## Preface — IMF technical assistance mission to the Central Bank of Seychelles, January 16–20, 2023 ## Source details **Canonical URL:** [Preface — IMF technical assistance mission to the Central Bank of Seychelles, January 16–20, 2023](https://www.imf.org/-/media/files/publications/tar/2024/english/tarea2024054-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/tar/2024/english/tarea2024054-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/tar/2024/english/tarea2024054-print-pdf.pdf.json) --- ### Mission and participants - Joint IMF TA mission from Monetary and Capital Markets (MCM) and Legal (LEG) Departments conducted virtually during January 16–20, 2023. - Objective: provide policy and legal guidance to the Central Bank of Seychelles (CBS) on drafting legal amendments to provide an adequate institutional framework and effective powers for bank resolution, limit public-fund usage, and address moral hazard concerns. - Mission chief: Ms. Hanife Yesim Aydin (MCM). - Team members: Ms. Chia Yi Tan (LEG); Messrs. Sean Kerr (LEG STX); Geoffrey Mortlock (MCM STX). - CBS participants included First Deputy Governor Brian Commettant; Second Deputy Governor Jenifer Sullivan; Financial Surveillance Division staff; Legal Unit Senior Legal Officer Tanya Thyroomoody. - CBS prepared a self-assessment of the current resolution framework against the FSB Key Attributes (KAs). ### Key findings from the executive summary - Overall focus: high-level advice on main components of a prospective resolution regime for banks to guide legal drafting of bank resolution amendments by the CBS. - Contextual points: - Seychelles’ banking system reform agenda is part of the Extended Fund Facility (EFF) program. - A policy paper on the Bank Resolution Bill was submitted to the Cabinet in October 2022. - A Bank Resolution bill is planned to be submitted to the Cabinet for approval by end-September 2023. *Findings and policy gaps (selected):* - Current framework provides corrective supervisory actions but lacks a clear escalated early-intervention structure and forward-looking triggers. - CBS lacks statutory powers for bank resolution aligned with the FSB KAs: missing statutory objectives, PONV triggers, resolution tools, and safeguards (including NCWOL). - FIA constrains implementation of key resolution options: sale of business (P&A), bridge bank, recapitalization via loss allocation to creditors. - CBS is not satisfactorily designated as a resolution authority with governance, transparency, operational independence, and accountability provisions. - Absence of a deposit insurance scheme (DIS); depositor preference exists up to R10,000 per account. - Inadequate loss-absorbing capacity (LAC) for DSIBs implies likely need for external funding in a DSIB resolution. - Domestic coordination and cross-border cooperation frameworks have important shortcomings. *Priorities emphasized by the mission (selected):* - Establish a Resolution Unit (RU) separate from Supervision. - Draft a stand-alone Bank Resolution Law aligned with the KAs. - Develop a resolution manual and commence resolution planning and resolvability assessments. - Pilot recovery planning with DSIBs; consider DIS assessment and depositor protection reforms. - Strengthen ELA legal framework and internal guidance. - Develop a public-funding framework with MOF oversight and exit strategy. --- ### Key recommendations (selected items from Table 1; preserve priority and timeframe) - Draft the proposed new Bank Resolution Law aligned to the FSB Key Attributes. (Paragraph Reference 24) Priority: H; Timeframe: NT - Evaluate the case for establishing deposit insurance in conjunction with strengthening depositor preference arrangements. (Paragraph Reference 27) Priority: H; Timeframe: MT - Strengthen capacity for early detection through EWI and stress testing integrated into off-site supervision. (Paragraphs 10, 11) Priority: H; Timeframe: MT - Develop a more structured early intervention framework with escalating triggers and supervisory responses. (Paragraph 10) Priority: H; Timeframe: MT - Develop prudential requirements and more detailed guidance for recovery planning for all banks. (Paragraphs 12, 13, 14) Priority: H; Timeframe: NT - Introduce recovery planning requirements starting with DSIBs, then extend to smaller banks in simplified form. (Paragraphs 14, 15) Priority: H; Timeframe: MT - Tighten legal framework for ELA and develop internal guidance, indicative documentation and terms and conditions for ELA. (Paragraph 17) Priority: H; Timeframe: NT - Strengthen separation between supervisory and resolution functions and ensure adequate resources. (Paragraph 30) Priority: H; Timeframe: NT - Develop a comprehensive resolution manual. (Paragraph 31) Priority: H; Timeframe: NT - Develop jointly between MOF and CBS a framework for using public funding in resolution with robust safeguards and ex-post recovery mechanism. (Paragraphs 41, 42, 43, 44) Priority: M; Timeframe: MT - Strengthen CBS engagement with home supervisory and resolution authorities on cross-border recovery and resolution. (Paragraphs 50, 51, 52) Priority: H; Timeframe: MT - Undertake senior management workshops, staff training and, after new framework is in place, a crisis management simulation exercise involving all relevant domestic agencies. (Paragraph 53) Priority: H; Timeframe: MT --- ### Seychelles banking system — size, structure, and key statistics ### Banking system size and market structure - Total assets of the Seychelles’ banking system are estimated to be 116 percent of the GDP, as of September 2022. - Eight licensed commercial banks, seven active. - Three active banks are subsidiaries and two are branches of foreign-owned banks. - Total assets of the three largest banks correspond to 86.1 percent of the total assets in the banking system. - 86.7 percent of total deposits are held by the three largest banks. - Two of the three largest banks are subsidiaries of foreign banks and the other one is a state-owned bank. - Subsidiaries of foreign banks hold 55.7 percent of assets and 55.9 percent of deposits. - Branches of foreign banks correspond to 4.6 percent of total assets and 4 percent of total deposits. ### Capitalization, assets and asset quality - Average reported capital adequacy ratio (CAR) was about 20 percent at end-December 2022. - Nonperforming loans (NPLs) increased from 5.4 percent in January 2022 to 7.6 percent in December 2022. - NPLs concentrated in the tourism sector. - Banks principally deposit funded: total deposits correspond to 86.8 percent of total liabilities. - Total assets dominated by loans and balances with international institutions abroad, accounting for 30.6 percent and 30.3 percent of total assets, respectively. - Banking system has a simple balance sheet structure; no complex financial instruments or exposures. ### Dollarization and FX exposure - Fifty percent of total liabilities are in foreign exchange (FX). - 52 percent of deposits are in FX. - 42 percent of total assets are in FX. - 24 percent of loans are in FX. - FX exposure limit: total short and long positions capped at 30 percent of bank capital (policy framework). - In practice banks do not extend FX credit to firms without FX earnings; current regulations provide no guidance on FX loans. - Banks in Seychelles do not have any interest rate or cross-currency swaps. ### Financial safety net and depositor protection - Financial safety net institutions: - CBS: regulator/supervisor of commercial banks, bureaux de change, credit unions, payment service providers, financial leasing companies, FMIs, and nonbank credit-granting organizations. - Financial Services Authority (FSA): regulator of nonbank financial services, fiduciary services, capital markets, collective investment schemes, and insurance. - Ministry of Finance (MOF): oversees effective operationalization of the financial safety net. - No deposit insurance scheme (DIS) in place; depositor preference exists for deposits up to R10,000 per account. - Authorities are considering possible establishment of a DIS or strengthening depositor preference. --- ### Early intervention, recovery planning, and supervisory tooling ### Findings on early intervention and recovery framework - Section 53 of the FIA provides corrective actions (written warnings; calling shareholder/administrator meetings; written orders including cease and desist; special prudential requirements; suspension of dividends; appointment of adviser/external auditor; temporary/permanent suspension of administrators; appointment of a reorganizing agent and revocation of license). - Authorities’ policy paper proposes strengthened early intervention powers: require implementation of recovery plan, removal/replacement of administrators/senior managers, appoint provisional administrator at bank’s expense, and broader CBS interventions to remediate banks. - CBS is reviewing Section 53 to include recapitalization by existing shareholders, changes to business practices, limits on exposures. - Problem-bank identification relies on offsite monitoring, trend analysis, and CAMELS; risk-based supervision (RBS) being implemented. - CBS does not currently use an EWS; stress testing not used regularly for early detection; no internal contingency plans for bank stress. - Recovery plans are not yet mandated; CBS intends to introduce recovery planning requirements. ### Recommendations for early intervention and recovery planning - Clarify blurred lines between normal supervision and early intervention in the FIA; establish forward-looking early intervention triggers (qualitative and quantitative) without being unduly prescriptive. - Develop a formalized Early Warning System (EWS) comprising a range of EWIs integrated into off-site supervision. - Strengthen FIA to allow escalated early-intervention structure tied to specified triggers. - Develop internal guidance on a formalized early intervention framework (preventative and corrective actions). - Develop contingency plans for emerging stress and undertake regular testing of capacity to apply early intervention. - Require banks to maintain recovery plans that comply with CBS requirements; start with pilot program for largest DSIBs and extend simplified requirements to smaller banks. - Prepare a policy paper on recovery plans covering structure, triggers, links to EWIs, restoration points, critical functions, recovery actions, scenarios, review and testing. - DSIBs to conduct reverse stress tests; banks to use stress-test results to calibrate risk appetite, capital and liquidity buffers. - Branches of foreign banks to have recovery plans closely integrated with parent; subsidiaries to have own plans highlighting parent support and independent recovery actions. - Develop internal guidance for supervisors on assessment and activation of recovery plans. --- ### Emergency Liquidity Assistance (ELA) ### Findings - Current framework allows CBS to provide ELA to deposit-taking institutions with severe and persistent liquidity problems but lacks adequate safeguards regarding solvency or restoration prospects. - Banks must meet reserve requirements and pass a solvency test to access ELA. - CBS drafting an ELA Agreement specifying terms and conditions. - Current framework does not authorize CBS to provide ELA to a bank in resolution. - CBS has not tested readiness to handle ELA requests. ### Recommendations on ELA - Revise Central Bank of Seychelles Act to include ELA provisions and safeguards; clarify ELA is discretionary to solvent banks with temporary liquidity shortfalls expected to remain viable over the medium term. - Prioritize development of internal guidance: indicative terms and conditions, collateral eligibility, price haircuts, communications, and exit arrangements. - Provide ELA to solvent and viable banks against CBS-specified collateral at appropriate penalty interest rates. - Require recipient bank to present remedial program to restore liquidity and address causes. - In exceptional cases of doubtful solvency or inadequate collateral, require government indemnity to protect CBS balance sheet. - Ensure banks are pre-positioned to enable CBS access to loan portfolios and other assets as collateral where other collateral exhausted. - Undertake regular simulation testing of ELA implementation. - Strengthen host authority role for foreign banks: dialogue with home central banks, monitor intra-group contingency plans, incorporate safeguards to ensure ELA remains within domestic subsidiaries/branches. - Legally empower CBS to provide ELA in FX to the extent FX reserves permit; consider swap arrangements with another central bank. - Prefer parent liquidity provision for foreign-owned banks; require higher scrutiny for branches and evidence from parent/home authority if ELA in FX considered. --- ### Bank resolution law, institutional design, and resolution powers ### Findings on current law and deficiencies - FIA authorizes CBS to take possession of a bank and decide within 30 days whether to reorganize, liquidate, or terminate possession; reorganizing agent must prepare reorganization plan subject to stakeholder objections and Supreme Court approval. - Current framework lacks KAs-aligned statutory objectives, clear triggers for resolution, and powers for a range of resolution options (sale of business, bridge bank, recapitalization with creditor loss allocation). - Excessive dependence on court-based processes risks delay and court-driven reversals. - Law lacks framework for temporary stay on contractual termination rights and lacks NCWOL safeguards and clear treatment of set-off, netting, and collateral. ### Proposed legislative reform and institutional design - CBS proposed major legislative reforms to establish a new Bank Resolution Law broadly aligned to the KAs and to designate CBS as resolution authority. - IMF view: a stand-alone Bank Resolution Law may be simpler and aid interpretation, but will require consequential amendments to existing legislation (notably the FIA). IMF provided a draft high-level outline (Appendix III in source). - Law should formally designate CBS as resolution authority and empower CBS to: - initiate resolution at a defined point of nonviability (PONV) well before insolvency; - implement resolution strategies and tools: recapitalization (bail-in if feasible), sale of business (P&A), bridge bank, closure and payout; - apply resolution powers to banks, branches, subsidiaries, holding companies, and non-regulated operational entities significant to operations; - implement resolution tools without court approval and limit courts to ex post compensation consistent with NCWOL. ### Core legal features and safeguards - Include NCWOL principle with requirement for independent ex post valuation to establish the counterfactual and a right to compensation equal to any shortfall relative to liquidation. - Provide legal clarity on set-off, contractual netting and collateral arrangements and protections for customer property rights and financial collateral. - Provide powers to temporarily suspend obligations, restrict enforcement of security, and temporarily suspend termination rights (subject to time limits and continuation of bank obligations). - Limit ex ante judicial review of nonviability and resolution decisions where constitutionally possible; preserve ex post review limited to compensation without automatic suspensive effect. ### Institutional separation and RU design - Ensure clear separation between supervision and resolution within CBS to minimize conflicts of interest. - Establish a Resolution Unit (RU) operationally separate from Surveillance Division with: - distinct responsibilities to develop Bank Resolution Law, resolution manual, framework for resolution planning and resolvability assessments; - mandate to manage bank resolution and undertake regular training and simulations; - separate reporting lines to different deputy governors, adequate staffing and budget, and ability to hire external resources. - RU to have access to confidential supervisory information and close consultation with Surveillance Division. --- ### Resolution planning, resolvability assessments, and resolution manual ### RU deliverables and sequencing (timelines preserved) - Develop a resolution manual/toolkit over the next 12 to 18 months covering: - assessment of bank viability (asset quality reviews, solvency assessments, stress testing); - resolution options by bank category (recapitalization, bridge bank, P&A, depositor payout); - selection criteria for strategy (systemic importance, form of incorporation, ownership); - procedures for entry into resolution and step-by-step implementation; - coordination between home and host resolution authorities and domestic coordination (CBS and MOF); - communications with stakeholders at each stage; - exit from resolution (including exit by the government where it provided equity or debt funding). - After the manual, develop a framework for resolution plans and resolvability assessments for DSIBs: - Resolvability assessments identify how to resolve a bank cost-effectively while maintaining financial system stability and should be reviewed regularly. - Bank-specific resolution plans for SIBs should be based on resolvability assessments and main strategies (recapitalization using bail-in and external funding or transferring critical functions to a bridge bank). - Suggested sequencing: - Prepare a consultation paper for DSIBs with draft data template, hold a workshop, finalize template. - Start with a domestically owned DSIB as a pilot to avoid cross-border complexities and refine process. ### Resolvability assessment framework: key components - Assess: - existing capital structure and availability of contractual bail-in debt; - estimated maximum losses and capital shortfalls across severe shocks (reverse stress tests); - availability of debt for contractual or statutory bail-in; - feasibility of diluting shareholders and executing bail-in; - identification and location of critical functions and services and feasibility of separating them; - participation in payment and settlement systems and implications of resolution; - fast-track licensing steps for bridge bank solutions; - termination rights of counterparties and means to avoid disorderly termination; - funding requirements and sources for each resolution option. --- ### Resolution funding, public funding framework, and LAC ### Findings on funding - Policy paper provides for temporary government funding where necessary to maintain financial stability, provided private sources are exhausted. - Government recovery of losses: government should recover outlays from failed bank and shareholders via reduced consideration in share sales, repayment from cashflows of the resolved bank and liquidation estate, or sale of government shares on commercial terms. - Inadequate LAC implies resolution of DSIB will likely require external funding. - Seychelles lacks a DIS usable for resolution funding; absence of a funding mechanism risks ad hoc public funding at greater taxpayer cost. ### Recommended approaches and design considerations (preserve exactly) - Two recommended approaches: - Develop a legislative framework under which public funding for resolution purposes could be provided, subject to robust preconditions and safeguards (could be done in the proposed resolution law). - Prepare a contingency plan that sets out a draft law or other mechanism for public funding, to be enacted if necessary, to avoid emergency legislation in crisis without prior consideration. - Recommended design considerations for a funding mechanism (preserve exactly): - a clear set of statutory objectives for the provision of any financial assistance, anchored to maintaining financial system stability; - a requirement that all estimated losses in the failed bank have been allocated to shareholders and subordinated creditors, and other senior unsecured creditors to the extent practicable, before external resolution funds are considered; - the identification of the purposes for which public funding may be provided; - conditionality attached to any such funding (including guarantees and indemnities); - powers to recover funding outlays (including any fees and interest costs) from the cashflows of the resolved bank and assets of the insolvency estate of the failed bank; and - powers to levy banks to recover the net present value of any funding outlays not recovered from the cashflows of the resolved bank and assets of the insolvency estate. ### Central bank funding limits and CBS internal policies - Critical that CBS balance sheet is not used as a funding source for solvency support. - If public funding for solvency support is provided as an exceptional, last-resort measure, it should be provided by the government under oversight of the Minister of Finance, and not through the CBS. - Central bank funding should only be used for liquidity support, with safeguards to protect the central bank balance sheet, and not for solvency or risk absorption. - Mission recommends CBS develop internal policies for lending to a bank in resolution addressing: - preconditions for lending; - processes for determining solvency/capital adequacy and likely restoration; - purposes for lending; - eligible collateral (including parent collateral and need for government indemnities); - terms and conditions of lending; - exit arrangements; and - disclosure and communications arrangements. ### Exit strategy for public funding - CBS and MOF must identify exit strategy: public funding and ownership should be temporary; government shares should be sold to private sector interests as soon as market conditions permit. - Factors in exit planning: - options and timeframe for sale of government shares with view to maximizing recoveries and ensuring sound ownership/governance; - repayment schedule for any government debt funding to recover full NPV of debt and interest as soon as practicable without destabilizing parties; - termination of guarantees and indemnities as soon as practicable and recovery of funds arising from claims under guarantees and indemnities; - termination of any ELA provided by the CBS. --- ### Depositor protection, domestic coordination, cross-border cooperation, and capacity building ### Depositor protection — findings and recommendations - Seychelles lacks an effective depositor protection framework; depositor preference up to R 10,000 per depositor applies in liquidation. - Absence of effective depositor protection creates risks of depositor runs, inter-bank contagion, and political pressure for taxpayer-funded rescues. - Recommendation: undertake thorough assessment of options for more effective depositor protection, possibly including: - a new DIS with a “paybox plus” mandate, coupled with a recalibrated depositor preference framework. - Further MCM TA could be considered. ### Domestic coordination — findings and recommendations - Current domestic coordination arrangements have important shortcomings; no explicit formal arrangements for information exchange and coordination between CBS, MOF, and other agencies for bank resolution. - CBS has bilateral MoUs with FSA and PEMC and a tripartite MoU with FSA and FIU; FSC chaired by CBS, represented by MOF, FSA, and FIU. - Recommendation: strengthen inter-agency cooperation; FSC should be advisory for information sharing and coordination, not decision-making; protect independence of member agencies. - Establish FSC working group for bank resolution reporting; develop multilateral MoU setting responsibilities and coordination for all stages of bank resolution. ### Cross-border cooperation — findings and recommendations - Minimal arrangements currently for cross-border cooperation on resolution. - CBS has two MoUs with home authorities for supervisory purposes but none explicitly covering resolution. - Recommendations: - Resolution Law should require CBS to decide whether to recognize, refuse or partially recognize foreign resolution action affecting a Seychelles branch. - Enable legal powers to recognize home authority resolution actions in Seychelles subject to financial stability and depositor protection objectives. - Empower CBS to establish working relationships, sign MoUs and exchange information with foreign resolution authorities. - For foreign-owned DSIBs, work closely with home resolution authorities and identify matters where legal recognition in Seychelles is needed; develop fallback resolution plans if home actions diverge from host objectives. ### Capacity building - Ongoing capacity building: regular staff training and senior management workshops. - CBS should fund training program for resolution staff with annual workshops including supervision, MOF and other safety-net players. - BIS-IMF Bank Resolution Online Course (BROC) recommended; crisis-simulation exercises (e.g., “resolution weekend”) to train/test short-timeframe resolution capability. --- ### Recovery plan guidance and supervisory review — excerpts (Appendix I and supervisory appendices) ### Recovery plan objectives (preserve exactly) - a. restore itself to financial soundness and compliance with prudential requirements within a short period following adverse shocks to capital, liquidity or other financial impairment, or in anticipation of such impairment; - b. maintain in an uninterrupted manner all critical functions and services, and ensure that operational support is provided to any entities in the banking group that perform such functions or services; - c. restore and maintain market confidence in the bank; and - d. remedy the factors that caused the bank to sustain a fall in capital, liquidity, profitability or asset quality so as to minimize the risk of recurrence. ### Principles and structure - Recovery plans should be Timely, Comprehensive, Credible, and Integrated. - Preparation requires a whole-of-bank work program with senior-level working group (Finance, Treasury, IT/Operations, Risk, Legal, Compliance, Communications, Internal Audit). - Governance: Board Risk Committee leads review/approval; Board Audit Committee ensures testing processes and internal audit involvement. ### Triggers and EWIs - Triggers must enable invocation before breach of prudential requirements; capital and liquidity triggers “set at a comfortable margin above minimum capital ratio requirements.” - EWIs should cover capital, liquidity, asset quality, profitability and qualitative triggers (e.g., requests for early redemption, difficulties issuing liabilities, unexpected loss of senior management, adverse court rulings, negative market commentary, fraud). - Indicative EWI examples by category preserved in source text (see capital, liquidity, asset quality, profitability lists). ### Scenarios, restoration points, and recovery actions - Scenario types: idiosyncratic, systemic, hybrid; include fast-burn and slow-burn stresses. - Example worst-case scenario: “a reduction in capital (including CET1, tier 1 and total capital) to 50 percent of the minimum required capital ratios and a fall in liquidity to 50 percent of the applicable liquidity requirement.” - Restoration points: minimum to meet regulatory requirements; often set higher to restore confidence. Restoration points should reference CET1, Tier 1, total capital ratios, LCR or other applicable liquidity ratio, profitability (ROA/ROE), and asset quality indicators. - Recovery actions must be detailed with quantified contributions to capital/liquidity, timeframes (desirably within three months, no more than six months for capital), implementation procedures, documentation, legal/regulatory steps, and delegated authorities. - Capital recovery options include rights issues, private placements, conversion/write-down of debt with contractual provisions, suspension of distributions, asset sales, sale of subsidiaries, and issuance of Tier 2 eligible debt. - Liquidity recovery options prioritized by speed (hours/days): sell marketable securities, obtain liquid assets from controlling shareholders, committed standby facilities from other banks, borrow from central bank under business-as-usual facilities, repo/SAP arrangements, shorten asset maturity profiles, reduce new lending. - All liquidity recovery actions should be quantified in terms of estimated impact on liquidity and documented. ### Testing, review and supervisory review - Recovery plans must be rigorously tested: walk-throughs, live simulations, full-scale simulations; senior management must participate; boards may be included. - Recovery plans should be reviewed at least annually; internal audit and occasional external independent reviews recommended. - Supervisory review checklist and indicative questions provided to assess executive summary, governance, integration with risk management, overview and critical functions, triggers, restoration points, recovery options, scenarios, communications, preparatory measures, testing and review processes. --- ### Resolution tools, options, and implementation features (excerpts) ### Minimum law coverage and tools - Law should list resolution tools and provide detail for: - sale of business tool (P&A); - bridge bank tool; - bail-in tool (write-down/conversion of liabilities); - temporary public support tool (state purchase/recapitalization). - Law should be “future-proof” and include powers that may not be used immediately. ### Operational mechanics and safeguards - Conceptual distinction between bail-in and write-down/conversion of capital instruments; write-down/conversion should precede or accompany use of resolution tools. - Scope/exclusions for bail-in should explicitly exclude at least insured deposits (or preferred deposit amounts where depositor preference applies), secured liabilities to the extent of collateral value, short-maturity interbank liabilities (<7 days), employee fixed salary, and trade creditors providing critical services. - Temporary public support must be conditioned on significant private loss absorption (example standard: shareholders and creditors absorb losses worth 8% of total liabilities including own funds—EU example). - Resolution manual should include crisis diagnostics, selection of resolution strategy by bank category, step-by-step implementation plans, and cross-border cooperation guidance. ### No creditor worse off (NCWOL) and valuation - Include NCWOL and require independent ex post valuation to establish counterfactual; right to compensation equal to any shortfall. ### Cross-border recognition and fallback - CBS must be empowered to recognize, refuse, or partially recognize foreign resolution actions affecting Seychelles branches, with statutory presumption in favour of recognition except on select grounds (harm to Seychelles financial stability, material fiscal implications, worse treatment of Seychelles creditors). - Host fallback options should be prepared where home actions do not meet host objectives (recapitalize subsidiary via bail-in, transfer critical functions to bridge bank, or wind down if not systemic). --- *IMF | Technical Report (content unit: tarea2024054-print-pdf).