assets and 12.0 percent of total deposits - Senior and subordinated debt represents 22.0 percent of total assets (sector-wide), driven by: - TBC: 19.5 percent (senior and subordinated debt as percent of total assets) - BOG: 22.3 percent - Most TBC and BOG debt is issued in foreign jurisdictions, notably the United Kingdom and Ireland; significant investors include multilateral international financial institutions. ### Sanctions-related actions (March 3, 2022) - NBG instructed Georgian financial sector representatives to fulfill obligations under financial sanctions imposed by the United States, Great Britain, the European Union, and other countries on the Russian financial system. - Sanctions applied to VTB Bank Georgia JSC operating in Georgia. - Agreed asset and deposit transfers involving VTB Bank Georgia JSC: - Transfer of deposits and loans of individuals from VTB Bank Georgia JSC to Basisbank JSC. - Transfer of a certain portion of the deposits and loans of legal entities from VTB Bank Georgia JSC to Liberty Bank JSC. ### Recovery and resolution regime — overview and progress - NBG has drafted extensive amendments to modernize resolution and crisis management: - Strengthen supervisory powers - Designate the NBG as the resolution authority - Provide a set of resolution objectives - Introduce recovery and resolution planning - Outstanding tasks include: - Define resolution triggers around nonviability - Operationalize resolution tools (e.g., bridge bank) - Set up a resolution funding framework combining TPF and DIF resources - Reinforce RLD staffing and capacity to mobilize additional staff for actual bank resolution actions - Finalize clear separation of responsibilities between NBG supervisory and resolution functions ### Recovery planning — status and recommendations - Legal requirement: - 2019 amendments require all banks to prepare recovery plans specifying how they will overcome shocks to capital and liquidity. - Implementation status: - NBG issued guidance in June 2020 for plan preparation and complementary self-assessments. - As of March 2022, NBG received 14 recovery plans from the three SIBs and other less significant banks. - BSD leads the review with input from specialist units including RLD; written feedback provided within three months of receipt. - Identified shortcomings in banks’ recovery plans: - Absence of clear governance structure (e.g., table with persons in charge) - Few quantitative and qualitative indicators (e.g., lower than EBA’s minimum list) - Inadequate attention to implementation risks and impediments and potential mitigation actions - Absence of idiosyncratic and market-wide stress, strategy and scenario analysis - Lack of duly correlated stress scenarios and analyses showing combined impact - Recommendations to NBG: - Issue further guidance and iterate reviews over several years until recovery planning is embedded in banks’ internal risk management - Establish a small team of senior supervisors to lead and coordinate review of all SIB recovery plans - Provide banks with templates covering early warning and escalation triggers, recovery options, and scenarios to facilitate benchmarking and industry dialogue - Extend recovery planning requirements to all banks after pilot reviews ### Early intervention and FOLTF (failing-or-likely-to-fail) - Supervision and escalation: - Current escalation process of supervisory measures and EIM adoption and engagement with the resolution function is not clarified. - Suggestion: develop internal guideline describing escalation process and RA’s direct involvement to enable updating resolution plans and preparing resolution tools. - Triggers and forward-looking approaches: - Current escalation from going-concern to gone-concern lacks sufficient triggers for early mitigation. - Suggestion: introduce internal guidance clarifying triggers incorporating quantitative and qualitative elements into risk-based assessments to reduce arbitrariness and increase transparency. - Legal clarity: - Recommend clarifying Article 30 of the Banking Law and retitling Article 30¹ to “temporary administration” to remove misunderstandings about scope of EIM powers. - Communication: - NBG has not adopted formal communication policy guidance for supervisory measures or EIMs; recommend internal guidance for NBG communications and clarity on what banks should communicate externally. - FOLTF indicators: - No clear standards or indicators of nonviability exist; recommended actions: - Introduce clear quantitative and qualitative (but objectively supported) standards or indicators of nonviability - Adopt a forward-looking methodology for FOLTF determination - Ensure triggers permit action before insolvency and include checks and balances to protect shareholders’ and creditors’ property rights ### Resolution planning — progress and recommendations - Current state: - Banks advanced in recovery framework application but less advanced in resolution planning. - RLD responsible for drafting resolution plans; requires bank cooperation on information systems, operational continuity, liquidity arrangements, and governance. - RLD prepared a stress scenario assessing resilience in idiosyncratic and systemic scenarios; strategic business analysis is well focused. - Recommendations: - Start constructive dialogue with banks to improve resolvability and quality of information; RLD should assess information quality annually. - Develop templates for provision of core information by banks, especially on liabilities, on a regular basis. - Issue policies and guidelines to progress resolution plan chapters (e.g., operational continuity, separability, liquidity in resolution). - Set specific LAC targets for each bank that might be subject to bail-in, with a deadline following FSAP recommendations of 2024. - Issue liabilities data report requirements for banks to monitor LAC compliance. - Discuss recapitalization amount adjustments and expectations for capital requirements in resolution scenarios between RLD and BSD; BSD indicated willingness to give special treatment in capital requirements during the first year after resolution, especially with respect to buffers. - Implement analytical framework to oversee asset encumbrance and anticipate liquidity needs in resolution; consider role of NBG liquidity support (ELA) in resolution. - Challenges due to market concentration: - High market concentration raises challenges for resolvability; sale of a whole bank may be infeasible for largest banks unless large foreign banks are bidders. - Bail-in remains preferred tool for SIBs but poses contagion risks; consider complementary tools such as sale of businesses or activities and analyze long-term alternatives. ### Bank crisis management — resolution powers and operational needs - Special managers: - No progress on FSAP recommendation to define desired skills of special managers and to establish presumption that NBG staff should only serve as special managers in extraordinary circumstances. - Need to identify qualified, independent professionals willing and able to serve as special managers. - Moratorium: - Georgian law allows imposition of a moratorium of up to 90 days, but long moratoria can adversely affect bank viability; credible resolution framework and diligent preparation should reduce need for long moratoria. - No-creditor-worse-off safeguard: - Effectiveness requires conduct of a liquidation valuation (known as ‘valuation 3’ in the European Union). - RLD needs: - List of preselected independent valuers - Draft contracts and templates with required information from banks - Effective process to manage the right to be heard before adopting final resolution decisions *Italic: Source: IMF staff summary of chapter content from the provided PDF excerpt.* ### 31. The RLD needs to formulate a policy addressing potential deviation from pari passu ### 31. The RLD needs to formulate a policy addressing potential deviation from pari passu treatment of creditors when executing resolution actions ### Pari passu deviations: scope and conditions - Need: Issue a policy limiting deviations from pari passu treatment when executing resolution actions (examples: setting up a bridge bank; sale of shares, assets, and/or liabilities). - Proposed specific situations where deviation would be permitted: - (i) it is not possible to impose a resolution tool within a reasonable time; - (ii) it is strictly necessary and is proportionate to ensure continuity of critical functions and core business lines; - (iii) it is strictly necessary and proportionate to avoid giving rise to widespread contagion of financial difficulties and threats; and - (iv) the losses borne by other creditors would be higher. ### Legal uncertainty and judicial review - Assessment needed: NBG should assess measures to minimize legal uncertainty over whether NBG resolution decisions will be sustained by the court. - Current legal landscape: - The court can confirm or declare the NBG resolution action as illegal. - Appropriate provisions exist to ensure judicial actions do not impede resolution implementation and to compensate creditors for damages paid by the Resolution Fund (for which the banking industry is ultimately financially responsible). ### Institutional capacity and RLD resourcing - Requirement: Effective exercise of resolution powers requires an independent authority with adequate human and technical resources. - Recommendations: - Implement planned relocation of the RLD into the Financial Stability Department, which reports directly to the governor. - Increase the number of staff allocated to the RLD (current staffing is clearly insufficient). ### Operationalization of the resolution regime: playbooks and legal support - Action: Prepare playbooks for authorities to operationalize resolution tools (steps, responsibilities, templates, drafts). - Coordination: RLD should prepare these documents in coordination with MoF, BSD, Securities Commission of Georgia (SCG), and relevant market infrastructures (payment systems, central counterparties). - Legal support: Robust legal support is needed. - Appendix II: Illustrates playbook content for sale of business, bridge bank, and bail-in tools. ### Bail-in feasibility, cross-border issues, and cooperation - Feasibility concern: Further work needed to ensure bail-in strategies are feasible for the two largest SIBs given share of debt issued in foreign jurisdictions. - Statutory clarity: Bail-in can be applied to all subordinated and senior debt instruments from a statutory perspective. - Cross-border challenge: Application to debt instruments issued abroad—in absence of contractual bail-in clauses—will hinge on close cooperation with foreign resolution authorities. - Recommendation: Explore negotiating cooperation agreements with the Bank of England and the Central Bank of Ireland to increase extra-territorial effectiveness of bail-in decisions and ensure a transparent and expedited recognition process. - Legal analysis: NBG should prepare its own legal analysis in each relevant jurisdiction of likely outcomes