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  • DS-2: DS-2: Recovery and Resolution Plans

    • DS-2.1 DS-2.1 Recovery and Resolution Plans

      • DS-2.1.1

        Recovery and Resolution Plans (RRPs) developed by DSIBs must be specific to their circumstances reflecting the nature, complexity, interconnectedness, level of substitutability and size of the bank in question. RRPs must include:

        (a) High-level substantive summary of the key recovery and resolution strategies and an operational plan for implementation;
        (b) Strategic analysis that underlies the recovery and resolution strategies;
        (c) Conditions for intervention, describing necessary and sufficient prerequisites for triggering the implementation of recovery or resolution actions;
        (d) Concrete and practical options for recovery and resolution measures;
        (e) Preparatory actions to ensure that the measures can be implemented effectively and in a timely manner;
        (f) Details of any potential material impediments (legal, strategic or technical) to an effective and timely execution of the plans; and
        (g) Responsibilities for executing preparatory actions, triggering the implementation of the plans and the actual measures.
        July 2018

      • DS-2.1.2

        Bahraini conventional bank licensees must engage in an annual simulation and scenario exercise to assess whether the RRPs are feasible and credible. The Board must approve any changes to RRPs resulting from such exercise. The results of such annual exercise and the RRPs must be submitted to the CBB annually by the 31st of August.

        Amended: July 2021
        July 2018

      • DS-2.1.3

        Underlying assumptions of the RRPs and stress scenarios must be sufficiently severe, but plausible. Both "solo" specific and "consolidated" stress scenarios, as appropriate, must be considered taking into account the potential impact of cross-border contagion in crisis scenarios, as well as simultaneous stress situations in several significant markets. RRPs must not make the assumption that the CBB or government support can be relied upon to recover the bank.

        July 2018

      • DS-2.1.4

        Bahraini conventional bank licensees must develop a robust governance structure and sufficient resources to support the recovery and resolution planning process. This includes clear responsibilities of business units, senior management up to, and including, board members. A senior level executive must be made responsible for the overall RRPs. This person must be responsible for ensuring that the bank is, and remains in compliance with the requirements of the RRPs and for ensuring that recovery and resolution planning is integrated into the bank's overall governance processes.

        July 2018

      • DS-2.1.5

        Bahraini conventional bank licensees must have systems in place that are able to generate on a timely basis, the information required to support the recovery and resolution planning process to enable both the bank and the CBB to carry out recovery and resolution planning effectively, and, where necessary, implement the RRPs.

        July 2018

      • DS-2.1.6

        RRPs should serve as guidance to banks and the CBB in a recovery or resolution scenario. The CBB may implement a different strategy should the bank need to be resolved.

        July 2018

      • Recovery Plan

        • DS-2.1.7

          The Recovery Plan must identify possible recovery measures, recovery options and the necessary steps and time needed to implement such measures, as well as assess the associated risks. An effective Recovery Plan must at least consider the following:

          (a) Governance arrangements and escalation process following a trigger event;
          (b) Recovery triggers must be well-defined and tailored to the full range of risks faced by the bank. The threshold level for triggers must be calibrated with impact on the bank's economic capital and set out clearly in the bank's recovery plan;
          (c) Actions or responses that should occur when triggers are breached; there should be an expectation that breach of a trigger causes a predetermined escalation and information process up to Board and Senior Management level;
          (d) A detailed explanation and analysis, illustrating how the triggers were calibrated, as well as highlighting the effectiveness of the triggers;
          (e) Incorporating qualitative triggers in their consideration of whether a recovery response is necessary and, if so, what kind of response would be appropriate;
          (f) Incorporating the triggers for recovery planning into the bank's overall risk management framework. Recovery triggers must be aligned with (but not limited to) existing triggers for liquidity or capital contingency plans, early warning indicators and the bank's risk appetite;
          (g) Triggers for recovery planning must be complemented by early warning indicators that alert the bank to emerging signs of stress, but that do not yet give rise to a triggering event;
          (h) Use at least one market-wide (systemic) stress scenarios and one bank-specific (idiosyncratic) stress scenarios, as well as a combination of systemic and idiosyncratic stress scenarios, to assess the robustness of their Recovery Plans and to assess which recovery options would be effective in a range of stress situations; and
          (i) Allocation of losses to shareholders, and unsecured and uninsured creditors in a manner that respects the hierarchy of claims.
          July 2018

        • DS-2.1.8

          Bahraini conventional bank licensees must notify the CBB when high levels of stress are experienced and/or recovery plan triggers are breached. Banks must also notify the CBB on the Recovery Plan actions or responses that would be taken by the Bank when the plan is activated.