* ### Preface................................................................................................................. ### Preface ### Mission and Participants - A joint IMF technical assistance (TA) mission from the Monetary and Capital Markets (MCM) and Legal (LEG) Departments was conducted virtually during January 16–20, 2023. - Mission objective: provide policy and legal guidance to the Central Bank of Seychelles (CBS) on drafting legal amendments to provide an adequate institutional framework and effective powers for bank resolution, limit public-fund usage, and address moral hazard concerns. - Mission leadership and team: - Mission chief: Ms. Hanife Yesim Aydin (MCM) - Team members: Ms. Chia Yi Tan (LEG); Messrs. Sean Kerr (LEG STX); Geoffrey Mortlock (MCM STX). - CBS officials met included: - Brian Commettant (First Deputy Governor) and Jenifer Sullivan (Second Deputy Governor). - Financial Surveillance Division attendees: Franchesca Melanie; Nathalie Violette; Vivienne Volcere; Tyron Scholastique; Joan Lespoir; Lynn Commettant; Gino Albert; Sheryl Laporte; Selma Valentin; Shirlee Agricole; Edouard Rose; Diandra Cedras; Nadine Boniface; Sammia Marchesseau. - Legal Unit attendee: Tanya Thyroomoody (Senior Legal Officer). - The mission benefited from CBS preparations, including a self-assessment of the current resolution framework against the Financial Stability Board (FSB) Key Attributes of Effective Resolution Regimes for Financial Institutions (KAs). ### Key Findings from the Executive Summary - Overall focus: high-level advice on main components of a prospective resolution regime for banks to guide legal drafting of bank resolution amendments by the CBS. - Context: - Seychelles’ banking system is undergoing regulatory reforms as part of the Extended Fund Facility (EFF) program. - A policy paper on the Bank Resolution Bill was submitted to the Cabinet in October 2022. - A Bank Resolution bill is planned to be submitted to the Cabinet for approval by end-September 2023. - Early intervention and supervision: - Current legal framework provides corrective actions but lacks an escalated structure commensurate with severity of situations. - Policy paper proposes strengthened early intervention powers: require recapitalization by existing shareholders, mandatory changes to business practices, limits on exposures. - Recommendation: clarify blurred lines between normal supervision and early intervention measures; establish forward-looking early intervention triggers with qualitative and quantitative triggers without being unduly prescriptive. - Essential tools: Effective early warning systems (EWS), stress tests, simulation testing. - Recovery planning: - Recommend statutory power to require banks to maintain recovery plans that comply with CBS requirements. - Suggest issuance of a policy paper on recovery planning setting expectations on structure and content (integration into risk management, recovery triggers, links to EWIs, restoration points, critical functions, recovery actions, scenario development, review and testing, governance). - Pilot program for recovery plans focusing on largest DSIBs; extend simpler requirements to smaller banks; branches of foreign banks must have recovery plans integrated with parent; subsidiaries to have their own plans. - Emergency Liquidity Assistance (ELA): - Current framework allows ELA to deposit-taking institutions with severe and persistent liquidity problems with inadequate safeguards. - Recommend clarifying ELA provision to solvent banks with temporary liquidity shortfalls and development of internal guidance, indicative documentation, and terms and conditions for ELA. - Exceptional ELA to an entity with doubtful solvency or inadequate collateral should be covered by a government indemnity. - Rules for liquidity to a bank in resolution under government indemnity need clarification. - Bank resolution framework and institutional design: - Current framework falls considerably short of the KAs: lacks statutory objectives, triggers for entry into resolution, powers for resolution options, and safeguards balancing public policy and stakeholder interests. - Current Financial Institutions Act (FIA) constrains resolution options; CBS not sufficiently designated as resolution authority with governance, transparency, operational independence, accountability provisions. - CBS proposed major legislative reforms to establish a new Bank Resolution law broadly aligned with the KAs and to designate CBS as resolution authority. - Mission recommendation: draft a stand-alone Bank Resolution law with consequential amendments to existing legislation, empower CBS to initiate resolution at a defined point of nonviability (PONV) and implement resolution strategies and tools applicable to banks, branches, subsidiaries, holding companies, and non-regulated operational entities significant to bank operations. - Recommend clear separation between supervision and resolution within CBS; establish a Resolution Unit (RU) operationally separate from Surveillance Division with separate reporting lines to different Deputy Governors. - Resolution planning and resolvability: - RU to develop a resolution manual/toolkit covering entry into resolution, selection of strategy, implementation of tools, and associated safeguards. - Commence resolution planning and resolvability assessments, starting with consultation paper and a pilot with a domestically owned DSIB. - Resolution funding and public funding framework: - Inadequate loss-absorbing capacity (LAC) implies resolution of a DSIB will likely require external funding. - Absence of a funding mechanism risks ad hoc public funding at potentially greater taxpayer cost. - Recommendation: CBS and Ministry of Finance (MOF) develop a framework governing use of temporary public funding for resolution, with government-provided solvency restoration funding under MOF oversight and strict conditionality; central bank funding should only be used for liquidity support and not solvency or risk absorption; public funding arrangements should include an exit strategy. - Deposit insurance and depositor protection: - Absence of deposit insurance exacerbates risks to financial stability and increases political pressure for government-funded rescues. - Recommendation: undertake assessment of depositor protection arrangements, evaluate depositor preference arrangements, and give further consideration to some form of deposit insurance. - Domestic and cross-border coordination: - Existing domestic coordination and cross-border cooperation frameworks have important shortcomings. - Financial Stability Committee (FSC) should be advisory, advance information sharing, and have crisis-management role formalized; independence of FSC member agencies should be protected. - Bank Resolution Law should enable CBS to recognize foreign resolution action affecting a Seychelles branch or take domestic actions consistent with foreign measures. - For foreign-owned DSIBs, CBS should work closely with home resolution authorities and consider legal recognition in Seychelles contingent on meeting Seychelles’ resolution objectives. ### Key Recommendations (selected from Table 1) - Bank Resolution Law: - Draft the proposed new Bank Resolution Law aligned to the FSB Key Attributes, subject to compatibility with Seychelles’ institutional arrangements. (Paragraph Reference 24) Priority: H; Timeframe: NT - Evaluate the case for establishing deposit insurance in conjunction with strengthening depositor preference arrangements. (Paragraph Reference 27) Priority: H; Timeframe: MT - Early Intervention, Recovery Planning, Emergency Liquidity Assistance: - Strengthen capacity for early detection through EWI and stress testing integrated into off-site supervision. (Paragraphs 10, 11) Priority: H; Timeframe: MT - Develop a more structured early intervention framework with escalating triggers and supervisory responses. (Paragraph 10) Priority: H; Timeframe: MT - Undertake regular testing of CBS capacity to apply early intervention. (Paragraph 10) Priority: M; Timeframe: MT - Develop prudential requirements and more detailed guidance for recovery planning for all banks. (Paragraphs 12, 13, 14) Priority: H; Timeframe: NT - Introduce recovery planning requirements starting with DSIBs, then extend to smaller banks in simplified form. (Paragraphs 14, 15) Priority: H; Timeframe: MT - Develop internal guidance for supervisors on assessment of recovery plans and integrate activation into early intervention. (Paragraph 15) Priority: H; Timeframe: MT - Tighten legal framework for ELA and develop internal guidance, indicative documentation and terms and conditions for ELA. (Paragraph 17) Priority: H; Timeframe: NT - Resolution, Resolution Planning, and Crisis Management: - Strengthen separation between supervisory and resolution functions and ensure adequate resources. (Paragraph 30) Priority: H; Timeframe: NT - Develop a comprehensive resolution manual. (Paragraph 31) Priority: H; Timeframe: NT - Develop framework for resolvability assessments and resolution plans for DSIBs. (Paragraphs 32, 33, 34, 35) Priority: M; Timeframe: MT - Develop jointly between MOF and CBS a framework for using public funding in resolution with robust safeguards and ex-post recovery mechanism. (Paragraphs 41, 42, 43, 44) Priority: M; Timeframe: MT - Strengthen domestic cooperation through FSC, MoU and inter-agency working group. (Paragraph 48) Priority: M; Timeframe: MT - Strengthen CBS engagement with home supervisory and resolution authorities on cross-border recovery and resolution. (Paragraphs 50, 51, 52) Priority: H; Timeframe: MT - Capacity Building and Testing: - Undertake senior management workshops, staff training and, after new framework is in place, a crisis management simulation exercise involving all relevant domestic agencies. (Paragraph 53) Priority: H; Timeframe: MT *Preface — IMF technical assistance mission to the Central Bank of Seychelles, January 16–20, 2023.* ### 1. Seychelles has a large, bank-dominated financial system. The size of total assets of the ### 1. Seychelles has a large, bank-dominated financial system. The size of total assets of the ### Banking system size and structure - Total assets of the Seychelles’ banking system are estimated to be 116 percent of the GDP, as of September 2022. - There are eight licensed commercial banks, seven of them being active in the system. - Three of these active banks are subsidiaries and two of them are branches of foreign-owned banks. - Total assets of the three largest banks correspond to 86.1 percent of the total assets in the banking system. - 86.7 percent of total deposits are held by the three largest banks. - Two of the three largest banks are subsidiaries of foreign banks and the other one is a state-owned bank. - Subsidiaries of foreign banks hold 55.7 percent of assets and 55.9 percent of deposits. - Branches of foreign banks correspond to 4.6 percent of total assets and 4 percent of total deposits. ### Capitalization, asset composition, and asset quality - The average reported capital adequacy ratio (CAR) was about 20 percent at end-December 2022. - Nonperforming loans (NPLs) increased from 5.4 percent in January 2022 to 7.6 percent in December 2022. - NPLs are concentrated in the tourism sector. - Banks are principally deposit funded, with total deposits corresponding to 86.8 percent of total liabilities. - Total assets are dominated by loans and balances with international institutions abroad, accounting for 30.6 percent and 30.3 percent of total assets, respectively. - The banking system has a simple balance sheet structure; banks do not have complex financial instruments or exposures. ### Dollarization and foreign currency exposures - Fifty percent of total liabilities are in foreign exchange (FX). - 52 percent of deposits are in FX. - 42 percent of total assets are in FX. - 24 percent of loans are in FX. - The policy framework stipulates a foreign exchange exposure limit on each of the total short and long positions as 30 percent of bank capital. - In practice banks do not extend foreign currency credit to firms without foreign exchange earnings, but current banking regulations do not provide any guidance on foreign exchange loans. - Banks in Seychelles do not have any interest rate or cross-currency swaps. ### Financial safety net and regulatory roles - The financial safety net comprises three institutions: - The CBS is mandated to regulate and supervise commercial banks, bureaux de change, credit unions, payment service providers, financial leasing companies, financial market infrastructures (FMIs), and nonbank credit-granting organizations. - The Financial Services Authority (FSA) is responsible for regulation of nonbank financial services, including fiduciary services, capital market and collective investment schemes, and insurance. - The Ministry of Finance (MOF) oversees the effective operationalization of the financial safety net. - There is no deposit insurance scheme (DIS) in place, but depositor preference exists for deposits of up to R10,000 per account. - Consideration is being given to the possible case for establishing a DIS or strengthening depositor preference. ### Ongoing regulatory reform agenda - A policy paper on a draft Financial Stability Law and a policy paper for the amendment of the capital adequacy regulation to adopt the Basel III capital definition were both approved by the Cabinet in May 2022. - Following a desk review by the MCM and LEG Departments of the IMF, the policy paper on the Bank Resolution Law was submitted to the Cabinet in October 2022. - The Bank Resolution Law is planned to be approved by the Cabinet by end-September 2023. - Additional ongoing reform initiatives include licensing framework, fit-and-proper framework, large exposures, and enforcement measures. ### Early intervention and bank recovery framework — Findings - Section 53 of the FIA provides for corrective actions that the CBS may apply to a bank that has breached regulatory requirements or conducted unsafe and unsound operation, including: - (a) the issuance of written warnings; - (b) calling a meeting of the shareholders, or other owners, and the administrators of the financial institution to discuss and agree on remedial measures to be taken; - (c) issuing written orders in respect of several areas, including to cease and desist from such particular activities and to undertake remedial action, imposing special prudential requirements that differ from those normally applicable to such financial institutions, and suspension of dividend payments or profit; - (d) appointment of an adviser for the financial institution; - (e) appointing an external auditor; - (f) temporarily or permanently suspending one or more administrators from performing duties in the financial institution; and - (g) appointing a reorganizing agent and revoking the bank’s license. - The authorities’ policy paper on a new Bank Resolution Bill proposes strengthened early intervention powers to be applied when a bank is experiencing significant deterioration or serious infringement of regulatory requirements, including: - (a) requiring banks to implement a recovery plan within a specified period of time; - (b) requiring the removal or replacement of one or more administrators or senior managers, and appointing a provisional administrator (at the bank’s expense) to temporarily replace or work with the board under the oversight of CBS; - (c) empowering the CBS to undertake a range of interventions to facilitate remediation of a bank. - The CBS is reviewing section 53 of the FIA to include recapitalization by existing shareholders, requiring changes to business practices, and imposing limits on exposures as additional early intervention measures. - Problem bank identification mainly relies on offsite monitoring, trend analysis, and a CAMELS rating system used in onsite supervision. - The CBS is implementing a risk-based supervision (RBS) framework; the RBS rating and onsite examination rating are expected to guide determinations of significant deterioration or infringement. - The CBS does not currently use a system of EWIs. - Stress testing exercises are not used regularly as tools for early detection of risks. - The CBS has not developed internal contingency plans for responding to bank stress and weakness. - The current framework does not include provisions related to recovery plans, and the CBS has not yet extended recovery planning requirements to banks, though it intends to introduce them. ### Early intervention and bank recovery framework — Recommendations - Clarify blurred lines between normal supervision and early intervention measures in the FIA and establish a more forward-looking set of early intervention triggers with both qualitative and quantitative triggers, without being unduly prescriptive. - Develop a formalized Early Warning System (EWS) comprising a range of EWIs to inform the CBS on incipient stress in individual banks and the banking system. - Strengthen the FIA to allow for an escalated structure of early intervention in response to specified triggers. - Develop internal guidance on a formalized early intervention framework comprising preventative and corrective actions. - Develop contingency plans for responding to emerging stress and noncompliance, and undertake regular testing of capacity to apply early intervention. - Strengthen capacity for early detection through development of EWIs and stress testing, integrated into offsite supervision. - Develop capacity to undertake regular stress testing of individual banks and the banking system using a macrofinancial shock scenario, and require banks to use that scenario to provide data on impacts on profitability, capital, and liquidity. - Require banks to use stress-test results to inform calibration of risk appetite settings, and capital and liquidity buffers. - DSIBs should conduct reverse stress tests to assist in recovery plan scenario development. - Provide CBS with a general power in the law to require banks to have a recovery plan that complies with prudential requirements specified by the CBS; start recovery plan requirements with pilot banks focusing on larger DSIBs, with simpler requirements phased for smaller banks. - Prepare a policy paper on recovery plans while the Bank Resolution law is developed, covering integration into risk management, recovery triggers, links to EWIs, restoration points for capital and liquidity, definition of critical functions, recovery actions, scenario development, and review/testing processes. - Ensure recovery scenarios cater for idiosyncratic, system-wide, and hybrid scenarios, linked to stress testing; require strong governance arrangements (signed off by the board) and integration into risk management frameworks. - Initiate a pilot program for banks’ preparation of recovery plans focusing on the largest DSIBs, then extend simpler requirements to smaller banks. - Differentiate DSIBs and smaller banks regarding comprehensiveness, review, and testing of recovery plans: - Annual updates for DSIBs. - Three yearly reviews for smaller banks, with updates required after major structural, financial, or operational changes. - Require branches of foreign banks to have their own recovery plans closely integrated into and informed by the parent’s recovery plans. - Require subsidiaries of foreign banks to have their own recovery plans, highlighting parent-bank support and independent recovery actions. - Require regular recovery plan testing and supervisors’ duty to review plans and integrate recovery planning activation into early intervention framework. - Develop internal guidance for supervisors on assessment of recovery plans and integration into early intervention framework. ### Emergency Liquidity Assistance (ELA) — Findings - The current framework allows the CBS to provide ELA to deposit-taking institutions with severe and persistent liquidity problems, with inadequate safeguards as regards solvency or prospect of restoration to a sound liquidity position. - Banks need to meet the reserve requirements and pass a solvency test to have access to ELA. - The CBS is working on a draft ELA Agreement that highlights terms and conditions for extending ELA. - The current framework does not authorize the CBS to provide ELA to a bank in resolution. - The CBS has not undertaken testing of its readiness to handle a request from a bank for ELA. ### Emergency Liquidity Assistance — Recommendations - Revise the Central Bank of Seychelles Act to include ELA provisions and safeguards, clarifying that ELA can be provided by the CBS on a discretionary basis to solvent banks that face temporary liquidity shortfalls, but are expected to remain viable over the medium term. - Prioritize development of internal guidance on provision of ELA for solvent banks with temporary liquidity shortages, including drafting legal and procedural documentation: indicative terms and conditions, collateral eligibility, price haircuts on collateral, communications, and exit arrangements. - Provide ELA to solvent and viable banks at the CBS’s discretion, against collateral specified by the CBS, and at appropriate penalty interest rates that reflect the cause(s) of a bank’s liquidity difficulties. - Require the bank receiving ELA to present the CBS with a program specifying remedial measures to restore liquidity and address causes of liquidity problems. - Empower the CBS to provide ELA to a solvent bank that has run out of all marketable securities on a separate set of collateral deemed sufficient by the CBS. - In exceptional situations where solvency of the recipient is in doubt or it cannot provide adequate collateral, provide the CBS with a government indemnity to protect its balance sheet. - Ensure banks are legally and operationally pre-positioned to enable the CBS to access banks’ loan portfolios and other assets as collateral where other collateral has been fully utilized. - Undertake regular testing of ELA implementation capacity through regular simulation exercises. - Strengthen the host authority role given significant presence of foreign banks by: - Strengthening dialogue with home central banks to share information and discuss coordinated liquidity support. - Prudently monitoring banks’ intra-group contingency plans and arrangements for providing liquidity support once recovery and resolution plans are in place. - Incorporating safeguards into the ELA framework allowing for oversight and sanctions to ensure ELA remains within domestic subsidiaries/branches. - Legally empower the CBS to provide ELA in FX to the extent it has a sufficient level of FX reserves; consider a swap arrangement with another central bank to bolster FX reserves. - Prefer obtaining liquidity from the parent of a foreign-owned bank and, if necessary, supported by home authorities, rather than extending ELA in FX to foreign-owned branches or subsidiaries. - Require higher scrutiny and potential restrictions for branches to mitigate upstreaming risk, including evidence from the parent that alternative funding cannot be sourced elsewhere or from the home authority. - Disburse ELA in FX only after enhanced supervisory monitoring and existence of a prudent mechanism for pre-approval of any flows from the foreign-owned subsidiary to its parent. - Ensure close coordination with home supervisors of foreign-owned subsidiaries and branches. ### Bank resolution law — Findings - The FIA authorizes the CBS to take possession of a bank when conditions are met; the CBS has 30 days to decide whether to reorganize the bank, liquidate the bank, or terminate possession. - If the CBS decides to reorganize the bank, a reorganizing agent must prepare a reorganization plan to be circulated to all stakeholders, including shareholders. - If persons holding one-third or more of the deposits and other liabilities object to the plan, the agent must modify the plan or request the CBS to revoke the license and start compulsory winding up. - Approval is needed from the Supreme Court before a reorganization plan can be executed; the Court may reject the plan with or without directing the CBS to revoke the license. - The current bank resolution framework lacks by reference to the KAs and good practice: - Clearly defined statutory objectives. - Triggers for entry into resolution. - Powers for implementing a range of resolution options. - The FIA heavily constrains resolution options, including no capacity to satisfactorily implement: - Sale of business (purchase and assumption, P&A) transactions. - A bridge bank solution. - A recapitalization involving loss absorption by subordinated and potentially senior unsecured creditors. - The FIA does not satisfactorily designate the CBS as resolution authority with appropriate provisions relating to governance, transparency, operational independence, and accountability. - The law is excessively dependent on court-based processes, creating risks of delayed resolution actions or court-driven modification or reversal of CBS decisions. - The law lacks an adequate framework for executing a temporary stay on contractual termination rights or the ability to impose a moratorium. - The law lacks appropriate safeguards, such as a “no creditor worse off than in liquidation” (NCWOL) framework. *IMF | Technical Report* ### 22. Reflecting these fundamental gaps and deficiencies in the existing framework, the ### 22. Reflecting these fundamental gaps and deficiencies in the existing framework, the ### Proposed legislative reform and resolution law - The CBS has proposed major legislative reforms to establish a new resolution law broadly aligned to the KAs. - The policy paper proposes that the CBS be formally designated as the resolution authority and be given a wide range of resolution powers to be executed by the resolution administrator, and a set of resolution tools that broadly align with the KAs and sound international practice. - Intention: take proposals to the Cabinet later this year, with a view to legislation being enacted as soon as practicable thereafter. - Policy options: - Draft a stand-alone Bank Resolution Law, or - Amend the existing FIA. - IMF team view: - Drafting a stand-alone Bank Resolution Law may be simpler and facilitate interpretation, but would require significant consequential amendments to existing legislation, particularly the FIA. - IMF provided a draft high-level outline of a stand-alone Bank Resolution Law to serve as a roadmap (Appendix III). ### Depositor protection gap and risks Findings - Seychelles lacks an effective depositor protection framework, and there is no DIS. - A depositor preference scheme applies in liquidation, providing a preference for deposits of up to R 10,000 per depositor. - Absence of effective depositor protection creates significant risks: - Depositor runs and inter-bank contagion in periods of stress. - Heightened risk of government pressure into taxpayer-funded resolution or costly unfunded depositor guarantee arrangements. - Authorities acknowledge these risks and propose a review of arrangements. Recommendations - Authorities encouraged to undertake a thorough assessment of options for a more effective depositor protection framework, possibly including: - A new DIS with a “paybox plus” mandate, coupled with a recalibrated depositor preference framework. - Further MCM TA could be considered if helpful. ### Core design features recommended for the Resolution Law - The Law should formally designate the CBS as the resolution authority. - CBS should be provided sufficient powers to initiate resolution at a defined point of nonviability (PONV) well before insolvency, and to implement appropriate resolution strategies and tools. - Key legal features and powers recommended: - Empower CBS to exercise resolution powers at an early stage once PONV is established. - Initiation of resolution could be preceded by banks’ recovery plans, but recovery is not a precondition for resolution. - The law should set criteria for determination of nonviability or provide for CBS to set such criteria by administrative instrument to ensure transparency. - Define objectives of and conditions for resolution. - Apply resolution powers to all banks in the Seychelles, including branches and subsidiaries of foreign banks, holding companies, and banks’ non-regulated operational entities significant to operations. - Empower CBS to implement resolution options including recapitalization (using bail-in, if feasible, or with external funding including from the government where necessary), sale of business (P&A), bridge bank, and closure and payout. - Enable implementation of resolution tools without court approval and without possibility of courts suspending or amending resolution decisions. - Include comprehensive safeguards along the lines set out in the Key Attributes, limiting the power of the court to ex post compensation based on the principle of NCWOL. ### NCWOL principle, valuation, and creditor compensation - Recommendation: include the NCWOL principle in the Law. - Omitting NCWOL risks considerable litigation and may undermine regime efficacy. - Law should require an independent valuer to make an ex post valuation to establish the “counterfactual” valuation. - Provision should establish the right to compensation for a creditor in the amount of the difference if the valuation demonstrates the creditor is worse off than in a liquidation under conventional insolvency law. ### Legal clarity on set-off, netting, and collateral - The legal framework governing set-off rights, contractual netting, and collateralization agreements should be clear and