of investor challenges to potential NBG bail-in decisions; analysis should: - Inform steps to increase legal certainty and reduce litigation risks; - Provide analysis of practicality of bailing in existing and new debt issuances in different jurisdictions to guide setting banks’ LAC targets. ### Temporary Public Funding (TPF), Resolution Fund, and ELA - Procyclicality concern: Georgia’s current resolution fund is based on ex post contributions and can be more procyclical than one based on ex ante contributions. - Alternatives to analyze (MoF, NBG, DIA): - Effectively manage timing of required ex post contributions. - Use the DIF to finance resolution operations with strict safeguards (long-term alternative requiring legal changes). - Policy on timing of ex post contributions: - Adopt a policy considering idiosyncratic and systemic factors affecting timing of repayment requirements. - Current regulation: allows a bank, in exceptional circumstances, to defer payment of ex post contributions for no longer than one year, with possible extension upon appropriate justification; proposed policy should specify requirements to extend the payment period and features of that extension. - Collateral for state funding: - Need a rule clarifying circumstances when collateral is required for state funding provided through a loan (to bank in resolution, bridge bank, or acquirer). - Regulation authorizes MoF to request collateral; recommended to elaborate on requirements to be exempt from that obligation. - Grants vs loans/guarantees: - Clear rule needed on provision of grants, especially if grants must be reimbursed ex post by banks. - Resolution Fund consists of TPF, which includes loans, guarantees, and grants issued by the MoF; loans and guarantees are common, grants are not. - Calculation of ex post contributions: - NBG should provide further guidance on computation of risk elements, notably: - asset quality (20 percent of the total weight); - business model and profitability (20 percent); - capital (40 percent); - liquidity (20 percent). - Practical rules in the European framework could serve as a starting point for the two 20 percent risk factors. - Institutional implications for TPF operationalization: - MoF and NBG should develop an internal contingency policy framework to facilitate rapid decision making. - MoF should prepare templates for parliamentary documentation required to secure approval for TPF (provision of TPF by MoF is subject to parliamentary approval). - MoF should assess budgetary implications of TPF and consider providing an explicit contingency fund in the annual budget. - Liquidity in resolution: TPF vs ELA - Clarification needed on when liquidity needs in resolution will be covered by TPF and when by ELA. - Current law allows NBG, in exceptional circumstances, to provide ELA to a bank whose solvency may be in doubt, including banks pending or undergoing resolution. - If operational or legal obstacles prevent implementation of TPF for liquidity, ELA in resolution will be the general rule. - A rule should incorporate roles of the RLD and the RC in initiating requests for ELA for a bank pending or undergoing resolution. - ELA institutional arrangements: - Need a formal joint agreement between MoF and NBG for execution of the MoF guarantee for ELA covering: - MoF expectations on NBG collateral requirements for ELA; - Relationship between ELA financing and potential Resolution Fund liquidity financing; - Detailed procedures for putting in place the guarantee and calling it upon in event of default on ELA and consequent NBG loss, including roles of both parties; - Potential role of ELA in resolution financing and guidance on use of TPF via the Resolution Fund to repay any ELA granted. ### Creditor hierarchy in liquidation and resolution - Authorities provided a tentative revised legal text for creditor hierarchy in liquidation (summarized in Box 1). - Mission views and suggestions: - General support for proposed revisions. - Examine status of the DIA when subrogated for insured depositors: DIS Law appears to assign priority to DIA claims inferior only to NBG claims (thus senior to MoF and Resolution Fund claims); mission suggests DIA should simply substitute for insured depositors in the hierarchy and authorities will assess harmonization needs between the Banking Law and the DIS Law. - Consider practical challenges of identifying direct and indirect owners (with non-deposit instrument claims); unclear if such claims exist in the banking system at present. - Reconsider special status of the Pension Agency in the proposed hierarchy: Pension Agency is a large depositor and management practice of failing to fully secure placed funds puts them at unnecessary risk; NBG and MoF should work with Pension Agency to ensure funds are not maintained as uninsured and unsecured deposits; NBG expertise on secured ELA may be relevant. - Box 1. Authorities Proposed New Creditor Hierarchy (order preserved): - a) Claims secured by financial instrument collateral (proposed Banking Law Article 10.1). - b) Claims secured by nonfinancial collateral (Article 10.2). - c) Other claims as follows (Article 10.3). - d) Expenses arising from the liquidation process (costs of the liquidation estate). - e) NBG (unsecured) claims, as well as any commercial bank claims arising from a loan to the liquidation estate. - f) MoF and the Resolution Fund outlays for resolution funding (i.e., excluding tax liabilities). - g) Insured deposits. - h) Deposits above the insured limit but less than GEL 100,000. - i) Pension Agency claims. - j) Deposits above the insured limit in excess of GEL 100,000, and deposits ineligible for deposit insurance. - k) Deposits of bank managers and 5 percent or greater shareholders, and their family members and agents, and deposits of financial institutions. - l) Tax liabilities. - m) Other claims. - n) Liabilities to direct and indirect owners arising from non-deposit (e.g., loan) instruments. - o) Subordinated debt not qualifying as regulatory capital. - p) Debt instruments with contractual bail-in clauses. - q) Capital instruments qualifying as Tier II capital. - r) Other capital instruments (i.e., AT1 instruments). - s) Equity capital. ### Inter-agency crisis preparedness and coordination: playbooks, contingency plans, and testing - Architecture guidance: - Base: departmental-level policy, procedure, and coordination framework documents ("playbooks"). - Next: scenario-specific playbooks involving two or more departments. - Above that: internal whole-of-agency contingency plans. - Interagency level: joint playbooks (e.g., NBG-MoF coordination in bank resolution). - Ultimate goal: IFSC national financial crisis preparedness plan. - NBG action items: - Ensure departmental-level playbooks for key functions. - RLD has prepared a liquidator’s playbook, an NBG staff playbook for liquidations, a detailed Excel-based technical map of all steps, and some 55 document templates (built on 2018 Regulation on Liquidation of Commercial Banks). - Prepare additional playbooks: supervisory early intervention, FOLTF determination, ELA, and use of individual resolution tools (bail-in, sale of business, bridge bank). - ELA playbook should build upon 2020 Rule and Conditions for Issuing a Last Resort Loan by the National Bank of Georgia and incorporate RLD and RC roles in initiating ELA requests for banks pending/undergoing resolution. - Existing NBG 2020 policy/procedure documents to build on: - Rule on Simplified Procedures for the Acquisition of a Significant Share of a Commercial Bank under Resolution; - Rule on Licensing, Management and Market Exit of a Bridge Bank; - Rule on Recapitalization of a Bank in Resolution by Means of Write-down or Conversion of Bank’s Liabilities; - Rule on Recapitalization by Means of Issuing New Shares of a Bank in Resolution; - Rule for the Valuation of the Assets and Liabilities of a Commercial Bank for the Purposes of Resolution. - Prepare an integrated Resolution Handbook that consolidates tool playbooks and addresses valuations and resolution funding, identifying roles for other NBG departments (financial markets, legal, procurement, logistics). - MoF action items: - Ensure departmental-level playbooks for financial stability and crisis management functions, including use of TPF (bridge bank capitalization and other legally permissible direct TPF). - Develop a Resolution Fund playbook addressing deployment of indirect TPF via the fund. - Build on MoF/NBG Joint Decree and Joint Regulation issued in 2020 regarding collection of contributions and administration of the Resolution Fund and provision of TPF. - Prepare playbooks addressing contingent liabilities for NBG ELA and potential lending to the DIF in response to DIA requests. - As owner of a bridge bank, prepare a bridge bank playbook covering establishment, governance, capitalization, financing, and eventual sale. - DIA action items: - DIA drafted new "Normative Acts" (pending Supervisory Board approval) providing detailed procedures for insured banks, agent banks, and DIA for conducting payouts; these were reviewed and commented on by NBG. - DIA requires playbooks for contingencies: liquify investment portfolio (via arrangements with NBG); borrow from MoF or market if DIF requires replenishment. - DIA is developing a Crisis Management Plan for crises beyond single-bank payouts (e.g., multiple simultaneous payouts). - Bilateral interagency playbooks recommended: - NBG-MoF: coordination for bridge bank tool (build on NBG Bridge Bank Rule). - NBG-MoF: resolution funding playbook addressing MoF provision of TPF (direct and indirect via Resolution Fund) and potential NBG ELA (build on Joint Regulation on Resolution Fund and TPF). - Consider broader coordination framework playbook for systemic crisis scenarios (multiple bank failures). - NBG-DIA: joint playbook for coordination if a problem bank might be declared FOLTF and put into liquidation; joint playbook if DIA needs to liquify DIF investment portfolio. - DIA-MoF: joint playbook for coordination if DIA needs to borrow from MoF to replenish DIF. - Whole-of-agency and national plan development: - Each IFSC member agency should develop internal whole-of-agency financial crisis contingency plans. - Long-term goal: overarching, integrated financial sector crisis contingency plan for Georgia leveraging internal playbooks and joint plans. - Testing program: - Establish testing by simulation exercises to practice playbook/plan use and identify enhancements. - Departments should undertake periodic testing of key playbooks in cooperation with other departments. - Senior management oversight required to ensure priority playbooks are tested (e.g., report results and enhancement actions routinely to senior management, such as the NBG FSC). - Good practice: adopt an annual planning cycle identifying priority exercises for the coming year. *Source: 1geoea2023001 - 31. The RLD needs to formulate a policy addressing potential deviation from pari passu* ### 59. The mission suggested to the authorities a medium-term