Agnieszka Kondracka, Team Manager at the Commercial Banking Department, UKNF, and Samanta Bujalska, Senior Specialist at the Commercial Banking Department, UKNF

A bank, as a special type of entity whose business consists of safekeeping large amounts of funds entrusted by multiple depositors and exposing those funds to risk, is required by law to manage that business in a specified, prudent and stable, manner. Planning is also one of the many legal obligations related to that management. 

Let us assume that any of the following situations occurs:

A. A bank suffers a significant financial loss – as a result of the increasingly stringent court rulings the bank has had to make additional write-offs for foreign-currency mortgage loans. An audit conducted by the bank’s auditor has further revealed that its situation is significantly worse than it has been presented.

B. A bank loses its liquidity – the media are reporting on the bank’s precarious situation and a threat of solvency loss, news is spreading about the president of the management board being arrested, there are worrying reports about the largest shareholders selling out their shares and withdrawing deposits, customers are starting to queue outside branches seeking to retrieve their deposited funds. 

At that point, a question arises: what should the bank do and how should it be prepared for taking immediate action? It is precisely for such events (e.g. significant worsening of financial performance, including, in particular, losses consuming capitals, a liquidity loss), resulting from external and internal factors affecting the entity, that a recovery plan is prepared¹.

One can say that the importance and role of that document are inscribed in its name, in a sense that a recovery plan sets out the steps to be taken to recover from a bad situation. 

A recovery plan is a method of preparing for ‘bad times’ (understood, for instance, as the times when the bank’s indicators fall below the set requirements). It allows to avoid a panic search for a solution after a particular adverse event has occurred. It should therefore be detailed and based on realistic assumptions, adopting a pessimistic scenario. 

A recovery plan (until implemented) is a document based on hypotheses which answers the following questions: who, what, when, how and for how long. It presents the assumptions for actions that can be taken immediately when risks materialise and when a threat to the safety of the bank emerges. It identifies the options that the bank has at its disposal to overcome a crisis situation (recovery options) and indicates where and how much funds will be raised. It also sets a time horizon for the implementation of specific recovery options and defines the competences of the bank’s governing bodies, including their responsibility for the implementation of the actions indicated in the plan². 

Therefore, if anything happens which affects, for example, the market, the broadly understood economy and has, a direct or indirect, significant impact on the bank’s activities, the bank may (and should), from a well thought-out and verified list of actions, choose a specific action which it has identified in the recovery plan as the most advantageous in that crisis situation (e.g. reduction of operating costs in a specific area and scope, termination of some of the contracts, issuance of shares). The plan is a sort of a manual that specifies how each of the bank’s organisational units should behave in a specific situation: what needs to be done in order for the bank’s situation to improve and for the deposits accumulated in the bank to be safe in the long term and holding them not too costly for the bank or, ultimately, for the bank itself to avoid restructuring and failure. 

The recovery plan must be up to date: it should be updated at least once a year and also following any significant changes, like changes in the organisational or legal structure of the bank, its financial situation, or after any other event that affects the assumptions adopted in the recovery plan and its implementation³. 

The recovery plan is a document prepared individually for a given bank. Each plan should describe hypothetical but realistic and severe stress events for the bank concerned and how to act in order to minimise or eliminate them  restoring normal operations.

How does the bank know that it should launch a recovery plan precisely at a given point in time? That exactly is the purpose of adopting thresholds or triggers for specific indicators. If they are exceeded it is the competence (and responsibility) of the bank’s management board to decide whether or not to activate a recovery plan. A catalogue of situations, in which it is the bank’s responsibility to activate the recovery plan, is also specified by the regulatory requirements⁴.

The levels of indicators should be set in such a way as to provide enough time to take recovery actions before the regulatory requirements are breached. A group of indicators which need to be monitored by the bank includes:

1) capital ratios, which are related to the quantity and quality of capital (including the increasing leverage level),

2) liquidity ratios, which should indicate whether the bank’s position can meet the current and the predictable liquidity and funding needs,

3) profitability ratios, which are applied to take into account all aspects related to the institution’s income, 

4) asset quality ratios, which should measure and monitor changes in the quality of the institution’s assets,

5) market-based indicators, which are used to capture changes in the market participants’ expectations, which could potentially lead to disruptions in access to finance and capital markets, especially in the event of a rapidly deteriorating financial position of institutions,

6) macroeconomic indicators, which are used to capture signs of deterioration in economic conditions in the sectors where the institution operates or has concentrated exposures or funding.

How can a bank, after meeting the triggers and launching a recovery plan, improve its situation? This can be done with the recovery options identified by the bank which show a variety of possible actions to implement in the event of a specific crisis situation. They should have a defined time horizon for implementation and valuation, ultimately in the form of a scale of impact on indicators, and take into account the actions to be taken by each organisational unit. The recovery plan presents a list of options where each option has a certain effect and the bank assesses which option should be executed when a given event occurs.

Examples of recovery options presented by banks in recovery plans:

1) increase of own funds – issuance of shares or other capital instruments, 

2) access to an NBP refinancing loan,

3) sale of companies or shares in subsidiaries,

4) reduction of the credit portfolio,

5) reducing operating costs through e.g. termination of lease agreements, termination of promotional and marketing agreements.

In such a case, how can the bank verify whether, when defining the list of options for the recovery plan, it has elaborated an appropriate and sufficient list of options? To this end, the bank must test hypothetical stress events. This is achieved with the use of several well thought-through and calculated stress test scenarios defined by the bank. These are scenarios of changes in the financial, capital or liquidity position caused by specific crisis situations, such as: recession, bank run, hacker attack, unexpected strong change of a macroeconomic parameter, armed invasion. They are designed on the basis of events which are significant from the bank’s perspective. Calculating the impact of those crisis scenarios allows to verify whether the actions that the bank plans to take in a given situation (the presented recovery options) will effectively improve the bank’s situation and have the desired effect of improving the indicators. 

Each bank’s recovery plan is reviewed by the Bank Guarantee Fund and approved by a decision of Komisja Nadzoru Finansowego. The regulations governing the adoption of recovery plans are modified on an ongoing basis both at national and EU level to ensure the safety of the sector, banks and their clients (including the funds raised by them) in a manner appropriate to the financial market situation. It is useful to read the fresh guidelines on overall recovery capacity in the context of recovery planning⁵.

To sum up, a recovery plan ensures that the bank quickly implements recovery actions in response to stress events. Well thought-through and calculated actions included in a recovery plan ensure an appropriate and rapid response from the bank, which contributes to the safety of the deposited funds and to the safety of the financial sector as a whole. The purpose of a recovery plan is to enable institutions experiencing financial difficulties to operate effectively, ultimately in order to prevent a bank’s insolvency and to ensure that important systemic functions of the institution are maintained⁶.

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¹The matter of banks’ recovery plans is governed by the relevant provisions of national and EU law (acts of statutory law and regulations). Recovery plans must be drawn up by commercial banks in accordance with the statutory obligations under Article 141m(1) or Article 141n(1) of the Banking Law (hereinafter: ‘Banking Law’) or as a result of the KNF imposing such an obligation.
²The detailed scope of a bank’s recovery plan is laid down in the Regulation of the Minister of Finance of 14 July 2016 on a bank’s recovery plan and the group recovery plan.
³In accordance with Article 141m(4) of the Banking Law.
⁴In particular, Article 142(1) of the Banking Law.
⁵Guidelines EBA/GL/2023/06 of 19 July 2023.
⁶The concept and purpose of recovery plans is regulated by Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council.