transparent. - Resolution regimes must provide safeguards protecting customer property rights, security interests, and financial collateral arrangements (including setoffs and netting rights). - A description of netting and setoff arrangements, collateralization agreements, and safeguards in the Resolution Law will be suitable for Seychelles. ### Resolution policy development, planning, and resolvability assessments Findings - CBS has not developed internal guidance on how a nonviable bank would be resolved. - CBS proposes to establish a small team to develop proposals for the new Resolution Law, but no substantive work on a resolution manual or resolution planning has yet been initiated. - Preliminary thought given to resolution planning for DSIBs, but no substantive work yet. Recommendations - Ensure clear separation between supervision and resolution within CBS to minimize conflicts of interest. - Establish a Resolution Unit (RU) that is operationally separate from the Surveillance Division, with distinct responsibilities to: - Develop the proposed new Resolution Law, a resolution manual, a framework for resolution planning and resolvability assessments. - Manage bank resolution, and undertake regular resolution and crisis management training and simulation exercises. - Maintain firewalls and governance via separate reporting lines to different deputy governors. - Have adequate staffing and budget and ability to hire external resources (legal, audit, IT, valuation). - Ensure effective information exchange between Surveillance Division and RU, including RU access to confidential supervisory information and close consultation on recovery and resolution issues. RU deliverables and sequencing - Develop a resolution manual/toolkit over the next 12 to 18 months that provides comprehensive guidance on: - (a) Assessment of a bank’s viability (drawing on asset quality reviews, solvency assessments and stress testing). - (b) Resolution options by category of bank (including recapitalization, bridge bank, P&A, depositor payout). - (c) Selection of a particular resolution option considering systemic importance, form of incorporation, and ownership. - (d) Procedures for facilitating entry into resolution. - (e) Step-by-step implementation of resolution options. - (f) Coordination between home and host resolution authorities for each stage of resolution. - (f) Domestic coordination for resolution (including between the CBS and the MOF especially). - (g) Communications with stakeholders at each stage of a resolution. - (h) Exit from resolution (including exit by the government to the extent it has provided equity or debt funding, or guarantees). - Appendix IV provides guidance on development of a resolution manual. - After the manual, develop a framework to prepare resolution plans and undertake resolvability assessments for DSIBs: - Resolvability assessments should identify how to resolve a bank cost-effectively while maintaining financial system stability. - Assessments should be reviewed regularly and updated. - Resolvability assessment should identify feasibility of resolution options aiming for least-cost resolution consistent with objectives. - Bank-specific resolution plans should be developed for SIBs, based on resolvability assessments and main resolution strategies (recapitalization using bail-in and external funding or transferring critical functions to a bridge bank). - Suggested sequencing: - Prepare a consultation paper for DSIBs explaining purpose, process, and division of responsibilities, including a draft data template for DSIBs to submit comprehensive data. - Hold a workshop with DSIBs, finalize and release data template. - Start with a domestically owned DSIB as a pilot program to avoid cross-border complexities and refine the process (guidance in Appendix V). Cross-border considerations - For foreign DSIBs, cross-border resolution plans are primarily the home resolution authority’s responsibility, developed in coordination with host authorities via crisis management groups or supervisory colleges. - Host authorities should identify how they would recognize and support home authority resolution actions to the extent those actions meet host objectives. - If home and host objectives diverge, host authorities should establish fallback resolution plans (e.g., wind down subsidiary/branch if not systemically important, or transfer critical functions to a bridge bank). ### Resolution funding: findings and recommendations Findings - The policy paper on bank resolution provides for temporary government funding where necessary to maintain financial stability, provided private sources are exhausted or cannot achieve objectives. - Government recovery of losses: - Government should be able to recover any losses incurred from the failed bank and its shareholders. - Recovery may be achieved by reducing consideration payable to shareholders from sale of their shares by the amount of government outlays. - Government would seek commercial terms for sale of its shares in a bridge bank or nationalized bank to recover expenses. - In a P&A where government funding is applied to facilitate transfer of business, government would seek to recover outlays through repayments from cashflows of the resolved bank and liquidation estate. Recommendations and observations - Minimize need for external funding in resolution of a DSIB. - In medium to longer term, ensure DSIBs hold sufficient capital, or LAC, via contractual bail-in liabilities, to achieve a relatively low probability of requiring external funding. - Undertake stress tests to assess capital/LAC needed in severe stress to continue critical functions without external funding. - If LAC via contractual bail-in instruments is pursued, assess feasibility considering limited development of capital markets in Seychelles and appropriate investor eligibility criteria. - If issuance is impracticable, consider increasing capital requirements for DSIBs over time to achieve a very low probability of nonviability. - In absence of sufficient LAC or inability to allocate losses to private sector, resolution will require external funding. - Losses should first be applied to shareholders, other capital instrument holders, and creditors subject to bail-in where feasible. - External funding likely needed for recapitalization (if bail-in insufficient), transfer of liabilities to existing or bridge bank, compensation to parties worse off under NCWOL, and indemnity to CBS for ELA or other liquidity support. - Some funding may come from cashflows of the bank in resolution, but front-loading will likely be required. - Seychelles lacks a DIS usable for resolution funding; subject to safeguards, additional funding likely needed for systemic failures, possibly from an ex ante bank resolution fund or public funding. - Experience from other jurisdictions: - Some countries (e.g., European Union and United Kingdom) have separate resolution funds funded by regular levies on systemic banks, applied subject to loss absorption by shareholders, other capital instrument holders, and bailed-in creditors. - Feasibility in Seychelles: - Establishing a separate resolution fund imposes additional costs on banks, potentially reducing lending capacity. - Decision not to establish a fund may reflect need to strengthen DIS funding base and focus bank levies on that objective. - These considerations point to an ex post form of resolution funding where government is initial source of funds (subject to safeguards) with capacity to levy banks for recovery shortfalls after funding deployed. *IMF | Technical Report* ### 42. The absence of a funding mechanism in the Seychelles creates a risk that public ### 42. The absence of a funding mechanism in the Seychelles creates a risk that public funding might be provided in an ad hoc manner, potentially at greater taxpayer cost than would otherwise be the case. ### Risk and recommended legislative approaches - Absence of a formal funding mechanism creates risk of ad hoc public funding at greater taxpayer cost. - Two recommended approaches: - Develop a legislative framework under which public funding for resolution purposes could be provided, subject to robust preconditions and safeguards (could be done in the proposed resolution law). - Prepare a contingency plan that sets out a draft law or other mechanism for public funding, to be enacted if necessary, to avoid emergency legislation in crisis without prior consideration. ### Recommended design considerations for a funding mechanism (preserve exactly) - a clear set of statutory objectives for the provision of any financial assistance, anchored to maintaining financial system stability; - a requirement that all estimated losses in the failed bank have been allocated to shareholders and subordinated creditors, and other senior unsecured creditors to the extent practicable, before external resolution funds are considered; - the identification of the purposes for which public funding may be provided; - conditionality attached to any such funding (including guarantees and indemnities); - powers to recover funding outlays (including any fees and interest costs) from the cashflows of the resolved bank and assets of the insolvency estate of the failed bank; and - powers to levy banks to recover the net present value of any funding outlays not recovered from the cashflows of the resolved bank and assets of the insolvency estate. ### Central bank funding limits and allocation of responsibilities - It is critical that the CBS balance sheet is not used as a funding source for solvency support. - If public funding for solvency support is provided as an exceptional, last-resort measure, it should be provided by the government under the oversight of the Minister of Finance, and not through the CBS. - Central bank funding should only be used for liquidity support, with proper safeguards to protect the central bank balance sheet, and not for solvency or risk absorption. ### CBS internal policies for lending to a bank in resolution - The mission recommends that the CBS develop comprehensive internal policies, processes, and procedures for lending to a bank in resolution, developed in parallel with frameworks for lending in other situations, including ELA. - Matters to be addressed include: - the preconditions for lending; - processes for determining solvency/capital adequacy, including that the CBS is satisfied that the proposed resolution is likely to restore the bank in question to capital soundness; - the purposes for which lending would be provided; - the eligible collateral, including potentially parent entity collateral and need for government indemnities to provide additional assurances (on which close collaboration with the MOF will be needed); - the terms and conditions of lending; - exit arrangements; and - disclosure and communications arrangements. ### Exit strategy for public funding arrangements - CBS and MOF must identify exit strategy recognizing public funding and public ownership (bridge bank or recapitalized bank) should be temporary; government shares should ultimately be sold to private sector interests with capacity to provide strong shareholder and governance support. - Aim: government to extricate itself from all funding support arrangements and shareholdings as soon as market conditions permit following completion of the resolution, and to maximize the net present value of recoveries consistent with resolution objectives. - Factors to consider in exit planning: - The options and timeframe for an optimal sale of government shares in a bank or bridge bank, with a view to maximizing recoveries but also ensuring that the bank/bridge bank is left with a sound ownership and governance structure; - The repayment schedule for any debt funding provided by the government, with a view to ensuring that the full net present value of the debt and interest accumulated on the debt is recovered as soon as practicable, subject to not destabilizing the parties involved; - The termination of guarantees and indemnities as soon as practicable, including the recovery of any funds from the resolved bank, or other party, arising from claims under guarantees and indemnities, and recovery of fees applicable to such arrangements, subject to not destabilizing the parties involved; and - The termination of any ELA provided by the CBS. --- ### VII. DOMESTIC COORDINATION — Findings - Existing framework in the Seychelles has important shortcomings in terms of domestic coordination. - No explicit formal arrangements for information exchange and coordination between the CBS, the MOF, and other relevant agencies in relation to bank resolution. - CBS has entered into bilateral MoUs with the FSA and the Public Enterprise Monitoring Commission (PEMC), and a tripartite MoU with the FSA and Financial Intelligence Unit to facilitate information exchange, cooperation, and coordination. There is also an MoU on cooperation between members of the FSC. - The CBS has not developed strategies for responding to financial crisis beyond bank resolution, such as providing liquidity to financial markets and taking initiatives to minimize risk of systemic financial crisis. - The FSC is chaired by the CBS and represented by the MOF, the FSA, and the FIU. - The authorities are drafting a Financial Stability Bill to formalize the Financial Stability Committee and its powers; the proposed Bill endeavors to legislate the FSC as the designated authority for financial stability matters with decision-making powers on financial stability issues. ### VII. DOMESTIC COORDINATION — Recommendations - Strengthen domestic inter-agency cooperation and coordination on financial stability and financial crisis management. - The FSC should be an advisory body for information sharing, coordination, and advice to member agencies, not a decision-making body; independence of each member agency should be protected. - Formalize the FSC’s role in relation to bank resolution: CBS responsible for resolution; FSC has advisory role. FSC should not have resolution or other regulatory powers. - Each member agency should have clear roles and responsibilities under stress and crisis situations. - Establish an FSC working group responsible for reporting to the FSC on bank resolution. - Develop a multilateral MoU setting out responsibilities of member agencies for bank resolution and the coordination process for all stages of bank resolution. - A working group under the FSC’s auspices, chaired by the CBS, should develop inter-agency coordination arrangements for approval by the FSC. --- ### VIII. CROSS-BORDER COOPERATION — Findings - Current framework provides minimal arrangements for cross-border cooperation. - CBS has two MoUs with home authorities for banking supervisory purposes, but these do not explicitly cover resolution matters. - CBS has not entered into specific cross-border recovery or resolution MoUs with home supervisory and resolution authorities, and has not participated in discussions with home authorities on these matters. ### VIII. CROSS-BORDER COOPERATION — Recommendations - Strengthen framework for cross-border cooperation and collaboration. - Resolution Law should require the CBS to decide to recognize, refuse to recognize, or recognize only in part foreign resolution action affecting a Seychelles branch of a foreign bank. - Recommend enabling legal powers to recognize home authority resolution actions in Seychelles, subject to financial stability deposit protection objectives being met. - Empower the CBS to establish working relationships with resolution authorities in foreign jurisdictions, including signing MoUs and exchanging information on recovery and resolution matters. - For foreign-owned DSIBs, CBS should work closely with home resolution authorities to deepen understanding of home resolution plans and align CBS resolution plans to complement those plans where possible. - CBS should identify matters for which legal recognition in Seychelles might be needed to facilitate implementation of home resolution plans, contingent on CBS satisfaction that home plans meet Seychelles resolution objectives (maintaining continuity of critical functions/services and protecting depositors and other creditors). - Develop fallback resolution plans in cooperation with home authorities for cases where home resolution actions do not adequately address Seychelles’ needs, with options depending on systemic importance: - If systemically important: recapitalization of a subsidiary via bail-in (if feasible), or transfer of critical functions/services and associated assets/liabilities to another bank or to a bridge bank; ensure parent bank functionality support or migration of functionality as part of resolution pre-positioning. - If not systemically important: business transfer to another bank, or orderly winding down and payout of insured depositors. --- ### IX. CAPACITY BUILDING - Capacity building should be ongoing, covering regular staff training and senior management workshops. - CBS should commit to and fund a training program for resolution staff, with annual workshops including supervision, MOF, and other financial safety net players. - Senior management workshops with open dialogue and guest speakers recommended. - TA on recovery planning would be useful; BIS-IMF Bank Resolution Online Course (BROC) recommended for resolution training. - Capacity building should include crisis-simulation exercises within the safety net to train and test ability to resolve a bank within a short timeframe (e.g., the “resolution weekend”). --- ### X. NEXT STEPS — Priorities emphasized by the mission - Establishment of an RU with responsibility for all resolution-related work, kept separate from the Supervision Department, and with a separate reporting line to the CBS Governor; - Development of a draft Resolution Bill with assistance from the IMF. This will be facilitated in the second IMF TA mission, scheduled for April 2023. The aim should be to have a draft Bill ready for introduction to parliament before end-2023; - Development a prudential guidance for banks on recovery planning, setting out the CBS’s expectations on the objectives, scope, and structure of bank recovery plans; recommended for release to banks for consultation in the second half of 2023; - Implementation of a pilot program on recovery planning with the DSIBs, with a view to asking the DSIBs to prepare recovery plans for review by CBS by March 2024, with recovery planning being extended to all other banks in simplified form later in 2024; - Refinement of a supervisory early intervention framework, comprising preventative actions for early-stage bank stress and corrective actions for more advanced stress and regulatory breaches, together with contingency plans; recommended that CBS develop the early intervention framework and contingency plans over the course of the next two years and periodically undertake internal testing; - Development of a comprehensive resolution manual during 2023, with a view to completing it by mid-2024; - Development of a framework for undertaking resolvability assessments (including a resolvability data template) and preparing resolution plans, with a view to completion during 2024 after the resolution manual; resolvability assessments and preparation of resolution plans for DSIBs should be progressively implemented over between late 2024 and end-2026, if possible; - Undertake a fundamental review of depositor protection arrangements, including an assessment of the efficacy of deposit insurance, with a view to completing this assessment and formulating recommendations during 2024. If a decision is made that a deposit insurance scheme should be established, this should be completed by end-2025, if feasible; and - Formalize the establishment of a Financial Stability Committee comprising the CBS, the MOF, and other relevant agencies, with a charter that sets out its purposes and modus operandi, anchored to monitoring and promotion of financial stability. As part of this, develop an MoU for all FSC member agencies which sets out responsibilities of the FSC and each member agency in a bank resolution and financial system crisis. --- ### APPENDIX I. GUIDANCE ON RECOVERY PLANS — Introduction and scope - Purpose: indicative guidance on bank recovery planning, including purpose, structure and nature of content expected for a recovery plan. Issues are not exhaustive and should consider size, nature, and complexity of the bank. - The appendix covers: - Objectives of recovery plans; - Principles for a recovery plan; - Preparation of the recovery plan; - General assumptions; - Elements of a recovery plan; - Recovery plan Executive Summary; - Governance issues; - Corporate overview; - Triggers; - Scenarios for recovery plans; - Restoration points for recovery; - Recovery actions; - Communications; - Preparatory measures; - Testing of recovery plans; and - Review and update of recovery plans. ### APPENDIX I. GUIDANCE ON RECOVERY PLANS — Objectives (preserve exactly) - a. restore itself to financial soundness and compliance with prudential requirements within a short period following adverse shocks to capital, liquidity or other financial impairment, or in anticipation of such impairment; - b. maintain in an uninterrupted manner all critical functions and services, and ensure that operational support is provided to any entities in the banking group that perform such functions or services; - c. restore and maintain market confidence in the bank; and - d. remedy the factors that caused the bank to sustain a fall in capital, liquidity, profitability or asset quality so as to minimize the risk of recurrence. - Recovery plans should cater for both ‘idiosyncratic’ scenarios (bank-specific, system stable) and system-wide scenarios (bank impacted while the financial system is under acute stress). - Recovery plan = financial parallel to a business continuity plan (BCP): recovery plan addresses financial shocks impacting financial soundness; BCP addresses operational shocks to IT and physical systems. - While recovery plans are mandated by regulation by most supervision authorities (a compliance issue), they should be core to bank business strategy to preserve operational capacity and shareholder value; failure to recover may lead to merger or resolution. *Italic: IMF | Technical Report* ### 6. In other words, successful recovery is “make or break” for a bank, and for its ### 6. In other words, successful recovery is “make or break” for a bank, and for its ### Principles for a recovery plan - Timely: contain a robust trigger framework, including a range of qualitative and quantitative triggers, to create a clear internal escalation process for early consideration and activation of the plan. - Comprehensive: contain a menu of recovery options sufficient to cope with a wide range of potential stress scenarios, including idiosyncratic and systemic scenarios, and within each, “slow-burn” and “fast-burn” stresses (i.e., stresses which impact gradually over many months—referred to as “slow burn,” and stresses which impact rapidly over days or a few weeks—referred to as “fast burn”). - Credible: recovery options should be realistic, providing a significant impact on capital and/or liquidity within a quick enough timeframe to restore market confidence, supported by a robust communication strategy. Recovery actions should be prioritized and quantified. They need to be capable of implementation within, at most, three to six months, in order to address market concerns and provide stability for the bank. - Integrated: contain robust governance arrangements to enhance development, approval, and execution; be aligned and consistent with existing contingency plans; and embedded into the overall risk management framework. ### Preparation of the recovery plan - A recovery plan is a comprehensive document drawing from the bank’s risk management framework, ICAAP, capital and liquidity contingency plans, communication contingency plans, and BCP; it needs a whole-of-bank effort. - Required structured work program elements: - a comprehensive project plan; - allocation of responsibilities to particular individuals for different elements of the recovery plan; - a working group to manage the process; - milestones and a well-defined timeline; - regular reporting of progress to senior management, with clear line-of-sight by the CEO; - regular reporting of progress to the board and relevant board committees. - Typical senior-level working group membership and responsibilities: - Finance: responsibility for capital-raising aspects of the plan; - Treasury: responsibility for liquidity aspects of the plan; - IT and Operations: responsibility for business continuity and ‘critical functions and services’ elements of the plan; - Risk: responsibility for integration with risk management framework, risk appetite statement, governance arrangements, ICAAP, liquidity contingency plan and BCP; - Legal: responsibility for legal elements, including capital-raising, board approvals, legal consents and regulatory approvals; - Compliance: responsibility for ensuring the plan addresses all regulatory compliance issues; - Communications: responsibility for public and other stakeholder communications aspects; - Internal audit or other appropriate personnel: responsibility for setting the proposed testing framework for the recovery plan. - Board responsibilities: - Board Risk Committee: lead responsibility for reviewing and approving the plan for referral to the board; ensure fitness for purpose and integration with risk management framework, ICAAP, liquidity contingency plan, and BCP. - Board Audit Committee: responsibility for ensuring appropriate testing processes, including internal audit procedures and consideration of regular external review. ### Embedding, review, and testing - Once board-approved, senior management must ensure the plan becomes a ‘living document’: - ensure all relevant staff are aware of the recovery plan and their responsibilities; - establish processes for annual reviews and updates to the plan, with board sign-off; - establish processes for regular testing of the recovery plan. ### Assumptions generally required for a recovery plan - Recovery plans are generally prepared on the basis of: - Additional public sector capital or liquidity support cannot be assumed to be available; - It should not be assumed that the supervisory authority would use its crisis management powers to facilitate recovery actions; - Where contractual provisions for write-off/conversion of debt instruments exist, inclusion in the menu of recovery options should be based on automatic triggers rather than assuming action by supervisors. ### Elements of a recovery plan - A recovery plan would generally include: - Executive summary; - Governance; - Triggers; - Corporate overview; - Recovery options; - Scenario analysis; - Communication plan; - Preparatory measures. ### Recovery plan executive summary (content expectations) - Should be relatively brief and provide a succinct summary including: - the objectives and scope of the plan; - its integration with the risk management framework, ICAAP, BCP, and related matters; - a brief description of the scenarios; - the restoration points for key variables, i.e., especially capital and liquidity; - the triggers for recovery plan activation, and escalation and implementation arrangements, and associated EWIs; - recovery actions; - communications aspects; - process for regular review and testing; - governance arrangements in relation to the plan’s approval. ### Governance issues (roles, responsibilities, and expectations) - The recovery plan should describe governance arrangements, clearly articulating roles of the board and senior management during: - development, review, approval, and ongoing maintenance in business-as-usual; and - monitoring and internal escalation for triggering and execution during a crisis. - The plan should explain how it was developed, processes for obtaining senior management approval, board committee and board approval, and linkages to the risk management framework, risk appetite, ICAAP, liquidity contingency plan, and BCP. - The plan should identify: - responsibilities of the board, relevant board committees and senior management in relation to the recovery plan; - intended process for annual reviews and the factors to be considered (e.g., changes to risk management framework, risk appetite, scope and scale of operations, ICAAP, contingency plans, BCP, and testing results); - proposed arrangements for testing the plan; - activation process based on triggers and who monitors triggers and authorizes activation; - management structure during recovery, including responsibilities for particular recovery actions and required authorizations and delegated authorities. - Fitness-for-purpose expectation: the 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, sufficient to ensure compliance with prudential requirements, prudential soundness, resilience to future shocks, resumption of normal operations for critical functions and services, and confidence of relevant stakeholders including financial markets. - Board must ensure: - triggers occur before any breach of prudential requirements; - plan is based on well-defined scenarios realistic and sufficiently severe to result in a major fall in capital and liquidity, with all relevant assumptions identified, and inclusion of idiosyncratic and market-wide scenarios; - recovery plan contains specific and detailed, realistic and practicable recovery actions with priorities clearly identified; - recovery plan quantifies expected contribution of each recovery action (e.g., amount of capital expected to be raised); - recovery actions include implementation details, step-by-step guidance and required documentation; - stakeholders and their information needs are identified, and means/timing for provision of information are set out; - all staff are aware of the plan and their responsibilities; - close integration with risk management framework, including EWIs, stress testing, risk monitoring, risk limits and controls, ICAAP, liquidity contingency planning, and BCP; - plan is kept under regular review, updated to reflect operational and structural changes, and subject to regular testing. - Board oversight: maintain close overview of management’s