work program to ### 1geoea2023001 - 59. The mission suggested to the authorities a medium-term work program to ### Medium-term work program to strengthen crisis preparedness - Suggested horizon: over the next three years. - First step: undertake in each agency an inventory of key departmental-level, scenario-specific, and bilateral playbooks to quantify documented policy, procedures, and coordination frameworks benchmarked against the recommendations in this technical report and other goals deemed important by agency management. - Purpose of stocktaking: identify gaps and shortcomings (e.g., missing playbooks, partial or incomplete playbooks). - Suggested completion timeframe for the stocktaking: 2022. - Prioritization: agency management to set priorities for addressing absent or incomplete playbooks and incorporate these into departmental and agency-wide workplans for the remainder of 2022 and in 2023. - Development timeline: work on agency-wide financial crisis contingency plans could be contemplated for 2023 and 2024 (at least within the NBG and the MoF). - Testing: testing of existing and new playbooks should be incorporated into annual workplans. ### Governance, oversight, and institutional arrangements - Senior management endorsement: development of key playbooks and a program of route testing should be endorsed and overseen by senior management within each IFSC member agency (e.g., within the NBG this work program likely overseen by the FSC). - Role of senior management: ensure adequate resources and collaborative work across relevant departments. - IFSC role: implementation of the work program to enhance domestic crisis preparedness and coordination framework should be overseen ultimately by the IFSC, serving an information sharing and process-coordination role to ensure whole-of-agency contingency plans dovetail into a national financial crisis contingency plan. - IFSC Charter: authorities proposed a few changes to reflect the IFSC role; the mission recommended considering a more substantive redraft of the charter to address separately the IFSC’s role in normal times (including overseeing the crisis preparedness work program) and its role in crisis times (interagency coordination in heightened stress or crisis). - Standing working group: mission recommended the IFSC be supported by a formal standing working group comprised of a small number of individuals from member agencies to support IFSC members in overseeing implementation of the crisis preparedness and coordination framework work program; the working group’s role should be articulated in the charter. ### Next steps — tasks recommended ahead of the second mission (scheduled for September 2022) - The mission recommended completing the following tasks ahead of the second mission scheduled for September 2022: - a) Stocktaking on missing/incomplete playbooks and contingency plans; - b) Operationalizing the bail-in tool from the authorities’ point of view (including a clear allocation of responsibilities and the interaction with other authorities and institutions); - c) Operationalizing the bridge bank tool from the authorities’ point of view, especially the MoF and the NBG; - d) Operationalizing the sale of business tool, with all the steps, templates, and drafts that the RLD needs to perform a successful sale; - e) Initiating the inventory of key playbooks and identifying missing or incomplete playbooks; - f) Establishing a formal standing Working Group to support the IFSC; - g) Preparing a new draft of the IFSC Charter; and - h) Further revising the creditor hierarchy as appropriate. ### Second mission focus and staffing recommendations - Second mission scope: provide further guidance on contingency preparation and staffing, development of the resolution regime, and playbooks on the bail-in, sale of business, and bridge bank tools. - Staffing guidance: - The RLD/NBG and the MoF should review their long-term staffing needs. - They should appoint and train a small core of permanent staff and establish arrangements to enable the quick increase of staff, as needed. - Tasking of units for playbook development: - The RLD should be tasked to develop guidelines/playbooks for the bail-in and sale of business tools. - The RLD and the MoF should develop guidelines/playbooks for the bridge bank tool. ### Appendix I — Guidance for supervisors on recovery plans (scope and structure) - Recovery plan elements covered: - Executive summary of the recovery plan; - Governance of recovery plans; - Integration of recovery plans with the bank’s risk management framework; - Overview of the bank and group, and critical functions and services; - Triggers for activation of the recovery plan; - Restoration points to achieve financial soundness; - Recovery options; - Scenarios; - Communications; - Preparatory measures; - Testing of the recovery plan; and - Review of the recovery plan. - Proportionality: guidance focused on larger banks; credit unions and other small SFIs require a proportionate approach with scaled-back recovery planning requirements, though recovery plans for small SFIs should still cover these topics on a more limited scale. - Mutual entities: capital issuance options are limited and that element of a recovery plan should be scaled back considerably relative to that for a non-mutual. ### Executive summary of the recovery plan — guidance and supervisory questions - Purpose: concise roadmap allowing senior management and the board to quickly understand and assess recovery options in severe stress. - Recommended content of the Executive Summary: - a. the objectives and scope of the plan; - b. governance of the plan—approval process and governance in activation; - c. integration with the risk management framework, ICAAP, BCP and related matters; - d. triggers for recovery plan activation, and escalation and implementation arrangements; - e. the ‘restoration points’ for key variables – especially capital and liquidity; - f. the recovery options; - g. a brief description of the scenarios; - h. communications; and - i. process for regular review and testing. - Checklist: Executive Summary should contain or reference a short checklist of decisions and actions for senior management and the board to: - a. determine whether to invoke the recovery plan; - b. ascertain the nature of the problem affecting the bank, its cause, and its impact; - c. determine the recovery strategy, including recovery actions and communications; and - d. ensure that all actions are subject to effective oversight and coordination. - Indicative supervisory questions: - Does the recovery plan contain an executive summary that is succinct and practical in its focus? - Does the executive summary cover the listed items? - Would the executive summary be a useful guide for senior management and directors in application situations? - Is the executive summary easy for a user to access and apply? - Does the executive summary contain a checklist of key decisions and actions for invocation and application? If not, is there a separate document containing such a checklist? ### Governance of recovery plans — guidance and supervisory assessment points - Governance requirements: - Describe specific governance arrangements, roles and responsibilities of the board and senior management during development, review, approval, ongoing maintenance, monitoring, escalation, and execution of recovery actions. - Identify a senior-level “owner” of the recovery plan (often the Chief Risk Officer). - Explain activation processes, monitoring responsibilities for triggers, authorizations and delegated authorities during recovery, management structure during recovery, and the typical role of the CEO and a Crisis Management Team (CMT). - The recovery plan should specify, for each recovery option, the level of authority needed to approve that option. - Fitness-for-purpose expectation: - Recovery plan should enable the bank to restore itself to financial soundness generally within three months of trigger points being breached, and no more than six months. - Senior management and board responsibilities include ensuring: - a. triggers occur sufficiently early to enable corrective actions before breaches of prudential requirements; - b. scenarios are realistic and sufficiently severe and clearly identify assumptions, including idiosyncratic, system-wide, and hybrid scenarios; - c. recovery actions are specific, detailed, realistic, and practicable with priorities identified; - d. quantification of expected contribution of each recovery action (e.g., amount of capital expected to be raised); - e. implementation details and step-by-step guidance for each recovery action with associated documentation; - f. identification of stakeholders and assessment of their information needs and timing; - g. staff awareness of the recovery plan and their responsibilities; - h. close integration with the bank’s risk management framework, including EWIs, stress testing, risk monitoring, ICAAP, liquidity contingency planning, and business continuity planning; - i. regular (generally annual) review, updates to reflect changes, and regular testing (e.g., annual desk-top tests and a live simulation exercise every three years). - Supervisory indicative questions on governance preparation and activation: - Owner and preparation team composition and seniority (CRO, CFO, Heads of Treasury/Operations/IT/Legal/Compliance/Communications). - Degree of Board Risk Committee and board oversight, time dedicated to review, and thoroughness of sign-off. - Controlling shareholders’ review and sign-off, particularly on responsibilities such as capital issuance. - Staff awareness arrangements and board members’ understanding of recovery plan responsibilities. - Activation governance: who can activate the plan, timing for board convening if not involved in activation, allocation of decision-making authorities for recovery actions, existence of crisis committees at management and board levels. ### Integration of recovery plans with risk management arrangements — key linkages - Recovery planning must be integrated into the bank’s risk management framework rather than treated as an isolated compliance exercise. - Noteworthy linkages: - a. Stress testing and reverse stress tests inform potential impacts on capital and liquidity and inform scenarios. - b. EWIs, supported by robust management information systems, inform triggering of the recovery plan and link to Risk Appetite Statement (RAS). - c. Close linkages with ICAAP and ILAAP for setting restoration points for capital and liquidity. - d. Triggers should be informed by and linked to minimum risk tolerances in the RAS. - e. Restoration points should be informed by and linked to desired risk settings in the RAS. - f. Linkages between recovery plan capital-related matters and the capital contingency plan; liquidity-related matters and the liquidity contingency plan. - g. Linkages between recovery planning and business continuity planning for operational requirements of recovery actions. - h. Feedback loop from recovery plan outcomes to risk appetite settings and risk limits (e.g., adjustments of risk limits and capital and liquidity buffers following shocks or supervisory assessment of plan credibility). *Source: IMF technical assistance mission report excerpt (1geoea2023001).* ### 14. It is therefore important that a bank ensures that its recovery planning processes are fully ### 1geoea2023001 - 14. It is therefore important that a bank ensures that its recovery planning processes are fully ### Integration of recovery planning into risk management - Recovery planning must be fully integrated into the bank’s wider risk management framework. The recovery plan should: - set out the nature of the linkages between the recovery plan and the risk management framework; and - describe the means by which the bank ensures a strong degree of integration of recovery planning into the risk management framework. - Issues to be assessed by supervisors (indicative questions): - a. Is the recovery plan adequately integrated with the bank’s stress testing arrangements? - b. Have the scenarios, restoration points, and recovery actions been informed by stress test results? In particular, have reverse stress tests been used to identify the magnitude of economic and financial shocks required to cause the bank to breach recovery plan triggers? - c. Is the recovery plan integrated with the bank’s risk management framework and RAS, especially as regards the setting of triggers and restoration points? Are the triggers for the recovery plan aligned to minimum tolerance levels in the RAS in respect of capital and liquidity? - d. Are EWIs used in the recovery plan informed by the bank’s stress testing and RAS? - e. Is the recovery plan integrated with the bank’s ICAAP and capital contingency plan? - f. Is the recovery plan integrated with the bank’s liquidity contingency plan? - g. Is the recovery plan integrated with the bank’s BCP? ### Overview of the bank — structure, operations, and critical functions - General guidance: the recovery plan should include comprehensive information on the bank’s structure and operations, including: - a. the bank’s ownership structure, including an identification of all parties with a significant ownership stake; - b. the group structure if the bank has subsidiaries or is owned by a holding company, including an organization chart for the group and an identification of each entity in the group; - c. if the bank is part of a wider financial conglomerate, the nature of its functional interdependencies with the various entities in the conglomerate; - d. the functions performed by the bank and each of the other entities in the group – domestically and in other countries; - e. the financial products and services provided by the bank and each entity in the group; - f. key risks of the bank and each entity in the group, and a description of (or reference to) the risk management framework applied to identify, measure, monitor and manage all material risks; - g. the nature of the inter-connections between entities in the group, including financial and operational inter-connections; - h. location of all branches of the bank and offices of other entities in the group, domestically and in other countries; - i. identification of correspondent banks and other banks or financial service providers with which the bank or the group has significant business dealings; - j. nature and extent of participation of the bank and the group in financial markets, by category of financial market; - k. nature and extent of participation of the bank and the group in payment and settlement systems; - l. entities that provide critical functions or services to the bank and the group; and - m. extent and nature of any outsourcing of critical functions and services to parties outside the group. - Identification and design of recovery actions: - Banks must identify critical functions and services, the legal entities and jurisdictions where they are located, and inter-dependencies. Recovery actions should be designed to ensure these functions and services can be maintained without interruption. - FSB definitions (as provided): - Critical functions: activities performed for third parties where failure would lead to disruption of services vital for the real economy and financial stability due to size/market share, interconnectedness, complexity, and cross-border activities. Examples include payments, custody, certain lending and deposit-taking activities in the commercial or retail sector, clearing and settling, limited segments of wholesale markets, market-making in certain securities and highly concentrated specialist lending sectors. - Elements of a critical function: - it is provided by a bank to third parties not affiliated to the bank; and - the sudden failure to provide that function would be likely to have a material impact on the third parties, give rise to contagion or undermine general confidence due to the systemic relevance of the function and the systemic relevance of the bank in providing the function. - Critical shared services: activities performed within the firm or outsourced where failure would lead to inability to perform critical functions. Examples include information technology, facility management, administrative services. - Recovery plan content requirements: - identify all critical functions and services, legal entities (including outsourced providers) that perform them, the jurisdictions where they are located, and inter-dependencies between them. - At a minimum, critical functions should include: - a. deposit-taking, particularly the capacity to receive deposits into transaction-facilitated deposit accounts and short-term deposits; - b. wholesale funding, including the capacity to receive deposits from other banks, correspondent banks and corporate entities, capacity to transact with the central bank for money market operations, issuance and servicing of bonds and paper, and capacity to meet obligations under securities lending, repos and risk transformation services; - c. lending and loan servicing, particularly the capacity to provide credit under committed credit facilities (such as overdrafts and stand-by facilities), participation in existing syndicated lending facilities, trade finance, leasing and factoring; - d. credit card services; - e. payments, clearing and settlement, and custodial services, including retail and wholesale payments services, capacity to meet obligations to payment and settlement service providers and other Financial Market Infrastructures (FMIs), treasury and cash management services; - f. capacity to meet obligations (paying and receiving) in relation to financial derivatives, such as swaps, options, forward contracts and other financial instruments used by the bank or its clients for risk hedging purposes; and - g. capacity to meet obligations in relation to capital market transactions and services. - At a minimum, critical services should include IT and systems/controls required to: - a. perform all critical functions; - b. maintain all customer and client records; - c. maintain all financial and management accounting records and reporting obligations; - d. identify, measure, monitor and control all material risks (including credit risk, exposure concentration risk, liquidity risk, interest rate risk, basis risk, currency risk, equity risk, asset price risk, operational risks, and reputation risk); and - e. meet all regulatory obligations and other legally binding regulatory requirements. - Recovery actions: - Recovery plans should set out financial and operational recovery actions to ensure all critical functions and services can be maintained without interruption and to manage contagion risk arising from interlinkages in a financial conglomerate or corporate connectedness. - Issues to be assessed by supervisors (indicative questions on overview of the bank): - a. Does the recovery plan provide sufficient detail of the bank’s organizational structure and group structure? If part of a financial conglomerate, does it set out interlinkages and interdependencies? - b. Is there sufficient information on ownership structure, including identification of all parties with a significant ownership stake? - c. Does the recovery plan identify adequately all critical functions and services, including critical shared services within the bank and group? - d. Does it identify the legal entities that provide critical functions and services? - e. Does it identify the inter-dependencies (functional and financial) between legal entities providing critical functions and services? - f. Does it identify all material outsourcing arrangements for critical functions and services, including legal entities, jurisdictions, and reference to legal contracts? - g. Does it identify back-up and business continuity arrangements for all critical functions and services, or refer to these being identifiable in the bank BCP? - h. Are cross-border operations adequately identified? - i. Does it identify the financial products and services provided by the bank and each entity in the group? - j. Does it identify the sources of funding for the bank and other entities in the group? - k. Does it identify the key risks of the bank and each entity in the group, and a description of (or reference to) the risk management framework applied to identify, measure, monitor and manage all material risks? - l. Does it identify correspondent banks and other banks or financial service providers with which the bank or group has significant business dealings? - m. Does it identify the nature and extent of participation of the bank and group in financial markets, by category of financial market? - n. Does it identify the nature and extent of participation of the bank and group in payment and settlement systems? ### Triggers for activation of the recovery plan - General guidance: - A recovery plan needs clearly defined triggers linked to key risk metrics relevant to financial soundness. Typical triggers comprise: - Capital ratio (e.g., CET1, tier 1 and total capital ratios); - Liquidity ratio (e.g., HQLA to total liabilities, LCR, Counterbalancing Capacity); - Asset quality (e.g., NPLs over 90 days past due as a percentage of total loans); - Profitability (e.g., NPAT as a percentage of total assets or equity); and - Credit rating. - Triggers should enable invocation well before breach of prudential requirements and before significant difficulties. Triggers for capital and liquidity are often set at or slightly above minimum tolerance levels in the bank’s RAS. Triggers for asset quality are generally set at or below maximum tolerance (e.g., NPLs/total loans), and profitability triggers at or slightly above minimum tolerance for ROE or ROA. - Example for credit rating trigger: usually set at or slightly above minimum tolerance for rating level in the RAS; e.g., one or two notches above the minimum rating for investment grade (BBB- or equivalent). - Inclusion of a trigger for disruption of critical functions/services is often desirable; example: sustained interruption