performance, understand the board’s own responsibilities including actions entrusted to the board, ensure compliance with regulatory requirements, comprehensiveness, practicality and realism, and ensure regular testing and assessment of test results. The board may participate in tests as active participants or observers. ### Integration with risk management and other processes - Recovery planning linkages to other processes: - role of stress testing in assessing potential impacts on capital and liquidity from shocks; - importance of EWIs, supported by robust management information systems, for informing triggering of the recovery plan; - close linkages with ICAAPs and liquidity plans; - linkages with business continuity planning, particularly for operational requirements of recovery actions; - feedback to risk appetite settings and risk limits (e.g., adjustments of risk limits and capital and liquidity buffers following shocks or if supervisors conclude plan lacks credibility). - Recommendation: ensure recovery planning processes are fully integrated into the wider risk management framework and include information setting out nature of linkages and means to ensure strong integration. ### Corporate overview (required information) - Recovery plan should include comprehensive information on structure and operations, including: - ownership structure, identification of parties with significant ownership stake; - group structure, organization chart and identification of each entity in the group; - functions performed by the bank and each other group entity; - financial products and services provided by the bank and each entity; - key risks of the bank and each entity, and description (or reference) to the risk management framework applied to identify, measure, monitor and manage all material risks; - nature of inter-connections between entities in the group, including financial and operational inter-connections; - location of all branches of the bank and offices of other entities in the group; - identification of correspondent banks and other banks or financial service providers with which the bank or group has significant business dealings; - nature and extent of participation in financial markets, by category; - nature and extent of participation in payment and settlement systems; - entities that provide critical functions or services to the bank and group; - extent and nature of any outsourcing of critical functions and services to parties outside the group. ### Critical functions and critical services - Identification requirements: - identify critical functions and services performed, legal entities and jurisdictions where they are located, and inter-dependencies between these entities; - recovery actions should ensure these functions and services can be maintained without interruption. - Minimum critical functions to include: - deposit taking, particularly capacity to receive deposits into transaction-facilitated deposit accounts and short-term deposits; - wholesale funding, including 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, capacity to meet obligations under securities lending, repos and risk transformation services; - lending and loan servicing, particularly capacity to provide credit under committed credit facilities (such as overdrafts and standby facilities), participation in existing syndicated lending facilities, trade finance, leasing and factoring; - credit card services; - 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 FMIs, treasury and cash management services; - 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; - capacity to meet obligations in relation to capital market transactions and services. - Minimum critical services to include IT and other systems and controls required to: - perform all critical functions; - maintain all customer and client records; - maintain all financial and management accounting records and reporting obligations; - 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); - meet all regulatory obligations. *IMF | Technical Report* ### 32. The recovery plans should set out the recovery actions—financial and operational—to ### 32. The recovery plans should set out the recovery actions—financial and operational—to ### Appendix Box 2. FSB Definition of Bank Critical Functions and Services - “Critical functions are activities performed for third parties where failure would lead to the disruption of services that are vital for the functioning of the real economy and for financial stability due to the banking group’s size or market share, external and internal 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.” - “A critical function has the following two elements: • 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 the general confidence of market participants due to: o the systemic relevance of the function for the third parties; and o the systemic relevance of the bank in providing the function.” - “Critical shared services are activities performed within the firm or outsourced to third parties where failure would lead to the inability to perform critical functions and, therefore, to the disruption of functions vital for the functioning of the real economy or for financial stability. Examples include the provision of information technology given the dependency of core banking processes on IT and other services such as facility management and administrative services.” ### Triggers - Recovery plans must have clearly identified triggers to: - invoke the recovery plan as a whole; and - invoke specific recovery actions where appropriate. - Triggers for the recovery plan as a whole should relate to key areas: capital, liquidity, profitability, and asset quality. - Specifics on trigger design: - Triggers should be set at a level that enables invocation before the bank breaches prudential requirements and before it gets into any significant difficulties. - For capital triggers: “set at a comfortable margin above minimum capital ratio requirements” so recovery actions can be initiated early. - Same principle applies to liquidity triggers. - Profitability and asset quality triggers should enable early action where profitability declines below, or impaired assets rise above, what the bank regards as a normal range. - Include escalating triggers for each category: capital, liquidity, profitability, asset quality, and operational disruption. - Consider triggers related to credit ratings (e.g., a rating agency considering a downgrade or rating watch status). - Qualitative triggers may include: requests for early redemption, difficulties issuing liabilities at market rates, unexpected loss of senior management, adverse court rulings, negative market commentary, fraud or malfeasance events, and significant reputational events. - Early warning indicators (EWIs): - Banks should include the nature of EWIs for each trigger and means of monitoring them. - Maintain comprehensive EWIs covering capital, liquidity, asset quality, profitability, and qualitative triggers. ### Scenarios for recovery plans - Typical recovery plan scenarios involve moderately severe impacts and include both “fast-burn” (hours and days) and “slow-burn” (weeks and months) stresses. - Three broad scenario types: a. idiosyncratic scenario — bank impacted by major loan losses, liquidity events or operational risk losses, while the financial system remains stable; b. systemic scenario — financial system in stress (e.g., severe recession) with many banks under capital and liquidity pressures; c. hybrid scenario — combination of idiosyncratic and systemic elements occurring simultaneously. - Scenario requirements: - Provide comprehensive descriptions including magnitude of impact on capital, profitability, asset quality and liquidity, and all material assumptions. - Include worst-case severe impacts on both capital and liquidity. - Do not design plans based on causes of impact; focus on magnitude of impact. - Integrate financial impacts for internal consistency (e.g., rise in NPLs → higher provisioning → immediate impact on CET1 → reduced profits → further capital impact → liquidity consequences). - Identify recovery actions on a graduated scale from mild/moderate to severe impacts. - Draw clear distinctions between idiosyncratic and system-wide scenarios, including differing feasibility of recovery actions in system-wide stress (e.g., sale of loan portfolios, accessing interbank liquidity, raising capital). - Example worst-case incorporated in scenarios: “a reduction in capital (including CET1, tier 1 and total capital) to 50 percent of the minimum required capital ratios and a fall in liquidity to 50 percent of the applicable liquidity requirement.” ### Restoration points for recovery - Restoration point must be clearly specified. - Minimum restoration requirement: restore capital and liquidity to levels meeting the supervisory authority’s regulatory requirements, with a sufficient cushion to achieve a very low probability of future breaches. - Often specify higher restoration points to restore market confidence and retain inter-bank funding access, and to reduce probability of subsequent near-failures. - Restoration points should include rationale and often reference levels for: • CET1 ratio; • Tier 1 capital ratio; • total capital ratio; • LCR or other applicable liquidity 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. - Restoration points may also reference a target credit rating and measures of market confidence, depositor satisfaction, stakeholder satisfaction, and resumption of business-as-usual operation of all critical functions and services. ### Recovery actions — general requirements - Recovery actions must be comprehensive and detailed enough to enable implementation; each action accompanied by step-by-step implementation guidance. - Identify person(s) authorized to take each action and all delegated authorities. - Emphasis on practicable actions implementable within a relatively short timeframe (e.g., “within three months, but no longer than six months”). - Prioritize recovery actions with greatest near-term benefit for restoring capital, liquidity, profitability and asset quality and with credibility for key stakeholders (depositors, creditors, news media, rating agencies). - For each recovery action, specify: a. quantitative amount contributed to restoration of capital, liquidity, profitability or asset quality; b. period of time required to complete the action; c. processes and procedures required to implement the action to completion; d. documentation prepared or required for prompt implementation; e. term sheets for capital issuance and underwriting arrangements, standby facilities, repo agreements, etc.; f. potential legal and regulatory requirements and means to meet them; g. persons in the bank (including directors) with authority to approve implementation steps. - Communications requirements: - Identify all stakeholders (internal and external), their information needs, and means to address them. - Communications actions should include: a. call center communications arrangements and upscaling for high volumes of calls; b. web-based communications; c. Question and Answer material; d. communications with correspondent banks and other counterparties on scheduled payments and settlements; e. communications with credit rating agencies and the financial news media; and f. information and processes to facilitate news media briefings. - Address synchronized communications to announce recovery actions at the same time as adverse impacts, especially for listed banks or where disclosure obligations apply. - Recovery actions must address underlying causes to have credibility (e.g., poor lending decisions require steps beyond capital restoration, potentially including independent expert engagement). ### Recovery actions in relation to capital - Set out comprehensive and detailed actions to restore CET1, Tier 1 and total capital to target levels. - Actions must be realistic, practicable, credible, and prioritized for probability of successful implementation and speed of contribution to capital restoration. - Desirable completion time: within three months, and not more than six months. - Typical capital recovery initiatives include: a. raise equity from existing shareholders via a rights issue (desirably underwritten by an investment bank) or private placement to existing controlling shareholders, consistent with the bank’s constitution; b. raise equity from new investors via issuance of shares to selected potential shareholders; c. convert debt into equity where debt has contractual conversion provisions upon specified triggers; d. write down debt where contractual provisions enable write-down upon specified triggers; e. suspension of distributions (including dividends) to shareholders; f. reduction or suspension in new lending to reduce additional capital required; g. initiatives to reduce operational expenses to reduce additional capital required; h. sale of assets or change in asset mix to reduce additional capital required and increase risk-weighted capital ratio by reducing risk-weighted credit exposures; i. sale of subsidiaries; and j. issuance of new debt eligible for inclusion in tier 2 capital. - For each capital action, specify estimated amount to be raised or capital savings induced and timeframe, step-by-step implementation, and draft documentation or detailed term sheets for issuance and underwriting. ### Recovery options for liquidity - Liquidity recovery actions must be specific, realistic, practicable, credible, and prioritized by probability of successful implementation and contribution to estimated liquidity needs. - Speed is critical: success and credibility are measured in hours and days rather than weeks or months. - Typical liquidity initiatives include: a. sell marketable securities; b. obtain liquid assets from controlling shareholders where feasible; c. raise liquidity via borrowing from other banks under committed standby facilities; d. borrow from the central bank under business-as-usual liquidity facilities provided routinely to banks by the central bank; e. sell illiquid assets in exchange for liquid assets, including via sale and repurchase agreements; f. lengthen the maturity profile of liabilities; g. shorten the maturity profile of assets (where feasible); h. reduce the need for liquidity by reducing new lending and reducing operating expenses, where feasible; and i. renegotiate the terms of scheduled debt repayments and debt servicing where this is considered feasible and prudent. *Source: IMF | Technical Report (content unit).* ### 61. All recovery actions should be quantified in terms of the estimated impact on liquidity. ### 61. All recovery actions should be quantified in terms of the estimated impact on liquidity. ### Liquidity actions and documentation - All recovery actions should be quantified in terms of the estimated impact on liquidity. - Implementation steps and timeframe for implementation should be set out in relation to each recovery action. - Any documentation needed for liquidity actions should be set out in draft form attached to the recovery plan or at least detailed term sheets for documentation provided as part of the recovery plan. ### Recovery options for profitability - All recovery actions should meet the standard test of being realistic, practicable and credible, and capable of delivering the intended outcomes in a realistic timeframe. - Profitability restoration is likely to be less urgent in the short-term compared with capital and liquidity recovery actions and may take longer to achieve; consequently, recovery plans could attach lower priority to profitability restoration initiatives in the short-term. - Restoration of profitability is critical for longer-term survival of the bank in terms of capital maintenance and market confidence. - Recovery actions should be set out comprehensively with detailed implementation steps. Likely categories include: - a. Initiatives to increase collections on loans made by the bank. - b. Initiatives to increase the risk-adjusted rate of return on loans and other assets, consistent with a prudent risk appetite and within the bank’s risk management framework. - c. Initiatives to reduce operating expenses, consistent with maintaining acceptable risk management practices. - d. Initiatives to increase revenue from under-performing business lines where feasible and where this is consistent with the bank’s risk appetite and risk management frameworks. - e. Initiatives to reduce or eliminate business activities that do not meet defined ROA and ROE hurdles. - f. Initiatives to reduce average funding costs where feasible, consistent with the bank’s risk appetite and risk management frameworks. - Where feasible, each category should include estimates of the contribution to increased profitability, the timeframe expected to achieve this, and the steps required to achieve it. ### Recovery options for asset quality - Recovery actions for asset quality must be realistic, practicable and credible. - Asset-quality recovery actions will tend to be longer term than immediate capital and liquidity remedies but should be achievable within timeframes credible to markets, rating agencies, depositors and other stakeholders. - Recovery actions should be classified into categories, such as: - a. the restructuring of loans to enhance recoverability; e.g., by elongating the term of the loan, suspending interest payments, etc.; - b. transferring impaired loans into an asset management company owned by the bank; - c. selling impaired loans to other parties; - d. write-off loans considered to be irrecoverable; and - e. strengthening the quality of lending policies and procedures, and associated credit risk management arrangements, in order to enhance asset quality for new loans. - For each recovery action, the plan should identify expected impacts on asset quality and the timeframe required to achieve desired outcomes; implementation steps must be specified in detail. ### Communications - The recovery plan should include a robust communication strategy for internal and external stakeholders (staff, internal bodies/committees, shareholders, other investors, authorities, counterparties, financial markets, FMI, depositors and the public). - Key objectives: ensure consistent, timely and appropriately detailed information on the recovery strategy is articulated at the outset; capacity to announce quickly the problem and proposed recovery actions to convince the market of a credible and timely route to restoring viability. - The plan should address management of potential negative market reactions. - The recovery plan should set out communications elements associated with particular recovery actions and general strategies for each scenario, identifying: - all stakeholders; - their information needs and the key information they should be provided (and when) in each scenario; - channels for communications (private telephone and email, news media releases, web-based information, automatic telephone responses, call center responses, social media communications); - allocation of responsibilities to particular office holders for particular communications. ### Preparatory measures (pre-positioning) - To improve credibility, banks should consider key dependencies for each recovery option and preparatory measures to alleviate operational barriers. - The recovery plan should describe preparatory measures, with an indicative timeframe and estimated cost for their completion. - Examples of preparations that should be made include: - a. Share issuance documentation and procedures. - b. Indicative shareholder resolutions and board resolutions for particular recovery actions. - c. Liquidity standby facilities. - d. Draft indicative news media statements and Q and A material. - e. Strengthened documentation of service level agreements for all outsourced services and critical shared services. ### Testing of recovery plans - Recovery plans must be subject to rigorous testing. Tests can evaluate: - the ability to detect emerging stress so triggers can be invoked; - the ability to implement recovery actions for capital, liquidity, asset quality, profitability, etc.; - the ability to communicate effectively with stakeholders (role-played); - senior management and board performance in recovery responsibilities; - data systems and legal documentation required for recovery; - the ability to implement time-critical recovery actions within specified timeframes; - the degree of integration of the recovery plan with the bank’s risk management framework, ICAAP, BCP, and governance arrangements. - Forms of testing include ‘walk-through’ tests, live simulation exercises for specific elements (capital, liquidity, communications), and full-scale live simulations. - Senior management should be involved in substantive testing, each member playing his/her own role; board members may be included where appropriate, for example to test communication with external parties. - Recovery plan should set out the framework for regular testing, including objectives and scope, parties responsible, processes and procedures, and means by which test results will be documented and reviewed by the board and internal audit. ### Review and update of the recovery plan - Recovery plans need comprehensive and regular review; internal review processes should be identified in detail, including reviews by risk management units and internal audit. - Reviews should cover scenarios, triggers, recovery actions and governance arrangements, and be informed by testing; test results should be an input into review. - Occasional external reviews by independent experts can be helpful, especially if experts participate in regular tests and in reviewing management and board adequacy. ### Appendix II — Supervisory review: scope and indicative questions - Appendix II provides indicative questions for supervisors in reviewing recovery plans, covering: - 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. - Selected supervisory questions and metrics: - Executive summary: Is it succinct, practical and a useful guide for senior management and directors? Does it contain a checklist of key decisions and actions? - Governance: Is there an ultimate ‘owner’ (e.g., CRO)? Was the plan prepared by a senior-level team with representatives from CRO, CFO, Head of Treasury, Head of Operations, Head of IT, Head of Legal, Head of Compliance, Head of Communications? Was the plan subject to comprehensive oversight by the board Risk Committee and the board? Are activation authorities and delegation of decision-making clearly set out? Are crisis committees defined? - Integration with risk management: Is the recovery plan integrated with stress testing, RAS, ICAAP, capital contingency plans, liquidity contingency plans, and business continuity plans? Have reverse stress tests been used to inform scenarios, restoration points and recovery actions? - Overview and critical functions: Does the plan provide sufficient detail on organizational and group structure, ownership, critical functions and services, legal entities providing critical functions, inter-dependencies, outsourcing arrangements, back-up and business continuity arrangements, cross-border operations, products and services, funding sources, key risks and correspondent/market participation? - Triggers: Triggers should relate to key risk metrics, typically: - Capital ratio (e.g., CET1, tier 1 and total capital ratios) - Liquidity ratio (e.g., HQLA to total liabilities, LCR) - 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) - Credit rating - Trigger setting: Triggers should enable invocation well before breaches of prudential requirements; capital and liquidity triggers are often set at or slightly above minimum tolerance levels in the RAS; asset quality triggers generally at or below maximum tolerance for NPLs/total loans; profitability triggers at or slightly above minimum tolerance for ROE or ROA; credit rating triggers usually at or slightly above minimum tolerance for the rating level in the RAS; e.g., one or two notches above the minimum rating for investment grade (BBB- or equivalent). *Source: tarea2024054-print-pdf - 61. All recovery actions should be quantified in terms of the estimated impact on liquidity.* ### 9. It is often desirable for a bank’s recovery plan to include a trigger relating to the ### 9. It is often desirable for a bank’s recovery plan to include a trigger relating to the ### Triggers and early warning indicators (EWIs) - Triggers may relate to disruption in performance of critical functions and services; example: a sustained interruption to the performance of any material critical functions and services for more than x hours (e.g., more than 8 hours) or where the disruption has the potential to cause material damage to the bank’s reputation and/or ability to meet payment and settlement obligations. - Not all triggers need to be quantitative; qualitative triggers can include: - requests from counterparties for early redemption of liabilities; - difficulties in issuing liabilities at current market rates; - unexpected loss of senior management; - adverse court rulings; - negative market commentary; - fraud or malfeasance events; - significant events that could cause significant reputational damage. - Banks should include in their recovery plan or supplementary material the nature of the EWIs they have in place for each trigger and the means by which they monitor such indicators. - Banks should maintain comprehensive EWIs to identify emerging stress as early as possible; EWIs should relate to capital, liquidity, asset quality and profitability, and to qualitative triggers. - Indicative examples of EWIs by risk category: - 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: - 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 for supervisors in reviewing triggers and EWIs - Indicative supervisory questions: a. Does the recovery plan differentiate between the triggers for activation of the recovery plan as a whole, and the triggers for the activation of specific recovery actions? b. Do the triggers enable the recovery plan to be activated 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., the bank’s lower tolerance levels for capital ratios and liquidity ratios, and its upper tolerance for impaired loans and for exposure concentration ratios)? d. What monitoring arrangements are in place to enable the senior management and the board to regularly monitor data in relation to the triggers? e. What systems apply for alerting the 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 in relation to capital, liquidity, asset quality and profitability? g. What monitoring arrangements are in place to enable the senior management and board to regularly monitor data in relation to the EWIs? h. Are the EWIs structured so that they identify escalating levels of potential risks 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 to activate particular recovery actions? j. Does it identify the persons responsible for the different elements of the activation process? k. Is there a clear documentation of delegated authorities for particular actions? l. Is there an appropriate process for escalation of decision-making? ### Restoration points for recovery - The restoration point must be clearly specified. - Minimum requirement: restore capital and liquidity to levels that meet the regulator’s regulatory requirements, with a sufficient cushion to achieve a very low probability of any future breaches of these requirements. - Often higher restoration points should be specified to restore and maintain market confidence and retain access to inter-bank funding; banks often set restoration points towards the higher end of the target range for key risk metrics in their RAS (e.g., capital and liquidity). - Restoration points should be clearly set out and justified, and include levels for: - CET1 ratio; - Tier 1 capital ratio; - total capital ratio; - HQLA ratio; - LCR ratio; - profitability, expressed both in ROA and ROE terms; - asset quality, expressed in terms of relevant indicators of impaired and restructured assets as a percentage of total assets or total loans. ### Issues for supervisors in reviewing restoration points - Supervisory assessment points: a. Does the recovery plan establish restoration points for key variables, such as capital, liquidity, asset quality and profitability? b. 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? c. 