for more than x hours (e.g., more than 8 hours) or where disruption could cause material reputational damage and/or inability to meet payment and settlement obligations. - Not all triggers need be quantitative. Qualitative triggers can include requests from counterparties for early redemption of liabilities; difficulties issuing liabilities at current market rates; unexpected loss of senior management; adverse court rulings; negative market commentary; fraud or malfeasance events; and other events causing significant reputational damage. - EWIs: - Banks should include in the recovery plan or supplementary material the EWIs in place for each trigger and how they are monitored. EWIs should enable early identification of emerging stress that could lead to trigger breaches. EWIs should relate to capital, liquidity, asset quality, profitability, and qualitative triggers. - Indicative examples of EWIs (as provided): Risk category — Early Warning Indicators - Capital: - Early-stage deterioration in capital ratios - Capital ratios falling below target levels in the RAS or in ICAAP - Rapid growth in lending - Increase in the proportion of higher-risk lending - Increase in risk appetite - Adverse movement in risk environment - Deterioration in risk management quality - Increase in risk-preferent activity - Deterioration in asset quality - Declining profitability - Liquidity: - Counterbalancing capacity evolution - Early-stage deterioration in liquidity ratios - Reduced reinvestment of maturing deposits - Shortening of average maturity of funding - Acceleration in withdrawal of deposits - Increase in risk premium on funding costs - Adverse movements in asset/liability maturity mismatch - Reduced cashflows (actual or forecast) from loan portfolio - Reduced ability to obtain funding in the inter-bank market - Asset quality: - Early-stage deterioration in asset quality indicators - Increase in unemployment and underemployment - Lengthening in loans past due - Increase in requests from borrowers for loan restructuring due to stress - Increase in interest rates - Increase in household and corporate leverage - Decline in asset prices relevant to collateral values - Profitability: - Increase in operating expenses - Reduced net interest margins - High wage inflation - Weakening in asset quality - Increased competitiveness and contestability in key financial markets - Higher forecast expenses associated with IT/cyber security risk factors - Higher forecast expenditures on bank restructuring and technology updates - Issues to be assessed by supervisors (indicative questions on triggers and monitoring): - a. Does the recovery plan differentiate between triggers for activation of the recovery plan as a whole, and triggers for activation of specific recovery actions? - b. Do the triggers enable activation well before any breach of prudential requirements has occurred? - c. Are the triggers set in relation to the risk tolerances in a bank’s Risk Appetite Statement (e.g., lower tolerance levels for capital and liquidity, and upper tolerance for impaired loans and exposure concentration ratios)? - d. What monitoring arrangements enable senior management and the board to regularly monitor data in relation to the triggers? - e. What systems apply for alerting senior management and board to a breach or risk of future breach of the triggers? - f. Are the triggers supported by comprehensive EWIs? Are there EWIs that provide reliable predictors of possible future breaches of recovery plan triggers, including capital, liquidity, asset quality and profitability? - g. What monitoring arrangements enable senior management and the board to regularly monitor data in relation to the EWIs? - h. Are the EWIs structured to identify escalating levels of potential risk of future trigger breaches, such as a ‘traffic light’ structure for EWIs? - i. Does the plan clearly set out the process by which a bank would activate its recovery plan and particular recovery actions? - j. Does it identify the persons responsible for the different elements of the activation process? - k. Is there clear documentation of delegated authorities for particular actions? - l. Is there an appropriate process for escalation of decision-making? ### Restoration points for recovery - General guidance: - The recovery plan must clearly specify “restoration point” targets. At minimum, a bank must restore capital and liquidity to levels that meet the regulator’s regulatory requirements, with a sufficient cushion to achieve a very low probability of future breaches. Frequently, higher restoration points are specified to restore and maintain market confidence and retain access to inter-bank funding, often set towards the higher end of the target range in the RAS (e.g., for capital and liquidity). - Restoration points to be set and documented (minimum list): - CET1 ratio; - Tier 1 capital ratio; - total capital ratio; - HQLA ratio; - LCR ratio; - profitability, expressed both in ROA and ROE terms; and - asset quality, expressed in terms of relevant indicators of impaired and restructured assets, as a percentage of total assets or total loans. - Additional restoration points: - reference to a target credit rating (where the bank already has a rating); - other measures such as defined measures of market confidence in the bank, depositor satisfaction, other stakeholder satisfaction, and resumption of business-as-usual operation of all critical functions and services. - Issues to be assessed by supervisors (indicative questions on restoration points): - Do recovery plans set out clearly and specifically the restoration points for the above factors and the bank’s rationale for selecting them? - Are the restoration points realistic and achievable? - Are the restoration points consistent with the bank resuming normal operations, especially for critical functions and services, and maintaining market confidence? *Source: 1geoea2023001 - section text.* ### 34. Indicative questions that supervisors could consider in reviewing the restoration points ### 34. Indicative questions that supervisors could consider in reviewing the restoration points for recovery plans ### Restoration points - Does the recovery plan establish restoration points for key variables, such as capital, liquidity, asset quality and profitability? - How has the bank set these restoration points? Were the levels of restoration points for capital and liquidity set in relation to the bank’s minimum tolerances in the Risk Appetite Statement? Were they set taking into account the bank’s stress tests? - Do the restoration points provide reasonable assurance that future breaches of prudential requirements will not occur? In particular, has the bank set post-recovery capital and liquidity levels at a sufficiently high level? - Would the restoration points enable the bank to retain an acceptable credit rating (sufficient to maintain access to financial markets and inter-bank funding)? ### General guidance on recovery options - Recovery options must be comprehensive and sufficiently detailed to enable implementation, including step-by-step implementation guidance. - Identify the person(s) authorized to take each action and make delegated authorities clear. - For each recovery action, identify the maximum plausible amount that the action would contribute to capital or liquidity. - Emphasis on recovery actions that are practicable and can be implemented within a relatively short timeframe (e.g., within three months, and no longer than six months). - Banks should prioritize recovery actions with the greatest near-term benefit to capital, liquidity, profitability and asset quality, and actions credible with key stakeholders. ### Required detail for each recovery action - Specify: - the quantitative amount the action would contribute to restoration of capital, liquidity, profitability or asset quality; - the period of time required to complete the recovery action; - the processes and procedures required to implement the recovery action to the point of completion; - the documentation that has been or will need to be prepared to ensure prompt implementation; - potential legal and regulatory requirements and means to meet them; - the persons in the bank (including directors) with authority to approve implementation steps. ### Recovery actions should address root causes - Recovery actions must address underlying causes (e.g., poor lending decisions causing asset quality deterioration). - Plans should provide generic guidance on steps to identify and resolve underlying causes, including engagement of independent expert parties where appropriate. ### Capital recovery actions - Recovery plan should set out comprehensive, detailed actions to restore CET1, Tier 1 and total capital to target levels. - Priority to actions with greatest probability of success in the shortest period; generally capable of completion within three months desirably, and not more than six months. - Categories of capital recovery actions include: - raise equity from existing shareholders via a rights issue (desirably underwritten by an investment bank) or private placement to existing controlling shareholders; - raise equity from new investors via issuance of shares to selected potential shareholders; - convert debt into equity where contractual provisions allow conversion on specified triggers; - write down debt where contractual provisions allow write-down on specified triggers; - suspension of distributions (including dividends) to shareholders; - reduction or suspension in new lending to reduce additional capital required; - initiatives to reduce operational expenses to reduce additional capital required; - sale of assets or change in asset mix to reduce additional capital required and increase the risk-weighted capital ratio; - sale of subsidiaries; - issuance of new debt eligible for inclusion in tier 2 capital. - For each action, specify amount estimated to be raised or capital savings induced and timeframe; include step-by-step implementation arrangements and draft documentation or detailed term sheets. - Feasibility, amount, sequencing and timeframe differ between idiosyncratic and market-wide scenarios; generally more feasible and faster in idiosyncratic scenarios. ### Liquidity recovery actions - Liquidity actions must be specific, realistic, practicable and credible; prioritized by probability of success and contribution to liquidity need. - Speed is critical: success and credibility measured in hours and days rather than weeks or months. - Categories of liquidity recovery actions include: - sell marketable securities; - obtain liquid assets from controlling shareholders where feasible; - raise liquidity via borrowing from other banks under committed stand-by facilities; - borrow from the central bank under business-as-usual liquidity facilities; - sell illiquid assets in exchange for liquid assets (including repo or securitization); - lengthen maturity profile of liabilities; - shorten maturity profile of assets (where feasible); - reduce need for liquidity by reducing new lending and operating expenses, where feasible; - renegotiate terms of scheduled debt repayments and debt servicing where feasible and prudent. - All liquidity recovery actions should be quantified in estimated impact on liquidity, with implementation steps, timeframes and draft documentation or detailed term sheets. ### Profitability recovery actions - Recovery actions must be realistic, practicable and credible; profitability restoration is typically less urgent but critical for longer-term survival. - Profitability actions will often take longer than capital and liquidity actions and may receive lower short-term priority. - Helpful categories include: - initiatives to reduce operating expenses, consistent with maintaining acceptable risk management and critical functions; - initiatives to increase revenue from under-performing business lines where feasible and consistent with risk appetite; - initiatives to reduce or eliminate business activities that do not meet defined ROA and ROE hurdles; - initiatives to reduce average funding costs where feasible, consistent with risk appetite. - Where feasible, include estimates of contribution to increased profitability, expected timeframe, and steps required. ### Asset quality recovery actions - Asset quality actions need to be realistic, practicable and credible; generally longer term than capital/liquidity recovery but should be achievable within credible timeframes. - Categories include: - restructuring loans to enhance recoverability (e.g., elongating term, suspending interest payments); - transferring impaired loans into an asset management company owned by the bank; - selling impaired loans to other parties; - write-off loans considered irrecoverable; - strengthening lending policies, procedures and credit risk management for new loans. - For each action, identify expected impacts on asset quality, timeframe required, and detailed implementation steps. ### Other types of recovery actions - Examples that may be included depending on bank/group situation: - removal of staff, including senior management, where they contributed to stress or impede recovery; - actions to minimize or manage contagion risk between entities in the banking group or financial conglomerate; - actions to address underlying causes of financial stress, potentially including: - establishment of an internal review process to evaluate causes and remedies; - possible appointment of an external, independent party to assess causes and remedies; - board oversight of these processes; - reporting to the regulator; - transparency, including public reporting on causes and remedies. ### Issues for supervisors — general questions - Does the recovery plan contain a comprehensive suite of recovery actions for capital, liquidity, asset quality, profitability, maintenance of critical functions and services, and communications with stakeholders? - Are the recovery actions credible and realistic? - Have recovery actions been set out by priority of action (sequence of implementation) and in relevant categories? - Have the impacts of recovery actions been quantified (e.g., contribution to capital, liquidity)? - Can recovery actions be implemented in a timely manner (e.g., within one week for near-term liquidity recovery, within one month for longer-term liquidity recovery, and within three to six months for capital recovery)? - For each recovery action, is there comprehensive and detailed guidance on step-by-step implementation procedures? - Have responsible persons and delegated authorities been identified for each recovery action? - Have any legal or regulatory obstacles been identified and solutions set out? - Is there supportive documentation for recovery actions (e.g., capital issuance term sheets, indicative capital offer documents, liquidity stand-by facility documentation)? - Does the recovery plan differentiate between idiosyncratic and system-wide scenarios in terms of: - selection of recovery actions; - implementation process; - likely success or failure of recovery actions; - amount of funds obtained (or saved) by particular actions; - timeframe for implementation? ### Issues for supervisors — capital-specific questions - Do recovery actions include sufficient capital-raising options? - Have capital-raising options been prioritized in sequence? - Have capital-raising options been quantified with a maximum plausible amount that could be raised or capital savings that could be made? - How long would it take to raise capital? Does the plan provide sufficient detail to determine whether capital can be raised within (at most) a period of three to six months from activation? - Does the plan identify detailed implementation steps and all regulatory approvals needed? - Has the bank prepared necessary legal documentation or at least term sheets for capital-raising options? - For bail-in debt (if any), is the contractual bail-in process documented? - Does the plan differentiate between idiosyncratic and system-wide scenarios for types, amounts, probability and timeframe of capital recovery actions? - Have other capital restoration/conservation options been identified (e.g., selling assets, selling subsidiaries, reducing average risk weight of assets, reducing new lending, suspending distributions, reducing expenditures)? Have these been prioritized, quantified and documented? ### Issues for supervisors — liquidity-specific questions - Have liquidity-raising/saving options been prioritized? - Are the recovery options practicable and implementable in sufficient time to meet liquidity needs? - Are they quantified and do they contain detailed implementation guidance? - Do they include sufficient options to reduce cash outflows (e.g., reduced new lending, reduced expenditures, suspension of dividends)? - Do they include sufficient options to increase cash inflows (e.g., access to standby facilities, liquid asset injections from shareholders, acceleration of loan repayments)? - Does the plan contain sufficient initiatives to increase High Quality Liquid Assets? - Does it contain measures to attract and retain deposits and lengthen funding maturities where feasible? - Has draft documentation been developed to facilitate liquidity recovery actions (e.g., draft liquidity injection documentation, stand-by documentation, term sheets)? - Do the options identify potential borrowing sources (e.g., particular banks, securitization vehicles, borrowing facility with shareholders)? ### Issues for supervisors — profitability-specific questions - Do recovery actions include adequate initiatives to restore the bank to an acceptable level of profitability within a reasonable period? - Are cost reduction actions adequately identified and quantified? Would they weaken the bank’s ability to perform critical functions and services? - Are actions to increase revenue and margins adequately identified and quantified? - Would revenue-enhancing actions be consistent with prudent risk management or create excessive risks? - Have recovery actions been prioritized and quantified? - Have implementation procedures been adequately documented? ### Issues for supervisors — asset-quality-specific questions - Do recovery actions include adequate initiatives to identify impaired assets? - Do recovery actions include undertaking an asset quality review (if needed)? Are procedures adequately identified and documented? - Does the plan identify how impaired assets would be managed to maximize recovery value? - Does it contain measures to address problems that created asset impairment (e.g., strengthening credit risk management)? - Does it contain initiatives to prevent further deterioration in asset quality (e.g., ceasing to extend credit to poor quality borrowers)? *Source: 34. Indicative questions that supervisors could consider in reviewing the restoration points for recovery plans (IMF).* ### 57. Indicative questions that supervisors could consider in reviewing the critical ### 57. Indicative questions that supervisors could consider in reviewing the critical ### Critical function/service-related recovery actions - Key supervisory review questions for recovery plans: - Does the recovery plan identify all material critical functions and services, including the legal entities that perform each category of function and service and the legal jurisdiction in which it operates? - Does the recovery plan identify how the bank will maintain critical functions and services with minimal or no interruption? - How realistic are these recovery actions? - Have the recovery actions been prioritized? - Are the recovery actions supported by detailed implementation processes and IT arrangements? - Are they consistent with the bank’s BCP, where consistency would be expected? ### Other recovery actions - Indicative supervisory review questions: - Does the recovery plan include actions designed to identify and potentially remove persons from the bank/group to the extent that they are thought to have been part of the cause of the problem or are obstructing the recovery process? - Does the recovery plan identify actions to address possible intra-group contagion risk, particularly if the bank is part of a large group or financial conglomerate? - Does the recovery plan identify generic processes for reviewing and assessing the causes of the problem and the remedies to seek to avoid repeating the problem? ### Scenarios for recovery plans — General guidance - Standard supervisory regulation requires inclusion of three types of scenarios: - an idiosyncratic scenario—i.e., a scenario in which the bank has been impacted by financial shocks, such as major loan losses, liquidity events or operational risk losses, but where the financial system remains stable; - a market-wide scenario—i.e., where the financial system is in stress, such as in a severe recession, with many banks sustaining capital and liquidity pressures, and with the bank in question being similarly affected; and - a combined scenario, combining elements of the idiosyncratic and market-wide scenarios, which occur simultaneously; e.g., where the financial system is under stress and the bank in question sustains major losses. - Scenario content and design expectations: - Provide reasonably comprehensive descriptions of scenarios, including detailed information on the magnitude of impact on capital, profitability, asset quality and liquidity, together with all material assumptions made. - Include severe impacts on both capital and liquidity such that the bank’s minimum regulatory requirements for capital and liquidity are breached. - Prefer broad-based, high-level scenarios rather than overly specific narratives. Scenarios should provide relevant details for impacts on: - loan losses; - operation risk losses (if the scenario involves these; e.g., a fraud or money laundering event); - profits; - capital; - cash inflows and outflows; - liquidity position; and - losses (or gains) arising from market risks as a result of assumed changes in asset prices, interest rates and exchange rates. - Scenario analysis should