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? d. Would the restoration points enable the bank to retain an acceptable credit rating (sufficient to maintain access to financial markets and inter-bank funding)? ### Recovery options — general requirements - Recovery options must be comprehensive, detailed, and include step-by-step implementation guidance. - Identify the person(s) authorized to take each action and make delegated authorities clear. - Identify the maximum plausible amount that the recovery action would contribute to capital or liquidity. - Emphasis on practicable actions implementable within a relatively short timeframe (e.g., within three months, and no longer than six months). - Prioritize recovery actions with the greatest near-term benefit to capital, liquidity, profitability and asset quality, and which have credibility with stakeholders. ### Requirements for each recovery action - For each recovery action, specify: h. the quantitative amount that the recovery action would contribute to the restoration of capital, liquidity, profitability or asset quality; i. the period of time required to complete the recovery action; j. the processes and procedures required to implement the recovery action to the point of completion; k. the documentation that has been prepared or that will need to be prepared to ensure prompt implementation of the recovery action; l. the potential legal and regulatory requirements which must be met to implement the recovery action and the means by which these requirements will be met; m. the persons in the bank (including directors) with the authority to approve implementation steps for the recovery action. - Recovery actions must address underlying causes of the problem and provide guidance on steps to identify and resolve underlying causes; may suggest engagement of an independent expert party. ### Recovery actions in relation to capital - Plans should set out comprehensive, realistic, practicable and credible recovery actions to restore CET1, Tier 1 and total capital to target levels. - Recovery actions should generally be capable of completion within three months desirably, and not more than six months. - Categories of capital recovery actions: a. raise equity from existing shareholders via a rights issue (desirably underwritten by an investment bank) or through private placement of equity to existing controlling shareholders, consistent with what is permitted under the bank’s constitution; b. raise equity from new investors, such as the issuance of shares to selected potential shareholders; c. convert debt into equity where the bank has a tranche of debt with contractual provisions to enable it to be converted into equity upon specified triggers being met; d. write down debt where the bank has a tranche of debt with contractual provisions to enable the debt to be written down upon specified triggers being met; e. suspension of distributions (including dividends) to shareholders; f. reduction or suspension in new lending, so as to reduce the amount of additional capital required; g. initiatives to reduce operational expenses, so as to reduce the amount of additional capital required; h. sale of assets or change in the mix of assets so as to reduce the amount of additional capital required and to increase the risk-weighted capital ratio by reducing the amount of risk-weighted credit exposures; i. sale of subsidiaries; j. issuance of new debt that meets the eligibility criteria for inclusion in tier 2 capital. - For each action, specify estimated amounts and timeframes, step-by-step implementation arrangements, and draft documentation or detailed term sheets. - Feasibility, amount, sequencing and timeframe differ between idiosyncratic and market-wide scenarios; recovery actions generally more feasible and faster in idiosyncratic scenarios. ### Recovery options for liquidity - Liquidity recovery actions must be specific, realistic, practicable and credible; priority based on probability of successful implementation and contribution to liquidity need. - Speed is critical; success and credibility measured in hours and days. - Categories of liquidity recovery actions: a. sell marketable securities; b. obtain liquid assets from controlling shareholders where feasible; c. raise liquidity via borrowing from other banks under committed standby facilities; d. borrow from the central bank under business-as-usual liquidity facilities provided routinely to banks by the central bank; e. sell illiquid assets in exchange for liquid assets, including via sale and repurchase agreements or securitisation; f. lengthen the maturity profile of liabilities; g. shorten the maturity profile of assets (where feasible); h. reduce the need for liquidity by reducing new lending and reducing operating expenses, where feasible; i. renegotiating the terms of scheduled debt repayments and debt servicing where this is considered feasible and prudent. - All liquidity recovery actions should be quantified in terms of estimated impact on liquidity, with implementation steps and timeframe, and draft documentation or detailed term sheets. ### Recovery options for profitability - Recovery actions must be realistic, practicable and credible; profitability restoration is less urgent short-term but critical for long-term survival. - Priority may be lower in short-term recovery, but essential for capital maintenance and market confidence. - Categories of profitability recovery actions: a. Initiatives to reduce operating expenses, consistent with maintaining acceptable risk management practices and critical functions and services. b. Initiatives to increase revenue from under-performing business lines where feasible and where this is consistent with the bank’s risk appetite and risk management frameworks. c. Initiatives to reduce or eliminate business activities that do not meet defined ROA and ROE hurdles. d. Initiatives to reduce average funding costs where feasible, consistent with the bank’s risk appetite and risk management frameworks. - Where feasible, include estimates of contribution to increased profitability, expected timeframe, and steps required. ### Recovery options for asset quality - Asset quality recovery actions meet tests of realism, practicability and credibility; tend to be longer term than capital and liquidity actions but should be achievable in credible timeframes. - Categories of asset quality recovery actions: a. restructuring of loans to enhance recoverability (e.g., elongating the term of the loan, suspending interest payments); b. transferring impaired loans into an asset management company owned by the bank; c. selling impaired loans to other parties; d. write-off loans considered to be irrecoverable; e. strengthening lending policies and procedures and credit risk management for new loans. - For each action, identify expected impacts on asset quality and timeframe; specify implementation steps in detail. ### Other types of recovery actions - Examples include: a. Possible removal of staff, including senior management, if responsible for the cause of stress or impediments to recovery. b. Actions to minimize or manage potential contagion risk between entities in the banking group or financial conglomerate. c. Actions to address underlying causes of the bank’s/group’s financial stress, potentially including: i. Establishment of an internal review process to evaluate causes and remedies. ii. Possible appointment of an external, independent party to undertake an assessment of causes and remedies. iii. board oversight of these processes. iv. Reporting to the regulator. v. Transparency, including public reporting on causes and remedies. *IMF | Technical Report* ### 34. Indicative questions that supervisors should consider in reviewing the recovery actions ### 34. Indicative questions that supervisors should consider in reviewing the recovery actions ### General (in general terms) - Does the recovery plan contain a comprehensive suite of recovery actions in respect of capital, liquidity, asset quality, profitability, maintenance of critical functions and services, and communications with stakeholders? - Are the recovery actions credible and realistic? - Have the recovery actions been set out by priority of action (i.e., sequence of implementation) and in the relevant categories? - Have the impacts of the recovery actions been quantified (e.g., in terms of contribution of the bank’s capital, liquidity, etc.)? - Can the recovery actions be implemented in a timely manner (e.g., within 1 week for near-term liquidity recovery, within 1 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 the responsible persons and delegated authorities been identified for each recovery action? - Have any legal or regulatory obstacles to recovery actions been identified and the solutions to those obstacles set out in the recovery plan? - Is there supportive documentation for recovery actions; e.g., capital issuance term sheets, indicative capital offer documents, liquidity standby facility documentation, etc.? - Does the recovery plan adequately differentiate between idiosyncratic and system-wide scenarios in terms of the impact these would have on: - i. the selection of recovery actions; - ii. the implementation process for recovery actions; - iii. the likely success or failure of recovery actions; - iv. the amount of funds obtained (or saved) by particular recovery actions; and - v. the timeframe for implementation of recovery actions? ### Capital recovery actions - Do the recovery actions include sufficient capital-raising options? - Have the capital-raising options been prioritized in terms of the sequence in which they would occur? - Have the capital-raising options been quantified, indicating a maximum plausible amount of capital that could be raised (or capital savings that could be made)? - How long would it take to raise capital? Does the recovery plan provide sufficient detailed information to determine whether capital can be raised within (at most) a three-to-six-month period from the time that the recovery plan activation has been triggered? - Does the recovery plan identify in detail the implementation steps required to implement particular capital-raising recovery actions? - Does the recovery plan identify all regulatory approvals needed for capital-raising recovery actions? - Has the bank prepared the necessary legal documentation, or at least terms sheets, for capital-raising recovery options? - For bail-in debt (if any), is the process for contractual bail-in documented? - Does the recovery plan adequately differentiate between idiosyncratic and system-wide scenarios in terms of the types of capital recovery actions that could be used, the amounts likely to be raised, the probability of successful implementation and the timeframe required for implementation? - Have other recovery actions for capital restoration and conservation been identified in sufficient detail, such as: - i. selling assets; - ii. selling subsidiaries; - iii. reducing the average risk weight of assets by changing the composition of assets to lower-risk assets; - iv. reducing new lending; - v. suspending distributions to shareholders; - vi. reducing expenditures, etc.? - Have these options been prioritized and quantified? - Have the implementation procedures for each option been documented adequately? ### Liquidity recovery actions - Have the liquidity-raising/saving recovery options been prioritized? - Are the recovery options practicable? Can they be implemented in sufficient time to meet liquidity needs? - Are they quantified? - Do they contain detailed implementation guidance? - Do the recovery actions include sufficient options for reducing cash outflows; e.g., via reduced new lending, reduced expenditures, suspension of dividends, etc.? - Do the recovery actions include sufficient options for increasing cash inflows; e.g., via 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 sufficient measures to attract new deposits and retain existing deposits, and to lengthen the maturity of funding where feasible? - Has draft documentation been developed to facilitate liquidity recovery actions, such as draft liquidity injection documentation, standby documentation, terms sheets for such documentation, etc.? - Do the recovery options identify potential sources of borrowing; e.g., particular banks, securitization vehicles, or a borrowing facility with shareholders? ### Profitability recovery actions - Do the recovery actions include adequate initiatives to restore the bank to an acceptable level of profitability, and within a reasonable period of time? - Are cost reduction actions adequately identified and quantified? Would cost reduction options weaken the ability of the bank to continue to perform critical functions and services? - Are actions to increase revenue and margins adequately identified and quantified? - Would revenue-enhancing recovery actions be consistent with maintaining prudent risk management or create excessive risks? - Have the recovery actions been prioritized and quantified? - Have the procedures required to implement them been adequately documented? ### Asset quality recovery actions - Do the recovery actions include adequate initiatives to identify impaired assets? - Do the recovery actions include undertaking an asset quality review (if needed)? If so, have the procedures been adequately identified and documented? - Does the recovery plan identify how impaired assets would be managed in ways that maximize recovery value? - Does it contain measures to address the problems that created asset impairment; e.g., measures to strengthen the credit risk management process? - Does it contain initiatives to prevent further deterioration in asset quality; e.g., ceasing to extend credit to poor quality borrowers, etc.? ### Critical functions/services recovery actions - 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 no or minimal 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 business continuity plan, where consistency would be expected? ### Other recovery actions - Does the recovery plan include actions that are 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 in 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 in question and the remedies to seek to avoid a repeat of the problem? ### Scenarios for recovery plans - Standard supervisory regulation on recovery planning requires banks to include three types of scenarios in their recovery plans: - a. 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; - b. 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 - c. 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. - The recovery plans should provide reasonably comprehensive descriptions of the scenarios used for the recovery plan, including detailed information on the magnitude of impact on capital, profitability, asset quality and liquidity, together with all material assumptions made. It is particularly important that the scenarios used include severe impacts on both capital and liquidity, where the bank’s minimum regulatory requirements for capital and liquidity are breached. - Banks should avoid designing recovery plans on the basis of particular causes of an adverse impact; the cause is much less important than the magnitude of the impact. Recovery plans should have broad-based, high-level scenarios that provide relevant details for impacts on: - a. loan losses; - b. operation risk losses (if the scenario involves these; e.g., a fraud or money laundering event); - c. profits; - d. capital; - e. cash inflows and outflows; - f. liquidity position; - g. losses (or gains) arising from market risks as a result of assumed changes in asset prices, interest rates and exchange rates. - Scenario analysis should include an identification of all material assumptions made for the scenario, including in respect of 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. The projections should incorporate the financial impacts of recovery actions taken in the scenario. - Selection of recovery actions should take into account the nature of the scenario (e.g., capital-raising and interbank liquidity access are 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 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 that the bank in question considers them to be relevant to their risk profile. ### Issues to be assessed by supervisors (scenarios) - 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 (in which the financial system is operating normally and only the bank in question has sustained major losses) and a market-wide scenario (in which many banks are experiencing very adverse economic and financial shocks)? - Does the recovery plan identify the assumptions made 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 as regards impacts on liquidity and the likely recovery strategies needed to respond to these? ### Communications - Recovery plans need to identify all stakeholders (internal and external), the information needs of each stakeholder category and the means by which those needs can best be addressed. - Communications actions should include proactive and reactive communication initiatives, including: - a. call center communications arrangements and upscaling for high volumes of calls; - b. web-based communications; - c. Question and Answer material; - d. communications with correspondent banks and other counterparties on matters relating to scheduled payments and settlements; - e. communications with credit rating agencies and the financial news media; - f. information and processes to facilitate news media briefings; and - g. guidance for communications via social media. - Recovery plans should address the need for synchronized communications, especially the ability of a bank to announce, with credibility, the recovery actions it plans to take at the same time as it announces the adverse impact that prompted such actions. - The recovery plan should identify the responsibilities of the board, CEO, CFO and other key officers in the communications strategy. It should set out means for coordination within the bank, within the group and with relevant agencies (e.g., banking supervisor and the stock exchange). If part of a financial conglomerate, include guidance on coordination across entities to achieve consistency of message. ### Issues to be assessed by supervisors (governance and communications) - 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: - i. news media statements; - ii. news media conferences; - iii. social media; - iv. call centers; - v. web-based information; - vi. automated emails; and - vii. 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 - Banks should consider key inter-dependencies for each recovery action and identify preparatory measures to alleviate operational barriers and complexities. Examples include changes to organizational or legal structures, separation of critical functions and services to be self-supporting, and preparation of documentation and procedures to facilitate recovery actions (especially for capital issuance, securitization, asset sales and accessing liquidity via standby facilities). - The recovery plan should describe the preparatory measures to be taken to improve the effectiveness of recovery options, with a work program to implement the measures. ### Examples of common preparatory measures - a. Share issuance terms sheets, documentation and issuance procedures—for ordinary shares, preference shares and hybrid instruments (e.g., subordinated debt capable of conversion to equity). - b. Subordinated debt terms sheets, documentation and issuance procedures, including tier 1 subordinated debt and tier 2 subordinated debt. - c. Terms sheets and documentation for equity and debt underwriting agreements. - d. Identification of potential underwriters. - e. Identification of potential institutional investors. - f. Identification of potential merger partners and indicative procedures for merger. - g. Documentation and operational pre-positioning for securitization of loans. - h. Documentation and operational pre-positioning for asset sale and repurchase arrangements. - i. Procedures and arrangements needed to sell subsidiaries if required. - j. Indicative shareholder resolutions and board resolutions for particular recovery actions. - k. Terms sheets and documentation for liquidity standby facilities. - l. Draft indicative news media statements and Q and A material. - m. Documentation of service-level agreements for all outsourced services and critical shared services. ### Issues to be assessed by supervisors (preparatory measures) - 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? *Source: IMF Technical Report — Indicative questions for supervisors reviewing recovery actions* ### 55. It is important that recovery plans are subject to rigorous testing. Testing can be done in a ### It is important that recovery plans are subject to rigorous testing. ### Objectives and scope of testing (paragraph 55) - Tests can be structured to evaluate: - the ability of the bank to detect emerging stress, such that the triggers for the recovery plan are able to be invoked as and when required; - the ability of the bank to implement recovery actions relating to particular categories of recovery—capital, liquidity, asset quality, profitability, etc.; - the ability to communicate effectively with stakeholders (role-played); - the performance of senior management in terms of its responsibilities in a recovery process; - the performance of the board in terms of its responsibilities in a recovery process—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 the specified timeframes, especially for time-critical actions; and - the degree of integration of the recovery plan with the bank’s risk management framework, ICAAP, business continuity plan and governance arrangements. ### Forms of testing and participation (paragraph 56) - Forms of testing include: - 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. - Participation and conduct: - members of senior management must be involved in substantive testing, especially live simulation exercises, with each member playing his/her own role; - for some tests, members of the board should be included (e.g., to test the board Chairperson’s ability to communicate effectively with external parties, role-played); - testing of senior management and board members’ capacity to communicate with role-played news media and financial markets under realistic time pressure is of particular importance. ### Testing framework requirements (paragraph 57) - The recovery plan should set out the framework for regular testing, including: - objectives and scope of testing; - the parties responsible for organizing and conducting the tests; - the processes and procedures for conducting the tests; - the means by which test results will be documented and reviewed by the board, and by internal audit. ### Issues for supervisors to assess testing arrangements (paragraph 58) - Indicative supervisory questions: - a. Has the bank identified the proposed arrangements for testing the recovery plan on a regular basis? Has the bank specified clear objectives for testing? - b. Is the scope of testing sufficient? Does it cover all elements of the recovery plan? - c. Does testing include members of senior management team (including CEO) and board? - d. Is Internal Audit involved in the testing process? - e. Is the frequency of testing sufficient? - f. Has an ‘owner’ for the testing process been identified? - g. Is the testing process adequately resourced? - h. Are external parties be involved in the testing process? - i. 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 (paragraphs 59–60) - Review frequency and scope: - A bank’s recovery plan needs to be subject to comprehensive and regular review—generally annually. - Reviews should be undertaken in respect of all aspects of the recovery plan, including the scenarios, triggers, recovery actions and governance arrangements. - Reviews should be informed by the testing of the recovery plan. - Internal and external review roles: - The recovery plan should identify internal review processes, including reviews by the risk management unit and internal audit. - Occasional external reviews by independent experts can be helpful, especially if external experts participate in regular tests and can use their insights to assess adequacy. - External reviews are important for assessing the adequacy of the bank’s management and board in relation to their responsibilities, given potential limitations of internal staff reviews. ### Issues for supervisors to assess review and update processes (paragraph 61) - Indicative supervisory questions: - a. Has the bank set out the proposed arrangements for the regular review of recovery plans? Are the arrangements adequate? - b. Has an ‘owner’ for the review process been identified? - c. How frequently is the recovery plan reviewed? - d. How will the review be integrated with the bank’s review of its risk management framework, risk appetite, ICAAP, BCP, etc.? - e. What is the involvement of the CEO, EXCO, board Risk Committee and board in the review process? *IMF | Technical Report* ### CHAPTER 2—Resolution Tools ### CHAPTER 2—Resolution Tools ### Resolution tools — overview - Legislation should list all resolution tools together and describe them in high-level terms; subsequent sections (one per type of tool) should explain each tool in detail. - CBS policy papers may justify limiting tools (e.g., no bail-in, no asset separation/use of asset management vehicle), but law should be “future-proof” and include powers that may not be used immediately. - At minimum the law should provide for: - sale of business tool (compulsory transfer of selected assets and liabilities or shares to a private purchaser); - bridge bank tool (transfer to a specially incorporated, gov’t owned bridge institution); - Bail-in tool (recapitalisation by writing down, including to zero, principal amounts of liabilities or converting them into equity); - Temporary public support tool (state purchase of whole bank or participation in recapitalisation using public funds). ### Conceptual distinctions and sequencing - Maintain a conceptual distinction between: - bail-in (resolution tool for recapitalisation affecting ordinary unsecured liabilities, both subordinated and senior, in theory); and - write down and conversion of capital instruments (economically similar to bail-in but affecting only capital instruments as initial loss absorption prior to recapitalisation or other resolution). - Use of write down and conversion of capital instruments should be a pre-requisite to or accompany any use of resolution tools to ensure shareholders and creditors absorb losses before recapitalisation or transfers or public support. ### Sale of business tool — operational and legal mechanics - CBS should effect transfers by a legally binding instrument (decision, order, notice—depending on local norms) that: - effects transfer in a legally perfect manner without shareholder approval or other consents; - expressly derogates from substantive or procedural rules that would otherwise apply under company or securities law. - CBS should strive to obtain commercial terms and ensure consideration is paid to shareholders (for share sales) or to the transferor bank (for asset sales). - CBS may make supplemental transfers following the first one and may make reverse transfers (from purchaser back to the bank). - Provision should empower CBS to make further detailed rules/issue further guidance on implementation. ### Bridge bank tool — specifics - Similar derogation from normal companies/securities law as sale of business tool. - Specifics to address: - incorporation of a bridge institution by the state; - temporary and short relief from full compliance with bank licensing conditions; - continued access to payment and settlement systems for the bridge bank. ### Bail-in tool — scope and exclusions - Bail-in tool should define scope and expressly exclude certain liabilities from scope of bail-in. - Normally excluded liabilities would at least comprise: - insured deposits (where there is a DGS; where there isn’t the exclusion could extend to the amount of deposits preferred in insolvency if there is depositor preference); - secured liabilities (only to the extent of the value of the security/collateral); - short maturity (<7 days) liabilities owed to other banks; - liabilities with remaining maturity <7 days owed within payment, clearing and settlement systems; - liabilities in respect of employee fixed salary; - liabilities owed to trade creditors that provide critical services (e.g., IT). - Other typical exclusions (e.g., fiduciary liabilities, liabilities in respect of client assets) may be less relevant depending on banks’ activities in the jurisdiction. - EU example reference: Art. 44 BRRD. ### Temporary public support tool — conditions and limits - Place strict conditions on state support: - consultation between CBS and the ministry, with government ultimately deciding that other tools won’t suffice to safeguard Seychelles financial stability; - law should make clear public funds are a last resort. - Require very significant loss absorption by shareholders and creditors before any public intervention; example standard: shareholders and creditors susceptible to bail-in have first absorbed losses worth 8% of the total liabilities including own funds (i.e., capital) of the bank (EU requirement example). - Establish right of the State to make an ex post recovery from surviving banks (potentially via a levy). - Empower CBS and/or the Ministry to make further rules controlling use of public funds; do not attempt to specify every detail in primary legislation. ### CBS policy power framing (prelude to Chapter 3) - Subsequent Parts should enshrine legal powers for CBS to apply resolution tools directly against the bank in resolution and relevant subsidiaries, derogating from companies, securities or insolvency law. - Powers should also be usable in respect of local branches of foreign banks, subject to Part 6 (cross-border). --- ### CHAPTER 3—Resolution powers ### Power to write down and convert capital instruments - Define the power to write down and convert capital instruments (distinct from bail-in). - Use of this power should be a pre-requisite to or accompany any use of resolution tools so shareholders and creditors absorb losses before recapitalisation, restoration of viability, or public support. ### General resolution powers — illustrative list - Powers CBS may need include (but are not limited to): - haircutting the value of claims (principal and interest) and altering their maturity; - power to transfer the bank’s shares and property to another person; - power to assume normal functions of bank’s management and shareholders (directly or via special manager); - power to require the bank to issue new capital instruments. ### Automatic exclusion of early termination clauses linked to resolution/recovery - Legislate that action under Part 3 (early intervention) or Part 4 (resolution) shall not per se constitute an event of default, termination event or entitle counterparties to terminate, provided the bank continues to perform its obligations under the contract. - Note: temporary stay provision means brief nonperformance (two day maximum) during the resolution stay would not constitute nonperformance enabling termination. - This automatic exclusion operates as a matter of law whenever action is taken under Part 3 or Part 4 and does not require CBS to make a specific instrument or order. - EU example references: Arts. 68-71 of BRRD. ### Power to temporarily suspend obligations - CBS may make an order temporarily suspending the bank’s payment and delivery obligations except for obligations owed within systemically important payment, clearing and settlement systems. - In jurisdictions with DGS, insured deposits would be excluded from this suspension. - Time limit: maximum end of the business day following the business day on which resolution commences (if these days are on either side of a weekend, effective duration is lengthened by the weekend). ### Power to restrict enforcement