identify all material assumptions, including macroeconomic variables and the state of the financial system. - Financial projections for each scenario should generally extend for two years from the point of initial impact and incorporate the financial impacts of recovery actions taken in the scenario. - Select recovery actions bearing in mind the scenario nature (e.g., raising capital or accessing interbank liquidity will be more challenging in market-wide or combined scenarios). - Scenarios should be informed by stress tests, particularly reverse stress tests that involve breaching the bank’s—and the group’s—minimum regulatory capital and liquidity ratios. - In the market-wide scenario, consideration should be given to including climate change impacts to the extent relevant to the bank’s risk profile. ### Scenarios for recovery plans — Issues to be assessed by supervisors - Indicative supervisory questions: - Does the recovery plan contain credible and severe scenarios, with clearly specified and quantified impacts on capital, liquidity, asset quality and profitability? - Do the scenarios include impacts on capital and liquidity that are severe enough to cause the bank to breach its minimum capital and liquidity regulatory requirements? - Are the scenarios based on the bank’s stress testing (especially reverse stress tests)? If so, are the assumptions and model parameters for the stress tests identified (either in the recovery plan or by reference to another document)? - Do the scenarios include financial projections for the bank and banking group extending out two years? - Are the financial projections supported by clearly identified assumptions? - Do the scenarios clearly differentiate between an idiosyncratic scenario (financial system operating normally and only the bank sustains major losses) and a market-wide scenario (many banks experiencing very adverse shocks)? - Does the recovery plan identify assumptions as to the different impacts that idiosyncratic and market-wide scenarios have on the nature, feasibility, timeframe, and success of recovery actions? - Does the recovery plan adequately identify the recovery actions taken for each scenario and incorporate the financial impacts of these actions into the financial projections? - Does the recovery plan differentiate between recovery actions needed for fast-moving events and slow-moving events, especially regarding impacts on liquidity and likely recovery strategies? ### Communications — General guidance - Communications must identify all stakeholders (internal and external), information needs by stakeholder category, and means to address those needs. - Communications actions should include proactive and reactive initiatives, including: - call center communications arrangements and upscaling for high volumes of calls; - web-based communications; - Q&A material; - communications with correspondent banks and other counterparties on matters relating to scheduled payments and settlements; - communications with credit rating agencies and the financial news media; - information and processes to facilitate news media briefings; and - guidance for communications via social media. - Recovery plans should address synchronized communications: the ability to announce recovery actions at the same time as announcing the adverse impact prompting those actions (critical for listed banks or where regulatory arrangements require prompt disclosure). - The recovery plan should identify responsibilities of the board, CEO, CFO, and other key officers in communications, coordination within the bank and group, and with relevant agencies. For financial conglomerates, guidance on coordination and message consistency across entities is required. ### Communications — Issues to be assessed by supervisors - Indicative supervisory questions: - Does the recovery plan identify all internal and external stakeholders? - Does the recovery plan set out stakeholder information needs in sufficient detail? - Does it set out how and when the information will be provided to each category of stakeholder? - Does the recovery plan cover communications via different processes and are these adequate, including communications via: - news media statements; - news media conferences; - social media; - call centers; - web-based information; - automated emails; and - telephone banking messaging? - Does the recovery plan contain communication process steps in sufficient detail? - Does the recovery plan identify who would be the lead communicators within the bank (including at board and senior management levels)? - Does it include draft material for news media releases, call center scripts, etc.? - Does the bank have a strategy to escalate call center capacity for high-volume calls? ### Preparatory measures — General guidance - To improve feasibility of recovery actions, banks should identify key inter-dependencies for each recovery action and preparatory measures to alleviate operational barriers and complexities (e.g., changes to organizational or legal structures, separation of critical functions, preparation of documentation and procedures facilitating capital issuance, securitization, asset sales and accessing liquidity via standby facilities). - The recovery plan should describe preparatory measures with a work program to implement them. ### Preparatory measures — Examples - Common preparatory measures include: - Share issuance term sheets, documentation, and issuance procedures—for ordinary shares, preference shares and hybrid instruments (e.g., subordinated debt capable of conversion to equity); - Subordinated debt term sheets, documentation, and issuance procedures, including tier 1 subordinated debt and tier 2 subordinated debt; - Term sheets and documentation for equity and debt underwriting agreements; - Identification of potential underwriters; - Identification of potential institutional investors; - Identification of potential merger partners and indicative procedures for merger; - Documentation and operational pre-positioning for securitization of loans; - Documentation and operational pre-positioning for asset sale and repurchase arrangements; - Procedures and arrangements needed to sell subsidiaries, if required; - Indicative shareholder resolutions and board resolutions for particular recovery actions; - Term sheets and documentation for liquidity stand-by facilities; - Draft indicative news media statements and Q&A material; - Documentation of service-level agreements for all outsourced services and critical shared services. ### Preparatory measures — Issues to be assessed by supervisors - Indicative supervisory questions: - Has the bank identified potential impediments to recovery actions that could be addressed through preparatory measures? - Has the bank identified the preparatory measures it intends to put in place? - Is the list of preparatory measures complete and comprehensive? - Does the bank have a work program to implement preparatory measures? Is the work program adequately structured and resourced? - What progress has been made in implementing preparatory measures? - Have the preparatory measures been approved by the board? - Has internal audit assessed the progress made in implementing preparatory measures? - Has there been any testing of the preparatory measures? ### Testing of recovery plans — General guidance - Rigorous testing of recovery plans is critical. Tests can evaluate: - the ability of the bank to detect emerging stress so that the triggers for the recovery plan can be invoked timely; - the bank’s ability to implement recovery actions relating to particular categories—capital, liquidity, asset quality, profitability, etc.; - the ability to communicate effectively with stakeholders (role-played); - the performance of senior management in their recovery responsibilities; - the board’s performance in its recovery responsibilities—especially high-level approvals and communication with external stakeholders and the financial news media; - the data systems required for recovery; - the legal documentation required for certain recovery actions; - the ability to implement recovery actions within specified timeframes, especially for time-critical actions; and - the degree of integration of the recovery plan with the bank’s risk management framework, ICAAP, BCP and governance arrangements. - Forms of testing: - “Walk-through” tests of processes and procedures for particular scenarios; - Live simulation exercises for particular elements of the recovery plan (e.g., capital, liquidity, or communications); - Full-scale live simulations to test the entirety of the recovery plan. - Senior management must be involved in substantive tests, each playing their own role; board members may be included for relevant elements (e.g., testing Board Chairperson’s communication under role-played media pressure). - Particular emphasis on testing senior management and board members’ capacity to communicate with role-played news media and financial markets under realistic time pressure. - The recovery plan should set out the framework for regular testing, including objectives, scope, responsible parties, processes and procedures for conducting tests, and means by which test results will be documented and reviewed by the board and internal audit. ### Testing of recovery plans — Issues to be assessed by supervisors - Indicative supervisory questions: - Has the bank identified proposed arrangements for testing the recovery plan on a regular basis? Has the bank specified clear objectives for testing? - Is the scope of testing sufficient? Does it cover all elements of the recovery plan? - Does testing include members of the senior management team (including CEO) and board? - Is Internal Audit involved in the testing process? - Is the frequency of testing sufficient? - Has an ‘owner’ for the testing process been identified? - Is the testing process adequately resourced? - Are external parties involved in the testing process? - Are the results of tests reported to the board and integrated into future revisions of the recovery plan? ### Review and update of the recovery plan — General guidance - Recovery plans should be subject to comprehensive and regular review—generally annually. - The recovery plan should identify internal review processes, including reviews by the risk management unit and internal audit, covering scenarios, triggers, recovery actions and governance arrangements; reviews should be informed by testing. - Occasional external reviews by independent experts can be helpful, particularly when external experts participate in regular tests and can assess adequacy of the plan and of management and board capabilities. ### Review and update — Issues to be assessed by supervisors - Indicative supervisory questions: - Has the bank set out the proposed arrangements for the regular review of recovery plans? Are the arrangements adequate? - Has an “owner” for the review process been identified? - How frequently is the recovery plan reviewed? - How will the review be integrated with the bank’s review of its risk management framework, risk appetite, ICAAP, and BCP, etc.? - What is the involvement of the CEO, EXCO, Board Risk Committee and the board in the review process? ### APPENDIX II. Guidance on the operationalization of resolution tools — 1. Sale of business - Preparatory items the resolution authority shall start preparing for the operationalization of the sale of business tool: - Legal advice on the suspension of any market information disclosure obligations by the resolution entity. - A policy to apply the rule that would allow not following the liquidation hierarchy and pari passu principle in a sale of shares, assets and/or liabilities. - Templates with the required information and rules to organize onsite visits (if needed) to support valuation 1 and 2. - List of pre-selected firms and draft contracts for the appointment of an external valuer. - Identification of internal experts in valuation for a possible appointment of an internal team for valuation 1. - Template with the information that a valuation 2 should include (the definition of potential perimeters—entity as a whole, by business lines or geographic activity, loan portfolios, shares, etc.—the possible value of the object of the sale: indicative commercial terms of the sale; etc.). - List of pre-selected firms and draft contracts for the appointment of an external advisor (investment bank or consultant company). - Draft of the resolution decision, considering any resolution power to be executed. - Template with the information that a vendor due diligence should contain. - Draft of confidentiality agreements. - Draft of the marketing decision. - Draft of the call of expression of interest in the sale process. - Rules to perform the nonbinding selection process. - Draft of the sale process letter. - Exchange information with the supervisory authority on the suitability assessment of potential bidders, including testing the effectiveness of the “rule on the simplified procedures regarding acquisition of significant shares of a commercial bank during resolution.” - Template with the content of the virtual data room. - Rules to select the winning bid. - Draft of the share/asset purchase agreement. - Draft of press releases and other communications. - Template with the information to be shared with the employee’s representatives. *Source: 1geoea2023001 - 57. Indicative questions that supervisors could consider in reviewing the critical* ### 2. Bridge bank ### 2. Bridge bank ### Operationalization of the bridge bank tool — preparatory tasks - Legal advice to set up a joint stock company and to draft the articles of association and other legal documents. - Clarification on who will be the bank’s owner. - Contacts with the department at the NBG in charge of providing the banking license. - In the context of resolution plans: work to get separability of banks. Structural and operational changes in the bank should be identified in advance. - List of pre-selected candidates for the bank’s valuation (including a draft for the request for proposal). - Legal analysis of the transfer of staff from the resolved bank and the cancellation and modification of contracts. - Legal assessment of other aspects of the transfer of assets and liabilities, including the tax implications. - Technical assessment and preparation of the funding of the bridge bank. - Technical assessment of the continuity of access to financial market infrastructures for the bridge bank. - List of pre-selected candidates for managing the bridge bank (including their draft contracts). - Exchange with the supervisory authority to ease the process to set the prudential requirements to the new bank (the transfer perimeter should be defined in advance and communicated to the supervisory authority). - Drafts of communication actions to give confidence to depositors, customers, employees, etc. ### Additional operational coordination and continuity measures - Contacts with institutions (payment systems, central counterparties, and other financial market infrastructures, etc.) that can play a role supporting the bank to ensure its operational continuity. ### Stakeholder communications and human resources - Drafts of communication actions to give confidence to depositors, customers, employees, etc. - Legal analysis of the transfer of staff from the resolved bank and the cancellation and modification of contracts. --- ### 3. Bail-in powers ### Operationalization of the bail-in tool — preparatory tasks - Templates with the required information and rules to organize onsite visits (if needed) to support valuation 1, 2 and 3. - List of pre-selected firms and draft contracts for the appointment of an external valuer. - Identification of internal experts in valuation for a possible appointment of an internal team for valuation 1. - Templates with the required information for the bail-in execution (updated Liabilities Data Report, additional data points, compulsory exclusions, etc.). - Draft for the resolution scheme, including: identification of the issuances affected by the write down or conversion; write-down of reserves, shares, relevant capital instruments and non-excluded liabilities; justification of discretionary exclusions; conversion of capital instruments into shares in a capital increase; determination of the rate of conversion to affected eligible instruments on the basis of the final valuation 2; suspension of trading of the instruments to be converted and written down; delisting and cancellation of the bailed-in shares; issuance and listing of the new shares; appointment a central securities depositary to keep the book-entry registers for the new shares; appointment of an agent bank to perform all the transactions underpinning the conversion and write-down of the capital instruments vis-à-vis the central securities depositaries where the relevant capital instruments are registered; date of effective application of the decision); specification of any other resolution powers applied in the decision; etc.). - Drafts for other decisions and communications. - Criteria for the removal and replacement by a special manager of the management body and the senior management of the institution. - Contacts with the SCG to clarify the whole process. - Template with the information to be shared with the employee representatives. - Draft of the business reorganization plan. ### Operational continuity and market infrastructure coordination - Contacts with institutions (payment systems, central counterparties, and other financial market infrastructures, etc.) that can play a role supporting the bank to ensure its operational continuity. --- ### Appendix III. Generic “playbook” content and structure ### Purpose and nature of a playbook - The term “playbook” is used here to refer to a document that sets out policies and procedures for undertaking key organizational functions. (Other comparable terms in common usage are “handbooks” and “manuals.”) - Playbooks are useful tools to help ensure an organization undertakes its functions in an organized, appropriate, and effective manner. - The core of a playbook is often detailed step-by-step procedures that guide the actions of the organization’s management and staff and provide clarity as to what individuals are expected to do. - Playbooks also need to incorporate policies adopted by the organization relevant to the subject. Policies generally guide the fulfillment of the organization’s legal responsibilities and activities and the use of its legal authorities and discretions. ### Possible structure for a playbook - Cover Page - Including (i) the name of the document and its subject; (ii) the responsible department (or division); (iii) the responsible individuals within the department; (iv) the date originally adopted and the dates of revisions/updates; and (v) the person to contact for questions regarding the document. - Background - Including (i) citation of legal provisions that relate to the subject, addressing the organization’s responsibilities, activities, authorities, discretions, and restrictions on the use of legal authorities; (ii) the organization’s internal delegations of institutional responsibilities to the relevant department; (iii) an overview of the department’s responsibilities and duties relevant to the subject (e.g., tasks that must be fulfilled, required reporting, etc.); and (iv) the general responsibilities and authorities of the specific managers and staff (i.e., who is responsible for what with respect to the subject). - Policies - If included as a separate section and not embedded in the procedures, describes the policies the organization or the department has adopted relevant to the subject, including citation of specific policy documents. - Procedures - Detailed step-by-step procedures to be followed in relation to the subject internally within the department, in collaboration with others in the organization (e.g., other departments), in collaboration with other organizations (e.g., other IFSC members) and with outside stakeholders (e.g., supervised firms, financial market participants, media and foreign supervisory authorities). - From front-line staff perspective, procedures specify duties and responsibilities, including (i) work that must be performed; (ii) factors that need to be considered or assessed; (iii) spreadsheets or documents that need to be completed; (iv) reports that need to be prepared; (v) required routine reporting to managers; and (vi) responsibilities for escalating issues, concerns, or problems to managers. Procedures also address steps for documenting the work, judgments, and decisions of front-line staff. - From management’s perspective, procedures specify duties and responsibilities, including (i) the authorities of the department’s managers (e.g., who decides what, who approves what, etc.); and (ii) requirements and steps for reporting upward to, and for obtaining required authorizations and approvals from, the organization’s senior management. Procedures specify requirements and steps for interacting with official institutions outside the organization and with other stakeholders. The procedures also address steps for documenting the work, judgments, and decisions of managers. - Playbook Maintenance Responsibilities - Specifies who is responsible for updating the playbook and keeping it current. This might be an individual or small team within the department. - Possible Annexes - Among these could be: (i) lists of relevant individuals, titles and contact information; (ii) procedure flowcharts or maps; (iii) templates for relevant documents (e.g., documents to be completed when undertaking analyses to ensure procedures are followed and relevant information has been considered, documents for notifications and reporting, documents for recording work, judgments and decisions, etc.); (iv) legal texts relevant to the playbook; and (v) list of relevant policy documents (if not included in a separate section). *Source: 1geoea2023001 - 2. Bridge bank* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1geoea2023001.pdf_