of security - CBS may make an order restricting enforcement of security by secured creditors of the bank in resolution. - Subject to equivalent time limit as the temporary suspension of obligations. - Provision does not apply to security taken from the bank by CBS in the context of CBS lending/market operations. ### Power to temporarily suspend termination rights - CBS may make an order suspending termination rights of any contractual counterparty of the bank in resolution. - Subject to equivalent time limit as other time-limited powers and subject to proviso that the bank continues to perform obligations under the contract (payments, deliveries, collateral). - Unlike the automatic exclusion of certain termination rights, this power requires a written order and can apply to a broader range of termination rights. --- ### Part 5 — Resolution safeguards and judicial review ### No creditor worse off (NCWO) - Establish rule that no creditor should make a worse recovery in resolution than in a normal insolvency under Part 7. - Provide for an independent valuer to make an ex post valuation to establish the counter-factual. - Establish right to compensation equal to the difference if a creditor would have made a better recovery in insolvency. ### Protection of netting and set-off arrangements - CBS may not use resolution powers to transfer some but not all rights and liabilities protected under netting or set-off arrangements — preserves inviolability of netting/set-off in resolution. - Consider extension to title transfer financial collateral arrangements (common in OTC derivatives and repo) if relevant to local bank activity; example statutory definitions precedents: S.48 UK Banking Act 2009. - “set-off” — arrangements under which two or more debts, claims or obligations can be set off against each other; - “netting arrangements” — arrangements under which a number of claims or obligations can be converted into a net claim or obligation and include “close-out” netting arrangements. - If deposit insurance exists, logical carve out for insured deposits to the extent needed to ensure availability of insured deposits. ### Protection of security interests - When transfer powers move a secured liability to another bank/bridge bank, the asset securing that liability must also be transferred (and vice versa). - Carve out possible if deposit insurance is established to ensure insured deposit availability. - Law should prevent CBS from using resolution powers to modify contract terms creating security where modification would cause the liability to no longer be secured. - Protection for secured liabilities against bail-in is best established in the bail-in section (exclusion for secured liabilities to the extent of value of security). ### Judicial review — ex ante and ex post - If constitutionally possible, determination that a bank is at the point of nonviability and the decision to resolve or liquidate should not be subject to ex ante judicial review. - Interested parties should have legal right to seek ex post judicial review, but remedies and effects can be limited: - judicial review must not have automatic suspensive effect on the challenged decision; - even if challenge succeeds, unwinding of property transfers done pursuant to the act should be prevented; remedy limited to compensation for damages. --- ### Part 6 — Cross-border resolution ### Recognition of foreign resolution action - CBS, when informed by a foreign resolution authority of foreign resolution action affecting a Seychelles branch, must decide to recognize, refuse to recognize, or partially recognize the foreign resolution action. - Law should create a statutory presumption in favour of recognition; refusal or partial recognition only on select grounds, e.g., if recognition would: - harm financial stability in the Seychelles; - have material fiscal implications for Seychelles; or - result in Seychelles creditors/depositors receiving worse treatment than those in the foreign jurisdiction. ### Non-recognition and independent branch resolution - If statutory grounds to refuse (or partially recognize) exist, CBS can deploy its own resolution tools and powers under Part 4 to resolve the Seychelles branch independently. - Separately, CBS must be empowered to take resolution action against a Seychelles branch even where the parent is not subject to foreign resolution proceedings, if conditions for resolution in Seychelles are met. ### Cooperation with other jurisdictions - Empower CBS to establish working relationships with foreign resolution authorities (e.g., sign MoU, exchange information on recovery and resolution matters). --- ### Part 7 — Bank insolvency ### Conditions for compulsory winding-up - CBS may appoint a liquidator to compulsory wind up a bank where: - (a) CBS has determined the bank is at the point of nonviability pursuant to Section [x] in Part 4; and - (b) CBS determines that resolution objectives are better served via compulsory winding up under this Part rather than resolution under Part 4. - CBS may also appoint a liquidator to wind up any bank unable to pay its debts or likely to become unable to pay its debts. - Once CBS decides to take resolution action under Part 4, compulsory winding up may not commence except with consent or at the initiative of CBS. - After a property transfer to a bridge bank or purchaser, CBS may commence winding up of the now-insolvent shell and enable it to continue providing administrative/operational support to transferee pending conclusion of winding up. ### Typical liquidator provisions - Reuse existing boilerplate for appointment, goals, powers, and objectives of liquidator where suitable. - Consider specifying clearer statutory objectives for liquidation; e.g., for nonbanks: winding up affairs to achieve best result for creditors as a whole. - If deposit insurance exists, statutory priority could be given to ensuring insured depositors are repaid promptly. - Define liquidator powers; include moratorium on other legal process against the bank undergoing winding-up if not already present. ### Creditor hierarchy - Law should clearly define priority of claims in insolvency and require distributions according to priority at conclusion of winding-up. - Question of depositor preference requires further discussion. - Typical creditor hierarchy in a jurisdiction with deposit insurance and depositor preference might look as follows: - Secured liabilities - Other preferred liabilities (e.g., salaries, taxes, pension contributions) - Insured deposits up to the insurance ceiling - Uninsured deposits - Ordinary unsecured creditors (a wide variety of unsecured claims, all ranking pari passu) - Subordinated debt - Tier 2 regulatory capital - Additional Tier 1 instruments - Common equity Tier 1 *IMF | Technical Report — CHAPTER 2—Resolution Tools (excerpts and related subsequent Parts as provided)* ### Part 8—Consequential amendments to other legislation ### Part 8—Consequential amendments to other legislation ### Section 13 FIA - Principle: FIA applies also to nonbank financial institutions (chiefly BDC). Thus, unless there is a strong policy imperative to do so, it is not necessary to alter the effect of any FIA provision insofar as they affect BDC but only select provisions insofar as they currently affect banks. - Concern: The current grounds for variation/revocation of license are very wide-ranging and could be criticized for allowing revocation in situations where it would be clearly disproportionate. The requirement that the CBS justify its action and the right for review mitigates this concern. - Caution: On point (1)(f) of S.13 the report cautions against trying to define the threshold for bank insolvency/apparent insolvency or of bank resolution within this provision itself, especially in any quantitative terms. - Proposed drafting approach: - Limit existing point (f) in scope to BDC and insert a new point (fa) immediately after as follows (exact wording preserved): - only in respect of a financial institutions that is a bank, [bank] satisfies the statutory conditions for compulsory winding-up established under Part 7 of [Bank Recovery and Resolution Act 2024] or the conditions for entry into resolution established under Part 4 of that Act. - Rationale: avoids defining legal thresholds for bank insolvency/resolution within license revocation provisions and allows license revocation to occur in either a bank resolution or a bank insolvency without automaticity of revocation. - Supplement to point (1)(c) of S.13 (for banks only): - Suggested amendment (exact wording preserved): - (c) either fails to comply with the terms and conditions of the license or any corrective measures required by the Central Bank in accordance with section 53 (Central Bank’s power over unsafe practises) or, in respect only of a financial institution that is a bank, fails to act in accordance with any measure taken by the Central Bank under Part 3 of the [Bank Recovery and Resolution Act] (Recovery and Early Intervention). - Practical note: License revocation at this stage might be unusual; escalation from failure to comply with recovery instructions is typically toward resolution rather than revocation. ### Section 53 FIA - Role: Section 53 should continue to apply to banks with minor modification as the legal anchor for ‘normal’ supervisory intervention (i.e., before reaching the threshold for early intervention/recovery under Part 3 of the new act and potentially including ‘heightened’ supervision short of formal recovery action/early intervention). - Interaction with early intervention: - Either within Section 53 itself, or in Part 3 of the new act, include a provision affirming that for early intervention under Part 3 to commence it is not necessary for CBS to have previously taken any action under Section 53 FIA. - Reorganising agents framework: - With the new legal regime for recovery and resolution, the framework for reorganising agents under S.66 FIA and Sch. 4 is redundant for banks. - Suggested amendment (exact wording preserved as example): - (k) only where the financial institution concerned is not a bank, appoint a reorganising agent in accordance with the provisions of section 66 of this Act. ### Section 66 FIA and Schedules 1 to 5 FIA - S. 66(1) and Sch 1: - Should not be amended because change-of-control and takeovers in the ordinary course should remain subject to regulatory approval. - Note: Part 4 of the new Act (resolution) could expressly exclude operation of Sch 1 FIA in bank resolution. - S.66(2) and Sch 2: - Part I of Sch 2 (voluntary winding up) could continue to apply to solvent banks that decide to close. - Part II (compulsory winding up) should be disapplied to banks and limited only to financial institutions that are not banks. - Replacement: Part 7 of the BRRA will establish provisions for winding up a failed bank that is not subject to resolution action, recycling much of Part II content where appropriate. - S. 66(3) and Sch 3: - Should be limited in scope to financial institutions that are not banks because Sch 3 becomes redundant for banks under Part 4 (resolution). - S. 66(4) and Sch 4: - Should be limited in scope to financial institutions that are not banks because Sch 4 becomes redundant for banks under Part 3 (recovery/early intervention). - S.66(5) and Sch 5: - Could continue to apply to foreign financial institutions that are banks. - Recommendation: include a provision affirming that the framework for closure of a foreign FI in Sch 5 is without prejudice to powers and tools for resolution of a foreign FI that is a bank under Part 4 (Resolution) and Part 6 (Cross-border resolution) of the new act; where CBS takes action under Part 4/Part 6, application of Sch 5 of the FIA is suspended. - Drafting caution: Whenever any FIA provision (especially the Schedules) is disapplied or modified for banks, check for explicit references to banks/banking and delete/amend as necessary. ### Appendix IV. Guidance on the Development of a Bank Resolution Manual — Introductory comments - Purpose: Provide guidance to a resolution authority on means by which a bank may be resolved; manual should be accessible and user-friendly. - Scope: Guidance covers nonviability assessment; entry into resolution; selection of resolution strategy by category of bank; implementation of resolution; communication; coordination of resolution actions among domestic agencies and cross-border coordination for foreign-owned banks or domestic banks with foreign operations. - Inter-agency input: - CBS and Ministry of Finance (MOF) collaborate on public funding, government guarantees, and ownership of a bridge bank; MOF involved in exit from public support and ownership arrangements. - Securities regulator involved in matters related to temporary suspension of disclosures to the stock exchange and public listing of shares in a restructured bank. - Communications elements require input from all agencies; a working group of all agencies led by CBS is suggested to coordinate manual development. - Resolution planning: - CBS should develop resolution plans for each DSIB, drawing on the manual and separate guidance on resolution planning and resolvability assessments. ### Appendix IV. Guidance — Key elements of a bank resolution manual - Key elements set out: - Crisis diagnostics—viability assessment and systemic impact assessment; - Resolution strategies, including criteria to assist in selecting which strategy might be appropriate in particular circumstances by category of bank; - Step-by-step implementation plans for resolution tools; and - Cross-border cooperation and coordination. ### Supervision to resolution - Continuum: Management of weak and failed banks ranges from early supervisory actions and preventative measures through intensive corrective actions to placing a bank into resolution if nonviable and not recoverable. - Separation principle: Maintain clear distinction between supervision (keeping bank functioning safely) and resolution (resolving failed bank quickly); benefits when supervision and resolution are managed as separate processes. - Process overview: - Early stages: identification of financial distress, informal and formal preventative/corrective measures; bank may invoke its recovery plan; private-sector solutions (e.g., merger) may be sought. - Supervisory framework: structured framework of preventative and corrective actions based on escalating quantitative and qualitative triggers and supervisory responses; contingency plans should be maintained. - Nonviability and entry into resolution: - If early intervention is unsuccessful and bank is nonviable (as specified in resolution law), supervisors should trigger resolution and resolution staff take responsibility. - Need for clear definition of nonviability and framework for assessing it. - Principal elements of viability assessment: - Solvency assessment to determine the risk-weighted capital ratio and the non-risk-weighted leverage ratio of the bank/group on the basis of an asset quality review estimating probable recoverable value of assets. - Assessment of liquidity position on a projected basis using a stress testing framework. - Complement indicator-based analysis with qualitative assessment of medium-term prospects, business model, governance, and quality of risk management. ### Appendix Box 1. Key Elements of an Early Intervention Framework (selected highlights) - a. Clarity of objectives: Principal objective to identify and respond promptly and effectively to emerging stress to restore bank/financial institution to sound condition. - b. Integrated approach: Early intervention integrated into a risk-based supervisory framework and linked to supervisory risk assessments and ratings. - c. Early-stage intervention: Supervisory actions taken at an early stage, with triggers based on early-stage indicators. - d. Early warning system (EWIs): Comprehensive, structured EWIs linked to main risk factors and to bank risk appetite and recovery plan triggers; include indicators for capital, asset quality, profitability, liquidity, market risk and operational risk. - e. Structured framework: Preventative and corrective actions with clearly identified triggers and escalation; preventative action addresses early-stage stress; corrective actions respond to advanced stress or regulatory noncompliance and often based on quantitative triggers. - f. Proactive, prompt, decisive and time-limited: - Preventative and corrective actions should be time-limited. - It would be unusual and potentially concerning for a supervisory authority to allow a bank to be in any form of preventative or corrective action for longer than around six months before restoration or transition to voluntary exit or resolution. - g. Documentation: Triggers and responses should be clearly documented in structured format for supervisory use. - h. Consistency of approach: Treat each supervised bank broadly the same in similar circumstances; supports competitive neutrality and reduces regulatory forbearance. - i. Transparency: Framework should be transparent so stakeholders can access and understand application and assess supervisory performance. - j. Governance: Clearly specified and documented allocation of powers and responsibilities for monitoring triggers, recommending and approving response actions, supervising implementation, and ex post review. - k. Contingency planning: Establish indicative response strategies for a range of scenarios; refresh and periodically test contingency plans. - l. Testing: - Desktop testing and live simulation exercises recommended. - Live simulations often include senior management and are generally held over a one-to-two-day period, followed by debrief and assessment. - m. Transitioning from intervention to resolution: - Clear pathway needed to transition a nonviable bank from heightened supervisory intervention to entry into resolution. - Requires established process for assessing viability; concept of nonviability must be clearly defined with analytical framework to determine viability or irrecoverable nonviability as trigger for resolution. - Procedures for entry into resolution should be clearly identified and documented. *Source: Part 8—Consequential amendments to other legislation; Appendix IV, as provided in the source content.* ### 11. Irrespective of a bank’s perceived medium-term prospects, it is desirable to have a hard ### 11. Irrespective of a bank’s perceived medium-term prospects, it is desirable to have a hard trigger for entry into resolution as a fallback if there is uncertainty over viability assessment outcomes. ### Supervisory assessment: crisis diagnostics (Steps 1—4) - Hard trigger example: - Bank’s capital ratio, calculated using an asset quality review, estimated to be below a defined threshold (e.g., 3 percent of risk-weighted exposures). - When supervisors assess a potentially vulnerable bank, the assessment should determine: - Solvency (i.e., surplus of assets over liabilities); - Common equity tier 1 capital position; - Total tier 1 capital position; - Total capital position; - Exposure to shareholders and other related parties; - Level of NPLs; - Level of specific provisions in relation to NPLs; - Expected loss on NPLs; and - Liquidity position - Asset valuation and capital estimation: - Estimate a range of capital values from best case to worst case, with assets estimated at expected recoverable values net of realization expenses. - Valuations on a going-concern basis unless closure is expected (gone-concern basis). - Supervisory authority should develop an asset quality review methodology for valuing individual loans and portfolios. - Slow deterioration: combine on-site assessment and external specialist asset valuation experts (such as one of the major accounting firms, other than the bank’s external auditor). - Rapid deterioration: fast-tracked solvency and asset quality review based on relatively conservative estimations of asset valuation. - Liquidity assessment should include analysis of: - the amount and quality of liquid assets; - access to parent or other shareholder liquidity (where applicable); - access to committed standby facilities with other banks; - amount and nature of assets capable of being used for collateral to obtain liquidity from the CBS or other sources; - maturity profile of liabilities, both using contractual and behavioral maturities, under assumed stress conditions; - schedule of projected payment and settlement obligations for a defined period (e.g., next one, two weeks, month, etc.); and - stress testing of liquidity by estimating the capacity of the bank to meet payment and settlement obligations, including deposit withdrawals, under a range of plausible stress scenarios. - Subsidiaries: - Capital/solvency and liquidity assessment of relevant subsidiaries that perform essential functions. - Timeliness and preparedness: - Supervisory authority should have capacity to undertake solvency, capital adequacy and liquidity assessments under acute time pressure (e.g., within 1 to 2 days). - Develop and test mechanisms and processes regularly. - Develop a data template detailing information needed for asset quality review/solvency and liquidity assessments. - Banks should be required to provide data to supervisors upon request, within a tight timeframe (e.g., 24 hours); this should be tested periodically. - Peer review: - Use peer review of selected banks to compare financial statistics and identify outliers and remedial actions. - Escalation: - If supervisors determine the bank is failing and supervisory actions cannot reverse its distress, or the bank is nonviable, responsibility passes to the resolution authority. ### Supervisory triggers for determining nonviability (Step 5) - Legal framework and triggers: - Establish clear dividing line between supervisory intervention (early intervention) and resolution. - Resolution triggers should include both qualitative and quantitative indicators and should not be unduly prescriptive. - Quantitative triggers examples: - Decrease of a bank’s regulatory capital level to below a predefined threshold (e.g., CAR or leverage ratio below 50 percent of the minimum required). - Some authorities specify a minimum level or hard trigger for entry into resolution in internal guidance (e.g., CAR falling below 3 percent of risk-weighted credit exposures). - Advantage: lowers risk of regulatory forbearance leading to delayed entry into resolution and greater losses for creditors. - Forward-looking evaluation: - Quantitative triggers should supplement the conventional insolvency test with forward-looking evaluation. - Resolution grounds can include where the bank: - (i) has become or is likely to become insolvent; - (ii) has suspended or is likely to suspend payments as they fall due; - (iii) has defaulted or is likely to default in making payments to depositors and other creditors; - (iv) is otherwise in a situation or circumstance that may materially impair the ability of the bank to make payments or otherwise continue its operations; - (v) the commencement of an insolvency or reorganization proceeding (other than on a solvent basis) over a group entity (including holding company); or - (vi) is a branch or subsidiary of a bank that has had its license in the country of its origin cancelled or been subjected to a resolution action or insolvency process. - CBS could add other indicators corresponding to the above, such as the bank’s inability to access financial markets or reliance on extraordinary public financial support. ### The resolution assessment process (Steps 5–6) - Upon supervisory trigger and handover to resolution authority: - Resolution authority reviews the diagnosis, determines possible resolution options, and selects the least-cost option that meets defined resolution objectives, taking into account systemic importance and inter-bank contagion risk. - Diagnosis and review often begin before the trigger is formally breached so the resolution authority can move quickly. - Immediate actions on entry into resolution: - Appoint a statutory manager or administrator, or resolution authority assumes control of the bank and relevant subsidiaries. - Statutory manager/resolution agent implements the resolution strategy. - Resolution option selection depends on factors including systemic importance: - Small bank with little or no systemic impact: likely closure and prompt pay-out of insured/preferred depositors or deposit account transfer via a P&A transaction. - Bank whose failure would have significant systemic impact: likely an “open resolution” to keep critical functions and services running. - Staffing preparedness: - Resolution authority should maintain a list of available candidates for statutory manager/resolution agent with backgrounds and experience to respond quickly. ### Systemic impact assessment (Step 5a) - Determination: - Taken by supervisory/resolution authority in liaison with other agencies. - Based on CBS’s DSIB framework but must account for time-specific circumstances of the distress event. - Systemic impact of a given bank can vary over time and with financial system fragility. - Criteria (drawn from BCBS DSIB framework) to consider: - the market share of each bank in each of the key lending sectors; - the market share of each bank in the deposit market (differentiating between retail and wholesale deposits); - the bank’s share of payments services, differentiated by payment system and payments product; - the bank’s share of lending to economic and social infrastructure providers; - inter-connectedness (including intra-group and between banks); - potential for the bank to cause contagion (drawing on the contagion criteria referred to below); - substitutability of systemically important financial functions (including considerations related to the concentrated nature of the banking sector); and - complexity (including any complexities arising from group structures and the location of essential banking functions in subsidiaries, and cross-border activity). - Group-level assessment: - Undertake systemic impact assessment on a solo and banking group basis where banks have significant business in subsidiaries. - Contagion risk assessment should include: - contagion via inter-bank exposures; - contagion arising from related party exposures, such as credit exposures to parent banks and other substantial shareholders; - credit rating downgrade risks associated with parent bank stress; - reputation impacts associated with parent bank or other major shareholder distress; - contagion risks associated with functional dependencies between banks with common shareholdings; - contagion via banks having common credit exposures (e.g., syndicated lending); - contagion impact of bank defaults on interest rate and foreign currency derivatives and the potential difficulty of replacing contracts under stressed conditions; and - confidence-linked contagion risks and potential for a generalized depositor run on banks. - Special considerations for systemic banks: - Functions that need to be continued may warrant recapitalization or transfer of critical functions and relevant assets and liabilities to a bridge bank or existing bank. - Resolution manual should list generic critical functions for systemic stability and guidance on quantitative thresholds for “open resolution” decisions. ### Resolution strategies and implementation (Step 5b) - Resolution authority determines appropriate strategy for systemic and non-systemic banks. - Standard resolution options: - Option 1: Closure and pay-out of insured deposits or preferred deposits (if depositor preference), followed by liquidation. - Process: - Appoint statutory manager/resolution agent and withdraw bank from payment channels. - Eligible deposit balances calculated on end-of-day positions. - CBS (or deposit insurer if established) confirms amount to be paid to each depositor, capped at deposit insurance or depositor preference cover per depositor/deposit category. - Payments made via a paying agent, funded by deposit insurance fund if one exists. - Payments should be made as soon as practicable, desirably within seven days. - Appropriate if: a. the bank is nonviable; b. the bank cannot recover; i.e., there is no prospect of shareholder support or external financial private sector support in the required timeframe; c. no other bank is prepared to acquire equity in the failing bank or to assume deposit liabilities (either total or solely insured deposits) and acquire assets from the failing bank; d. closure of the bank would not have a significant adverse impact on the stability of the financial system or economy; and e. closure and pay-out is a lower cost option than the alternative closed resolution options (such as P&A). - Option 2: Closure and transfer of insured deposit accounts and performing assets to a receiving bank (purchase and assumption, P&A). - Process: - Appoint statutory manager/resolution agent and withdraw bank from payment channels. - Eligible deposit balances calculated on end-of-day positions. - CBS (or deposit insurer if established) confirms amount to which each depositor is entitled, capped at deposit insurance cover per depositor or depositor preference cap. - Deposit accounts and legal right to operate associated IT systems transferred to acquiring bank or bridge bank. - Receiving bank administers failed bank’s IT systems; deposit accounts operate as usual once transferred. - Receiving bank purchases assets from the failed bank at market value. - If only insured/preferred deposits transferred, deposit insurer funds any shortfall in assets over deposit liabilities. - If uninsured deposits also transferred: - Deposit insurer provides funds up to insured deposits and resolution authorities fund the remaining gap. - Failed bank wound up through insolvency law; deposit insurance agency (if exists) has a subrogated claim of insured depositors on bank assets in liquidation. - Depositor preference system: - Preferred deposits transferred and funding gap met by resolution funding source. - If sufficient assets, nonpreferred deposit liabilities could also be included in P&A. - Preconditions and planning: - Requires pre-identification of candidate banks with prudential and operational capacity to assume at least insured/preferred deposits and acquire performing assets and critical functions. - Regular assessments of suitable candidate banks and, if time permits, bidding by candidate banks on eligible business, selecting on least cost to deposit insurer and suitability. - Option 2 might be appropriate if: a. the bank is nonviable; b. the bank cannot recover; i.e., there is no prospect of shareholder support or external financial private sector support in the required timeframe; c. no other bank is prepared to acquire equity in the failing bank; d. one or more banks are willing to assume the deposits (either all deposits or at least insured deposits), funded either fully by the deposit insurance agency or funded through a combination of deposit insurance funding and assets transferred to the acquiring bank.; e. closure of the bank would not have a significant adverse impact on the stability of the financial system or economy; and f. closure and transfer of insured deposits is assessed as being a lower cost option than the alternative closed resolution options (such as payout). *IMF | Technical Report* ### 43. As the third option, P&A option could also be conducted through the transfer of most ### Resolution options involving transfer, sale, bail-in, and public support ### Option 3 — Purchase & Assumption (P&A) via transfer to acquiring bank or bridge bank - Transfer of most or all of the failed bank’s assets, liabilities and business functions to another existing bank or a bridge bank, potentially including derivatives contracts, insurance business, ownership of key subsidiaries, etc. - Involves appointment of a statutory manager/resolution agent and withdrawal of the failed bank from payment systems. - Assessment of systemically important and otherwise viable business and associated functionality to be transferred to an existing bank or a bridge bank. - The business to be transferred (most likely including all critical functions and performing assets) would be valued and transferred at assessed market value. - Funding outcomes: - If the assets to be transferred at least equal the liabilities to be assumed by the acquiring bank, then no resolution funding would be required. - A surplus of assets relative to liabilities transferred would entail payment of the net amount to the account of the bankruptcy estate of the failed bank. - A deficiency in assets relative to liabilities transferred would require funding from either the bail-in of uninsured and unsecured liabilities (where feasible), the deposit insurance agency (if there is one) or the government (as a last resort only). - A deposit insurer’s funding would be capped at the amount it would have paid (net of recoveries) under a least-cost deposit insurance pay-out or insured deposit account transfer, where deposit insurance exists. - The failed bank, including any nonperforming loans that are excluded from the transfer, would be closed, and its residual business wound up under insolvency law. - Ex post compensation would be paid to creditors to the extent they were rendered worse off than under a conventional winding up, applying the statutory ranking of claims in winding up. - Option 3 might be appropriate if: a. the bank is nonviable; b. the bank cannot recover; i.e., there is no prospect of shareholder support in the required timeframe; c. the closure of the bank would have a significant adverse impact on the stability of the financial system; d. at least one suitably capitalized bank is able and willing to acquire the systemically important business of the bank, or a bridge bank could be established to acquire the relevant business. (The latter would be an option where no existing bank is willing or able to immediately acquire the systemic business of the failed bank. This option should be used with great caution, however, as bridge banks are inherently difficult to operate and if not well designed, may crystalize significant costs for taxpayers over the medium term); and e. the implementation of the P&A tool would not create market concentration concerns (and if such concern does exist, then a bridge bank could be used). ### Option 4 — Sale of the bank to another bank - Place the bank into administration and sell a majority shareholding position to an acquiring bank. - Methods: - Cancelling existing shares (assuming powers exist), with compensation to shareholders for the assessed value of the shares (if any) under a ‘no creditor/no shareholder worse off’ framework and issuing new shares to the acquiring bank. - Issuing new shares to an acquiring bank and diluting existing shares to their assessed market value, resulting in the acquiring bank assuming a controlling shareholding. - The distressed bank would be recapitalized to the appropriate target level (i.e., sufficient to comfortably exceed the regulatory requirements and to maintain an acceptable credit rating and maintain depositor and investor confidence). - Option 4 might be appropriate if: a. the bank is nonviable; b. the bank cannot recover; i.e., there is no prospect of shareholder support in the required timeframe; c. the closure of the bank would have a significant adverse impact on the stability of the financial system; d. at least one suitably capitalized bank is able and willing to acquire either 100 percent or a majority shareholding in the bank, sufficient to recapitalize the bank to the required target level; and e. the acquisition of the failed bank by the acquiring bank would not lead to excessive market concentration or systemic risk. ### Option 5 — Recapitalization of the bank through bail-in - Appoint an administrator, assess the worst-case capital position (including capital support needs for essential subsidiaries), and determine amount of capital required to meet a target capital ratio sufficient to comply with capital requirements and maintain market confidence and credit ratings. - Bail-in implementation mechanisms (subject to law): - Write-down or conversion of applicable liabilities (contractual loss-absorbing debt such as additional tier 1 or tier 2 instruments or statutory bail-in of unsecured and uninsured liabilities) to an equity instrument that ranks equal to diluted equity of existing shareholders or converted to preference shares that rank above existing equity and qualify for inclusion in CET1. - Liabilities bailed-in in inverse order of their ranking in a winding-up: lowest ranking liabilities (loss-absorbing capital-eligible debt instruments or subordinated debt) first, then senior unsecured bonds, then uninsured deposits, etc. - Insured deposits would be exempted from bail-in but the deposit insurance agency would bear the bail-in cost if it had subjugated their claims. - If no deposit insurance exists, but a depositor preference arrangement applies, then preferred deposits would likely be exempted from bail-in. - Some other liabilities might be exempted, potentially including liabilities payable to suppliers of essential services and liabilities in relation to derivatives required to maintain balance sheet hedges. - Bail-in can be achieved through different mechanisms, as discussed later in this note. - Option 5 might be appropriate if: a. the bank is nonviable and cannot recover; i.e., there is no prospect of shareholder support in the required timeframe; b. the bank has sufficient loss-absorbing debt, subordinated debt and senior unsecured debt (excluding insured deposits) to be a source for recapitalization, either through conversion to equity or other eligible capital instrument or write-down, after first writing down existing equity; c. the closure of the bank would have a significant adverse impact on the stability of the financial system; and d. bail-in would not trigger contagion or other systemic disruption on a significant scale. - Bail-in is more likely for an idiosyncratic bank failure where other banks are prudentially sound and market confidence is reasonably strong; less attractive in multiple bank distress or where bail-in could trigger contagious runs. ### Option 6 — Use of public support (last resort) - In extreme conditions where other resolution options are not possible and temporary public financial support may be the only way to avoid widespread financial contagion and collapse. - Requires careful review of the bank’s capital position on a forward-looking basis, including capital support needs for essential subsidiaries, and determination of capital required to meet a target capital ratio. - Recapitalization by issuance of shares to the government (directly or via a government-owned entity) sufficient to achieve the target capital ratio. - Should be last resort after all other options (including bail-in) assessed and found nonviable or systemically destabilizing. - Existing shareholders to be fully bailed-in first (shares cancelled if of no value or diluted to assessed market value). Subordinated debt should also be bailed in. - Government shareholding could be ordinary shares with full voting rights or preference shares with full or limited voting rights; government should price shares and any support at appropriate commercial pricing and secure sufficient control to manage arising risks. - Conditions and safeguards for public resources: - Systemic stability: limited to cases that threaten the financial system or continuity of essential payment, clearing, and settlement functions. - Loss recognition: All unrecognized losses must be recognized and the bank’s equity and other capital instruments written down for the losses. - Restructuring: Solvency support combined with a comprehensive restructuring plan with time-bound, monitorable targets and strict supervision and enhanced reporting. - Recovery: Use of public resources should be repaid within a reasonable timeframe, either through asset recoveries or special levies on the industry. - Option 6 requires great caution and should only be considered as a last resort when financial stability is severely threatened (times of acute contagion risks). Prior conditions: all losses first recognized (and equity capital written down) before public funds are injected. If losses exceed equity capital, attribution of losses to other creditors is a key decision balancing financial stability with cost minimization and moral hazard concerns. ### Criteria for selecting resolution options - Selection depends on many considerations, typically including: a. Impact of potential closure on stability of financial system and economy; closed resolution for little impact, open resolution for significant adverse impact—focus to maintain continuity of critical functions and services. b. Cost of resolution: select option with lowest cost of implementation (measured in terms of Net Present Value (NPV)) including: - loss of value from assets upon disposal; - cost of recapitalization (if applicable); - costs associated with guarantees and indemnities (if applicable); - legal, accounting and other professional fees; - tender costs (where applicable); and - administration costs. c. Protection of insured depositors (or preferred depositors where no deposit insurance): ensure prompt access to 100 percent of their insured deposits at minimum inconvenience; deposit insurance agency’s contribution should be on a ‘least cost’ basis. d. Impact on public funding: resolution should, in principle, involve zero public funding; where unavoidable, public funding should be at commercial pricing and recovered (in NPV terms) from levies on the banking industry to the extent assets are insufficient. e. Impact on moral hazard and market discipline: minimize moral hazard by ensuring losses borne by shareholders, capital instrument holders and creditors in order of claims in winding up, with zero or minimal taxpayer contribution. f. Impact on competition and financial system efficiency: design resolution to minimize adverse impacts on competition and efficiency; watch for excessive market concentration from mergers or closures. ### Aspects of resolution implementation - A. Legal framework: - Resolution manual should include legal documents providing the legal foundation for resolution and facilitate access to specific documentation during a crisis. - B. No creditor worse off: - Apply principle that creditors (and shareholders) should not be worse off than under liquidation; procedures to assess counterfactual NPV outcomes under conventional winding up via independent valuation; assessed valuation and compensation subject to transparency, accountability and scope for court challenge. - C. Communications and coordination: - Manual needs to identify communications to each stakeholder category (depositors, public, banks, other financial institutions, foreign counterparties, foreign regulators, rating agencies, news media and social media), key information to convey, and responsible agencies; include checklists for media statements and other communications. *IMF | Technical Report — excerpts on resolution options, selection criteria, and implementation aspects* ### 61. There must be clear and concise guidance on public and other stakeholder ### There must be clear and concise guidance on public and other stakeholder communications ### 61. Communications strategy and objectives - Resolution authority must be ready to publicly announce, at the time an administrator is appointed in an open resolution: - the intended scope of business of the bank under administration; - which obligations will be continued; and - which obligations will be suspended. - Clarity and certainty are crucial for counterparties, depositors, and other stakeholders. - The communications strategy should include: - identification of the information to be conveyed by each agency; - specification of each category of stakeholder to receive communications; - timing of each communication in the resolution process; and - the channels used for communications. ### 61. Key stakeholder categories to address - depositors of the bank being resolved; - depositors in other banks; - other creditors of the bank being resolved; - borrowers of the bank being resolved, especially those with overdraft and other committed credit facilities; - the management of other banks; - the financial institutions which meet their payment obligations through the bank being resolved; - foreign regulators (e.g., of the foreign banks operating in the country); - the financial news media and general news media; - social media; - the general public. ### D. Cross-border coordination and cooperation (paragraphs 62–63) - The manual needs to include guidance on cross-border coordination and cooperation. - Matters to be covered include: - a. A clear delineation of resolution responsibilities between the parent authorities (the prudential supervisor/resolution authority and ministry of finance in the home and host countries). These should be documented in either a multilateral MoU (for all agencies) or bilateral MoUs. - b. Identification of information exchange arrangements between the respective agencies, based on the above-mentioned MoU(s). - c. Coordination of the development and enforcement of recovery plans, resolvability assessments and resolution plans, such that the recovery plans and resolution plans for the subsidiary banks in the host country are informed by, and not materially inconsistent with, the parent bank recovery and resolution plans. - d. Processes for coordinating the solvency/capital assessment and liquidity assessment for the parent banking group and subsidiaries in the host country. - Paragraph 63: Process for coordinating the identification and assessment of resolution options. This is especially important for recapitalization options for the subsidiary, drawing on the two generic models for group-based recapitalization: Single Point of Entry (SPE) and Multiple Points of Entry (MPE). ### SPE and MPE recapitalization models (paragraphs 64–65) - Paragraph 64 — Under an SPE model: - recapitalization of the subsidiary in a host country would be performed at the parent level, either via: - bail-in of liabilities in the parent bank, - bail-in of liabilities in the subsidiary (in exchange for shares in the parent bank), or - external injection of capital into the parent bank, - with the capital being cascaded to the subsidiary in the host country. - Paragraph 65 — Under an MPE model: - recapitalization of the subsidiary in the host country would be performed at the level of the subsidiary, either by: - bail-in of liabilities of the subsidiary, or - injection of capital into the subsidiary by the government or another party approved by the CBS. - Under an SPE approach, the parent bank remains the shareholder of the subsidiary. - Under the MPE approach, the subsidiary might cease to be a member of the parent banking group, reflecting its new shareholding arrangements. - If the subsidiary ceases to be a member of the parent banking group, it is necessary to ensure contractual arrangements are entered into between the subsidiary and parent bank for all essential functional support provided by the parent bank to be continued (on commercial terms). ### Procedural note - Procedure for conducting a P&A transaction *IMF | Technical Report — extracted content* ### 66. The process for implementing a P&A must be clearly laid out in decrees and resolution ### 66. The process for implementing a P&A must be clearly laid out in decrees and resolution ### Process overview - The P&A process involves valuing a bank, marketing it, soliciting and accepting bids for its sale, and working with an acquirer through the closing process. - Key tasks include: - Resolution preparation; - Marketing strategy; - Legal documents; - Potential acquirers; - Marketing presentation; - Due diligence; - Bid acceptance; - Contract signing; - Closing the transaction; and - Public awareness. ### Resolution preparation - Swift action preserves asset and franchise values, increasing desirability to acquirers and lowering resolution cost. - Four resolution preparation steps: - Compiling Initial Information; - Asset Valuation; - Completion of a financial information package (Bid Package); and - Marketing Meeting Logistics. - Specialized staff may be required, including an asset valuation specialist and a marketing specialist. ### Initial information (minimum dataset) - Bank premises and owned property: location and number of main offices and branches; number of employees at each location; records maintained on site (at each location); banking premises owned or leased; recorded value; other tenants; information system—computerized or manual. - Loans: name and amount of major debtors; insider lines (directors, officers, shareholders, affiliates); loan classifications. - Deposits: number and value of deposits at each location; name and amount of major depositors; insider depositors (directors, officers, shareholders); distribution of depositors; debtor/depositor relationships (for potential offsets6). - Borrowings—secured and unsecured; subsidiaries; contingent liabilities; Trust Department activities; ownership structure; enforcement actions pending; litigation; other—leases, contracts, etc. - The preliminary information informs transaction form decisions; a more comprehensive information package will be prepared for potential acquirers. ### Asset valuation - Supervisory authority staff or experts estimate asset worth; time constraints typically require statistical sampling rather than full appraisals. - Method: divide assets into categories, identify a sample, review assets to establish a liquidation value for each asset. - Liquidation value derived from future cash flows minus expenses incurred during collection; adjustments discount future cash flows and account for liquidation expenses. - Resulting loss factors are applied by category, aggregated and extrapolated to the bank as a whole to produce a loss factor (cost of liquidation) used in bid assessment. ### Bid package (content and confidentiality) - Builds on initial information and includes detailed data on asset and liability composition. Important inclusions: - Demographic information (market area, population, history of bank, customer type, competition); - Schedules representing book values for balance sheet items: cash and equivalents; investment securities; loans (by type and currency); fixed assets; other real estate; subsidiaries; other assets; deposit base (by type and currency); borrowings; guarantees; other liabilities; contingent liabilities; capital accounts (including recent income and expense statement). - Detailed description of data processing facilities (communications map, security modules, outsourcing contracts). - Employees—short biographies of key management, chart of ALL employees: titles, number, capabilities, training and salaries if possible. - Contracts—detailed listing of all contracts. - Litigation—detail of pending court cases, including a legal opinion estimating outcome and foreseeable consequences. - Both the asset valuation and the bid package are proprietary and strictly confidential; the bid package will be provided to potential acquirers, but the asset valuation will not. ### Marketing presentation logistics and strategy - Marketing specialist estimates time needed to complete asset valuation and bid package; prepares Confidentiality Agreements for invitees. - Factors affecting marketing strategy: asset and liability composition; competitive and economic conditions of market area; prior resolution experience in the same market; other relevant information (e.g., potential fraud). - Transaction design questions: what types/categories of assets to offer; how assets should be packaged; how assets should be priced. - P&A variations and features: - P&As with put options on assets permit post-transaction due diligence (risk of “cherry-picking” and neglect of servicing questionable assets). - Under P&A concept, assets and insured deposits transfer to acquirer at market value; if insufficient “good” assets, the deposit insurance scheme must advance cash so assets equal liabilities. - Forms a P&A can take: Whole Bank; Clean Bank (with variations such as put back rights, exclusive asset purchase options, representations and warranties). - Exclusive asset purchase option often simplest; liquidator may lack funds for putbacks and asset quality may not support representations and warranties. - Alternative: pass assets at book value initially, then obtain third-party valuations; if more than a ten percent variation between two reports, a third can be ordered. - Objective: include as many assets as possible while ensuring adequate quality to not jeopardize acquirer financial position. ### Legal documents - Standardized documents requiring legal review include: - Confidentiality Agreement—required before any information is provided; confidentiality is paramount. - Deposit Transfer Agreement—identifies deposits and terms for assumption. - Asset Sales Agreement—terms and conditions for asset sales. These two can be combined into P&A Agreements. Acquirer indemnified for actions of failing bank prior to failure unless expressly assumed (legal re-direction of claims to the receiver). - Interim Asset Servicing Agreement—requires acquirer to service specific assets for a period (applies with exclusive options or when supervisory authority lacks servicing personnel). - Escrow Agreement—allows P&A consummation in advance of bank closing by placing signed documents into escrow. Agent Bank receives only a copy of the Escrow Agreement. - Bid Agreement Form—commits potential acquirer to abide by resolution process restrictions and pay the specified amount. ### Potential acquirers and eligibility - P&A provides acquirers opportunity to increase market share or enter new areas; paying a premium for deposits and options on premises is often more cost-effective than de novo entry. Example statistic: in the U.S., acquirers in these transactions retain approximately 70 percent of deposits.7 - Maintain a database of approved banks and investors interested in establishing operations. When evaluating investor groups consider: time required for licensing a new bank; ability to raise sufficient capital; ability to provide competent management. - Supervisory and resolution authorities should be confident parties on the list can acquire and sustain profitable operations; the supervisory authority should track interested banks/investor groups and inform the marketing specialist. ### Marketing presentation (execution) - Contact identified potential acquirers; mail or fax registration forms and Confidentiality Agreements without identifying the failing bank. Potential acquirers return forms and retain originals as admission tickets.8 - Logistics: adequate chairs, tables, tested audio-visual equipment. - At registration provide one information package per potential acquirer (even if multiple representatives attend). - Presentation topics to cover: redacted financial data from the Bid Package; P&A transaction summary with sample pro forma balance sheet marked “For Reference Purposes Only”; legal summary by resolution authority attorney; regulatory requirements (capital and other requirements for new/enlarged bank); due diligence scheduling (ranging from 1 day to 1 week or more depending on transaction); bid process and Bid Agreement Form with estimated timing for due diligence, bid acceptance, and closing. - Emphasize confidentiality: potential acquirers must not discuss the bank failure or impending transaction with failing bank employees, vendors, lessors, attorneys, or accountants prior to closing; prohibited from contacting other potential acquirers. ### Due diligence (access and limits) - Due diligence = onsite inspection of premises, records, and operations to assess franchise value and calculate a bid. - Preconditions: completed Confidentiality Agreement; reminder of confidentiality legal bindingness and criminal penalties for violations. - Timing: small/deposit-transfer-only transactions may be completed in a day or less; larger transactions with asset sales may require a week or more. For lengthy reviews, financial information may be updated and provided to all potential acquirers. - Record access policies to prevent customer raiding: may provide depositor information represented only by account numbers (no names/addresses where possible). More access permitted for asset review. - Copying failing bank records should be prohibited; handwritten notes or PC-generated information may be permitted. Prohibited access typically includes board minutes; Supervisory examinations; personnel or other sensitive records. ### Bid acceptance and selection - After due diligence, potential acquirers submit bids. The bid amount (premium) is the price for asset purchase options, deposit base, branch network, etc. - Resolution authority reserves the right to accept or reject any bid for any reason. Selection often based on the highest bid, though priced asset pools may require more complex analysis. - Winner notified and meeting scheduled to sign contracts; confidentiality reminder appropriate. Losing bidders notified but the identity of the winning bidder should not be disclosed. The winning bidder is referred to as the “Agent Bank” in the P&A. ### Contract signing - P&A contracts are signed several days prior to bank closing to eliminate last-minute conditions or demands. Authorized representatives sign Deposit Transfer and Asset Sales Agreements, and if applicable, the Interim Servicing Agreement. Both parties sign the Escrow Agreement; other signed Agreements delivered to the Agent Bank at bank closing. ### Closing the transaction - Closing transfers purchased assets and assumed deposits to the Agent Bank; prompt access to deposits is critical for confidence. - If bank operated under conservatorship, much of preparation can be done in advance. - At closing, the accounting team prepares Pro Forma financial statements and will: balance the accounts of the bank; transfer certain assets and insured deposits to the acquirer; prepare a pro forma balance sheet showing division of assets and deposit liabilities; calculate any amount necessary to balance the transaction (assets purchased compared to deposits assumed, minus bid amount). - Operational recommendation: close at usual time on a Friday, work through weekend to prepare Pro Forma, allow Agent Bank to re-open as branch on Monday. Agent Bank signs Official Receipts documenting assets and liabilities transferred. - On Monday, Agent Bank has access to liquid assets purchased to fund transferred deposits based on the Pro Forma; if Pro Forma incomplete, an estimate will be produced subject to adjustment for errors and omissions. ### Public awareness - Upon closure and appointment of an administrator, the CBS issues a press release informing public that action minimizes impact on local economy by finding an Agent Bank to handle deposits and transferring assets into private sector. Agent Bank press release requires resolution authority approval in advance. ### Bail-in (overview and implementation guidance) - Bail-in converts subordinated and senior liabilities to equity or writes them down to absorb losses and facilitate recapitalization of a bank in resolution or a bridge bank. Guidance draws from the FSB and IMF consultants. - Mechanisms to achieve bail-in: - Require banks, as part of recovery planning, to have a tranche of debt contractually convertible to eligible capital instruments or written down upon defined triggers. - Use statutory powers to bail-in unsecured debt by converting it to eligible capital or writing it down, applied consistent with ranking of claims in winding up. - Use P&A powers to retain a tranche of debt in the failed bank so reduced debt transferred to a bridge bank provides funding for capital; or transfer tranches to a special entity if recapitalizing the failed bank. Creditors of retained/transferred debt compensated ex post if left worse off than in full liquidation (on basis of ranking of claims). - For complex and SIBs or their groups, bail-in is one tool for failure resolution. - Bail-in tool operation: write-down and conversion of capital and liabilities (not compulsorily excluded) to restore regulatory capital necessary for continuation of authorized activities and maintain market confidence; implementable by resolution authority decision. - Credibility and transparency require sufficient preparation by failing bank, resolution authority, securities depositories, market operators, and ability of market participants to anticipate each resolution step. ### Simplified bail-in process (key steps and responsibilities) - Valuations and timing: supervisors ensure a fair, prudent, realistic valuation to inform (a) whether conditions for resolution met (“Valuation 1”), (b) determine type/extent of resolution action (“Valuation 2”), and (c) provide independent valuation for creditor treatment comparison (“Valuation 3”). If independent valuation cannot be immediate, provisional valuation performed with independent valuation conducted as soon as possible. Based on Valuation 3, resolution authority decides on potential compensation no later than 1 year after application of resolution measure. Creditors who registered3 their claims within 6 months after bail-in decision became enforceable are only creditors entitled to compensation. - Central Bank/Resolution authority: central bank decides whether bank is failing or likely to fail (“FLTF”) based on Valuation 1; resolution authority assesses conditions for bail-in use. - Resolution administration: resolution authority may introduce resolution administration, suspending powers of management and supreme body and exercising responsibilities via administrator. - Market communication: where instruments subject to bail-in are traded on regulated market, resolution authority informs market operator without delay; may require suspension/delisting/removal. Transferability for in-flight transactions remains subject to settlement system rules. - Bail-in agent selection: resolution authority selects a bank with adequate capabilities to administer bail-in implementation (bail-in agent); possibly the FLTF bank itself in some cases. - Bail-in decision: resolution authority issues bail-in decision identifying instruments and conversion rates; ensures no creditor receives worse treatment than in national insolvency proceedings and equal treatment within same insolvency class. Where provisional Valuation 2 used, certificates of entitlement may be issued to adjust outcomes when independent Valuation 2 available. - Communications and processing steps: resolution authority informs failing bank, central securities depository (“CDC”) and (I)CSDs of instruments, parameters, conversion rates; failing bank prepares documents for bail-in agent; bail-in agent transmits electronic instructions to CDC/(I)CSDs; CDC/(I)CSDs process write-downs/conversions, cancel or reduce face value of original instruments, and distribute shares and certificates of entitlement. CDC/ICSD inform account holders and custodians who inform their clients. Bail-in agent maintains list of real owners and invites instructions to transfer credited securities to owners’ accounts. Shareholders instruct bail-in agent to transfer securities to owners’ accounts of their choice. - Implementation note: process relies on applicable legal framework and Principles on Bail-in Execution issued by FSB, maximizing use of existing FMI procedures and considering involvement of ICSDs. ### Bail-in guidance for resolution manuals (items to develop) - Methodology to determine extent losses can be absorbed by diluting shareholders, including execution of share dilution and relevant company law and stock exchange listing requirements. - Determination of extent subordinated debt will be written down or converted to equity, and treatment in business transfer contexts (left in failed bank or transferred to recipient bank/bridge bank). - Means by which contractual bail-in debt would be converted or written down if not already done under prompt corrective action or recovery plan. - Means by which forced bail-in would apply to unsecured liabilities using emergency decree provisions, including liabilities subject to bail-in, methodology for proportion to be bailed-in, mode (conversion/write-down), communications with affected creditors, arrangements for any NCWOL compensation, and public communications. - Determination of whether existing shareholders remain as minority shareholders post-recapitalization or are paid out for residual value and shares cancelled. ### Bridge bank (rationale, preconditions, governance, financial support) - Rationale: used when a bank is nonviable but its failure would cause systemic distress; transfers critical functions, insured and possibly uninsured deposits, viable assets, and contractual rights/obligations for critical functions to a temporary bridge bank to preserve stability. Bad assets and certain liabilities (e.g., subordinated debt) can be left in failed bank for liquidation. - Deposit transfer decision: at minimum transfer all insured deposits, with deposit insurer providing additional cash so transferred assets equal transferred deposits. If sufficient performing assets exist, all deposits may be transferred with deposit insurance contributions limited to what it would pay to insured depositors. Bail-in of contractual bail-in debt and possibly other unsecured liabilities occurs in resolution phase immediately preceding transfer to bridge bank. - Key objectives: maintain critical services and continuity important for financial stability and minimize disruption to financial system. - Preconditions for establishing bridge bank: supervisory determination of nonviability; resolution authority determination that failure poses systemic threat and proposal to establish bridge bank, including future business plan, funding needs, and any public sector support; if public resources required, resolution authority recommends approach to Minister of Finance and Minister approves. - Contingency planning: pre-prepared documentation for establishing legal entity, company constitution, governance and management structures, lists of potential directors and senior management, guidance for fast-tracking bank licensing and consents. - Use-case: bridge bank spans time between failure and sale of bridge bank/assets; suited where no immediate private acquirers and systemic concerns exist. - Governance: ensure adequate capital and liquidity; necessary IT changes; removal of directors/management if obstructive; pre-identify replacement candidates including senior staff from resolution authority or foreign banks. Bridge bank must meet same prudential norms as other member banks and not have competitive advantage. Target capital ratio should be around same level as peer group and sufficient to obtain a credit rating similar to pre-distress; restoring market confidence may require a target credit rating of at least investment grade for major banks. - Capital support by government: government recapitalization only as last resort and on commercial terms; existing shareholders should be removed or diluted consistent with pre-resolution assessed value. MOF guidance needed on form of government capital (preference vs ordinary shares), pricing based on conservative valuation immediately pre-resolution, voting rights on preference shares, other control forms (appointment rights, vetoes, approval of key transactions), and exit arrangements. - Financial support to bridge bank: guidance should identify liquidity central bank may provide based on stress-tested liquidity projection at resolution, specifying maximum funding amount, purposes, preconditions, term, interest rate, fees, repayment schedule, rollover terms, reporting requirements, restrictions on risk-taking, events of default, remedies, and debt acceleration provisions. Funding should be collateralized where possible, with identified collateral types, legal/operational arrangements to access collateral, and haircuts by collateral category. Funding should be on commercial terms with risk-reflective pricing. - Other forms of financial support (guarantees, indemnities) should be identified with terms including preconditions, obligations covered, fees, conditionality, reporting requirements, duration, events of default, and remedies; provided on commercial terms with risk-reflective pricing. *IMF | Technical Report — Excerpt provided in source PDF* ### APPENDIX V. RESOLUTION PLANNING AND RESOLVABILITY ASSESSMENTS ### APPENDIX V. RESOLUTION PLANNING AND RESOLVABILITY ASSESSMENTS ### Resolution plans - A resolution plan sets out the means by which a DSIB or other large bank would be resolved, taking into account the specific features of that bank and any entities in its financial group (e.g., holding company and subsidiaries) relevant to the performance of a bank’s critical functions and services. - Resolution plans are prepared by the resolution authority on the basis of selecting one or two resolution strategies suitable for the DSIB, informed by the guidance in the resolution authority’s bank resolution manual. - Purpose: facilitate the effective use of resolution powers to maintain continuity of systemically important functions (‘critical functions’) and associated services (‘critical services’), with the aim of making the resolution of any bank and its associated group feasible without severe disruption to the financial system and economy, and without exposing taxpayers to loss where practicable. - A resolution plan should include a resolution strategy and an operational plan, and should identify in particular: - (i) financial and economic functions, and associated services, for which continuity is critical; - (ii) suitable resolution options to preserve those functions or wind them down in an orderly manner; - (iii) data requirements on the bank’s and associated group’s business operations, structures, and systemically important functions; - (iv) potential barriers to effective resolution and actions to mitigate those barriers; - (v) actions to protect insured depositors and insurance policy holders and ensure the rapid return of segregated client assets; and - (vi) clear options or principles for the exit from the resolution process. - Resolution plans should be reviewed and updated on a regular basis by the resolution authority on the basis of periodic resolvability assessments that take into account any material changes to the business operations of the bank. ### Resolvability assessments - Resolvability assessments inform resolution plans and comprise three stages: - (a) assessment of the feasibility of different resolution options for the bank in question; - (b) assessment of the systemic impact of each resolution option; and - (c) assessment of the impediments to resolvability and identification of the actions needed to improve the bank’s resolvability under the preferred resolution options. - A resolvability assessment needs to be done on a consistent basis across all DSIBs using a framework developed by the resolution authority and should involve an assessment of the resolvability of each DSIB and its relevant banking group based on the most practicable resolution options. - Most likely resolution options for a DSIB, subject to the bank/group characteristics, are generally: - (i) recapitalization of the bank (likely slimmed down to focus on critical functions and services, and associated assets and liabilities); or - (ii) transferring critical functions and services and other relevant assets and liabilities from the failing DSIB to a bridge bank. - The resolvability assessment framework typically involves assessing: - (a) the existing capital structure of the bank and the availability of any contractual bail-in debt; - (b) the estimated maximum losses and capital shortfalls for a range of severe financial shocks; - (c) the availability of debt that could potentially be subject to contractual bail-in, and separately, the debt that could be subject to statutory bail-in; - (d) the technical issues involved in diluting existing shares and implementing bail-in; - (e) the identification of all critical functions and services, and the entities within which these are performed; - (f) the ability to separate critical from noncritical functions and services; - (g) the extent to which critical functions and services are performed by parties outside the banking group (i.e., outsourced) and the contractual arrangements applicable to them; - (h) the payment and settlement systems of which the bank or its subsidiaries are members, and the implications of entry into resolution or change of ownership for each such system; - (i) the types of capital instruments that would be used in a recapitalization of the bank or of a bridge bank; - (j) the regulatory requirements, including disclosure requirements, associated with each phase of resolution; - (k) the fast-track licensing steps needed if a bridge bank solution is used; - (l) the rights of termination of counterparties to the bank upon entry into resolution or change of ownership, and the means by which this could be avoided where it is desirable to do so; - (m) the arrangements required to ensure continuity of critical functions and services of foreign subsidiaries and branches if applicable, including foreign regulatory requirements; - (n) the process for establishing a bridge bank; and - (o) the funding requirements for each aspect of resolution for each resolution option. ### Critical functions and services - Focus: identify a bank’s/group’s critical functions and services that must be continued to minimize adverse impacts on the financial system and economy. - Any resolution for a systemically important bank should ensure critical functions and services are continued, either in the bank itself or in another entity (i.e., a bridge bank or another bank). - FSB definition: a critical function has two elements: - a. it is provided by a bank/group to third parties not affiliated to the bank/group; and - b. 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 the general confidence of market participants due to: - the systemic relevance of the function for the third parties; and - the systemic relevance of the bank/group in providing the function. - Typical critical functions include: - Deposit-taking, particularly the capacity to receive deposits into transaction accounts. - Transactions capacity—the ability to make and receive payments. - Clearing and settlement functions. - Wholesale funding, particularly the ability to receive funding via on-call wholesale deposits. - Correspondent banking functions. - Treasury functions. - Derivatives servicing; e.g., with respect to interest rate and currency swaps, forwards and options. - Provision of credit under committed credit facilities. - Loan servicing. - Provision of risk hedges to customers. - Provision of financial services to markets in which the bank is the sole or predominant provider and where significant disruption to the financial system or economy would result if the services were discontinued. - Critical services: activities performed within the firm or outsourced to third parties where failure would lead to the inability to perform critical functions and, therefore, to disruption of functions vital for the real economy or financial stability. - Critical services include systems, data and other functionality required to: - perform critical functions; - maintain customer accounts; - maintain financial records; - meet financial obligations as they become due and payable; - maintain payroll and other employee obligations; - maintain operational security, including the security of all premises required for critical functions and services; - maintain all assets required for the performance of critical functions and services; - identify, measure, monitor and manage all material risks; - comply with prudential requirements; and - comply with other legal requirements. - The resolvability assessment must identify the entities performing critical functions and services and their jurisdictions, and must identify contractual arrangements (including SLAs) and the contractual implications of resolution or change of ownership. - Potential impediments to continuity under each resolution option should be assessed and mitigants identified; resolution plans then assemble operational details required for continuity for each resolution option. ### Loss absorption - Resolvability assessments must assess potential for loss absorption and funding to facilitate recapitalization of the bank or capitalization of a bridge bank based on the capital and liabilities of the bank. - This assessment should consider possible worst-case losses in a nonviability scenario (e.g., informed by reverse stress tests) and the amount of loss absorption available from: - (i) common equity; - (ii) additional tier 1 capital; - (iii) tier 2 capital; - (iv) subordinated liabilities capable of contractual bail-in not included in capital; - (v) senior unsecured liabilities capable of contractual bail-in not included in capital; and - (vi) other unsecured liabilities capable of statutory bail-in, consistent with the ranking of claims under applicable insolvency law. - If available loss absorption is insufficient under a plausible worst-case nonviability scenario to facilitate recapitalization of the bank or capitalization of a bridge bank without causing financial stability risks (e.g., contagion impacts), the resolution authority should assess the feasibility and cost/benefit trade-offs of requiring the bank to increase its capital or contractual bail-in liabilities. ### Impediments to resolution and mitigation options - Potential impediments to resolution that should be assessed include: - (i) domestic statutory and regulatory impediments to resolution implementation; - (ii) foreign statutory or regulatory impediments; and - (iii) contractual impediments. - For critical services provided on a shared-services basis within a financial group, assess impediments to continuity and identify means to avoid or manage them. - Options to consider include: - (i) requiring shared services to be contractually documented in ways that prevent suspension or termination of services merely as a result of entry into resolution or the exercise of resolution powers, provided that the bank in resolution and its relevant subsidiaries continue to make payments due under contractual arrangements; - (ii) requiring back-up systems for critical services to be located within the bank; or - (iii) requiring critical services to be located within the bank. - The resolvability assessment should evaluate the feasibility and costs/benefits of each applicable option. ### Cross-border cooperation and coordination - In cross-border banking groups, the home resolution authority should lead development of the group resolution plan in coordination with members of the group’s Crisis Management Group (CMG) or supervisory college. - Host authorities in jurisdictions where the banking group has a systemic presence should be given access to resolution plans and information/measures that would impact their jurisdiction; host resolution authorities may maintain their own resolution plans for local operations, cooperating with the home authority to align with the group plan. - The parent entity resolution plan should focus on whole-of-group implementation and typically enable the parent to provide capital, liquidity funding and operational support to host operations, possibly via: - Single Point of Entry (SPE) resolution, with capital and liquidity injections facilitated via the parent entity (e.g., bail-in at parent level or alternative capital-raising); or - Multiple Points of Entry (MPE) resolution, with capital and liquidity injected separately into the parent/holding company and each relevant subsidiary (e.g., bail-in at each legal entity). - Resolution plans should set out means by which a host subsidiary/branch is integrated into the parent resolution strategy if the parent resolution involves sale or transfer of business to a bridge bank in the home jurisdiction, including appropriate legal recognition or facilitation by the host authority. - Plans must cater for situations where the home authority’s resolution does not meet the financial system and depositor protection needs of the host country; include a host country ‘fallback’ resolution option enabling separation and resolution of the subsidiary/branch to maintain continuity of critical functions and systems in the host country. - Host fallback options may involve transfer of relevant business functions to another local bank or to a bridge bank established for that purpose, and some host authorities require foreign subsidiaries/branches to be pre-positioned to maintain critical functions and services on a stand-alone basis. - Cross-border planning must recognize overlapping but potentially divergent interests of home and host authorities; dealings should be open with a view to seek a workable whole-of-group resolution while understanding the likely need for a host fallback option. ### Indicative process for preparing resolution plans and conducting resolvability assessments - Step 1—Identify potential resolution options for a bank and relevant group: - The resolution authority identifies likely resolution options for a bank and its relevant group, drawing on the resolution manual guidance. - In the case of a DSIB, the most likely resolution options are: - Recapitalization of the bank (slimmed down to exclude noncritical functions and services). This would desirably be done through a bail-in of liabilities to the extent feasible, but might require some public funding; and - P&A. This would involve transferring critical functions and systems, and associated assets and liabilities, and contractual rights and obligations, to a bridge bank established by the resolution authority and capitalized by bail-in and selective liability transfer to the extent possible, supplemented with external resolution funding if necessary. *IMF | Technical Report — APPENDIX V. RESOLUTION PLANNING AND RESOLVABILITY ASSESSMENTS* ### 25. A resolution plan might focus just on one of these resolution options, but will often allow ### 25. A resolution plan might focus just on one of these resolution options, but will often allow ### Step 2 — Consult DSIBs on resolution planning and resolvability assessments - Resolution authority prepares a paper setting out: - resolution objectives; - nature of resolution powers; - point of entry into resolution; - purpose of resolution plans and resolvability assessments; - resolution options. - Paper explains process and timeline for resolvability assessments and resolution plans, and inputs required from DSIBs. - Paper notes DSIBs may be required to make changes to structure and operations to enable particular resolution options. - A draft data template is attached to the consultation paper. - Resolution authority may hold a workshop with DSIBs; banks invited to make submissions and suggest changes. - After consultation, resolution authority finalizes the paper and data template. ### Step 3 — Obtain comprehensive data from a bank and relevant group - Use a standardized data template for all DSIBs to enable peer review. - Data template typically requires: a. Organization structure of the banking group, identification of holding company (if applicable), bank, all subsidiaries, and any ‘sister’ entities providing material functions or services; identify country of domicile of each entity. b. For each entity, identification of functions (business products and services provided to persons outside the group) and services (services provided to entities within the group). c. Nature of the legal form and capital structure of the holding company and the bank. d. Detailed balance sheet of the bank and holding company and of any subsidiary that provides critical functions or services, including detailed information on capital, quasi-capital, subordinated debt, and liabilities by category of liability. e. Critical functions and services performed by the bank and group, and entities performing each function and service. - Definition: Critical functions are activities performed for third parties where failure would lead to disruption of services vital for the real economy and for financial stability due to the banking group’s size or market share, external and internal interconnectedness, complexity and cross-border activities. - Examples of critical functions: payments functions, custody, certain lending and deposit-taking activities in the commercial or retail sector, clearing and settling, segments of wholesale markets, market-making in certain securities, provider of swaps, futures and options in the interest rate and foreign exchange market, and highly concentrated specialist lending sectors. - Critical shared services: internal or outsourced activities where failure would lead to inability to perform critical functions (examples: information technology, facility management, administrative services). - Criteria for selecting critical functions: ▪ function is provided to third parties not affiliated to the institution or group; and ▪ sudden disruption would likely have a material negative impact on third parties, give rise to contagion or undermine general confidence due to systemic relevance. - Criteria for selecting critical services: ▪ activity, function or service is performed by an internal unit, a separate legal entity within the group or an external provider; ▪ performed for one or more business units or legal entities of the group; ▪ sudden and disorderly failure or malfunction would lead to the collapse of or present a serious impediment to the performance of critical functions. - See FSB guidance on critical functions and services referenced in the source. f. For critical systems, identity of providers under outsourcing arrangements and country of domicile; details of contractual arrangements, focusing on grounds for termination or suspension by the outsourced provider. g. For each critical function, the local currency amount of the function performed (e.g., total amount of lending or funding as at the most recent date for which data are available or as at a date specified by the resolution authority), at a granular level by category specified by the resolution authority (e.g., lending by borrower and loan product category, deposits by customer category). h. Participation in each payment and settlement system, including types of payments/settlements performed and average payment/settlement volumes for a period specified by the resolution authority. i. Amount of inter-bank funding and credit exposures as at a date specified by the resolution authority. j. For bank and holding company, amount of loss absorption capacity, including: - ordinary share capital (and extent to which it is fully paid), - preference share capital, - Additional Tier 1 capital instruments, - Tier 2 capital instruments, - other subordinated debt, - uninsured deposits (disaggregated between retail and wholesale deposits), - unsecured bonds and paper issued by the bank or holding company. - Identify debt instruments with contractual capacity for conversion to equity or ability to be written down and the terms. ### Step 4 — Initial resolvability assessment - Resolvability assessment evaluates feasibility of either or both resolution options, taking into account: a. Nature of critical functions and services and their location by legal entity in the group. b. Nature of critical services performed by outsourced parties and contractual arrangements, focusing on capacity for providers to suspend or terminate services. c. Noncritical functions and services that could be discontinued. d. Market share of the DSIB in each category of critical function, share of participation in FMI and key financial markets, impact of DSIB failure on financial system and economy, and speed with which other banks could replace functions. e. Potential amount of loss absorption needed and sequencing; assessed on working assumption that the DSIB’s capital ratio has fallen to not more than 3 percent of risk-weighted exposures and potentially as low as -20 percent (informed by stress tests based on nonviability scenarios). f. Evaluation of whether recapitalization should be undertaken (under option 1) on a SPE or MPE basis. g. Evaluation of the business that would be transferred to a bridge bank (under option 2). h. Assessment of extent of funding shortfall required to establish the recapitalized bank or bridge bank to a capital rate that is at least 300 bps above the regulatory minimum for DSIBs, taking into account termination of noncritical functions. i. Assessment of external funding sources needed and the process for obtaining the funds. j. Obstacles to implementation of either resolution option, including contractual impediments, location of critical functions and services, cross-border complications, and regulatory impediments. ### Step 5 — Discuss with DSIB - Discuss results of step 4 with the DSIB to: - seek clarification where uncertainties exist; - identify further information requirements; - discuss possible changes to bank and group to facilitate resolution under either option. ### Step 6 — Prepare comprehensive resolution plan - Resolution plans should set out means by which each resolution option would be implemented, including: - changes needed to group structure; - locations of critical functions and services; - contractual arrangements with service providers; - amount and structure of contractual bail-in liabilities required for sufficient loss absorption to minimize external funding. - Plan should identify: - capital structure that would evolve from bail-in and the form of capital arising from any external capital sources; - possible need for government guarantees and indemnities by amount and duration; - possible liquidity support from the central bank by amount and duration, and collateral available and possible indemnity requirements; - communications required for each resolution option from point of entry into resolution through each stage. ### Step 7 — Pre-positioning the DSIB - Resolution authority specifies pre-positioning needed for each DSIB to implement selected resolution options, such as: - simplification of group structure; - movement of some critical functions and services from other legal entities to the bank; - establishing contractual arrangements for outsourced critical services that do not provide for termination in a resolution situation; - establishment of a tranche of bail-in debt. *IMF | Technical Report* --- _Source: https://www.imf.org/-/media/files/publications/tar/2024/english/tarea2024054-print-pdf.pdf_