          July 2018

        • DS-2.1.9

          Bahraini conventional bank licensees must use quantitative and, if relevant, qualitative triggers in their recovery plans. The quantitative triggers focused on firm-specific liquidity and capital measures are critical. The quantitative triggers may include different elements such as:

          (a) withdrawal of deposits and other funding;
          (b) revenue performance (or components of these);
          (c) ratings downgrades;
          (d) credit risk limits;
          (e) equity ratios;
          (f) renewal of wholesale financing;
          (g) increased collateral requirements;
          (h) interest rate environment; and
          (i) senior debt spreads.
          July 2018

        • DS-2.1.10

          Bahraini conventional bank licensees must use three stress scenarios at a minimum, i.e. systemic, idiosyncratic and a combination of both for the purpose of recovery planning.

          July 2018

        • DS-2.1.11

          The following elements are illustrative in nature for stress scenarios to be considered in Recovery planning:

          a) significant deposit withdrawal or runoff;
          b) collapse of global financial markets;
          c) significant capital and liquidity impacts;
          d) severe losses through a rogue trader;
          e) rating downgrades;
          f) US Dollar or a Euro crisis;
          g) GDP growth rates; h) loss of goodwill;
          i) exodus of talent;
          j) currency or commodity prices volatility;
          k) increased collateral requirements;
          l) bank failures;
          m) fraud; and
          n) reputational crisis.
          July 2018

        • DS-2.1.12

          Bahraini conventional bank licensees must consider a variety of feasible recovery options that could play a critical role towards improving resilience and viability ultimately. Such options may include for instance the following illustrative options:

          (a) Issuance of capital instruments at short notice;
          (b) Seeking additional liquidity from existing or new sources;
          (c) Sale or disposal of a part of the business and assets;
          (d) Restricting new business activities;
          (e) Lowering dividend pay outs; and
          (f) Restructuring.
          July 2018

      • Resolution Plan

        • DS-2.1.13

          Bahraini conventional bank licensees must establish Resolution Plans intended to facilitate smooth resolution making it feasible without severe market disruption. It must include a substantive resolution strategy approved by the Board and agreed with the CBB, and an operational plan for its implementation. It must identify, in particular:

          (a) Financial and economic functions for which continuity during the resolution process is critical and suitable resolution options to preserve those functions, or wind them down in an orderly manner;
          (b) Data requirements on the bank's business operations, structures, and systemically important functions;
          (c) Potential legal, strategic or technical barriers to effective resolution and actions to mitigate those barriers; and
          (d) Actions to protect insured depositors and ensure the rapid return of segregated client assets.
          July 2018

        • DS-2.1.14

          Bahraini conventional bank licensees must consider the following important elements in their analysis leading to the development of the resolution plan:

          (a) The corporate and group structure
          (b) Relevant entities and the identification of material entities;
          (c) Balance sheet profile including on and off balance sheet;
          (d) Funding, liquidity and capital needs;
          (e) Business model of the parent and material entities;
          (f) Core business lines;
          (g) Operational, financial, legal and structural dependencies;
          (h) External dependencies;
          (i) Financial functions mapping each material entity and business lines;
          (j) Resolution strategies and options.
          July 2018

        • DS-2.1.15

          For the purpose of DS-2.1.13(a), banks shall consider in their recovery and resolution planning processes the identification and the development of suitable resolution options for 'critical functions' and 'critical shared services. The resolution strategy and operational plan should encompass appropriate actions which help maintain continuity of these functions while avoiding unnecessary loss of value and minimising, where possible, the costs of resolution.

          July 2018

        • DS-2.1.16

          Critical functions are activities performed for third parties not affiliated to the bank, the failure of which would lead to a disruption of services that are vital for the functioning of the real economy and for financial stability due to the bank/banking group's size or market share, interconnectedness, complexity and cross-border activities.

          July 2018

        • DS-2.1.17

          The designation of a function as critical does not imply that the function and all related liabilities will be protected in a resolution. Rather, the designation is meant to assist the CBB and relevant authorities in developing resolution strategies that minimise systemic disruption and preserve value. It is important to note that the institution specific lists of critical functions will be an important input in the resolution planning process and the resolvability assessments.

          July 2018

        • DS-2.1.18

          The criticality of a function can be assessed in a three-step process: —

          a) Impact assessment: It will include understanding the nature and extent of the activity and assessing the impact of the failure of the function on the market and infrastructure, on customers, on other market participants and finally the interdependences of the market;
          b) Evaluating the market for that function: This will encompass understanding how quickly the market is able to substitute the service providers of the failed function. Such an assessment will include supply side analysis of service providers covering market concentration;
          c) Firm-specific test: The analysis will determine whether the bank's failure would have a material impact on third parties, on the potential for contagion and on the general confidence of market participants which will be based on understanding of the overall market share of the firm for that specific function etc.
          July 2018

        • DS-2.1.19

          These critical functions are assessed in the following five broad categories with distinct economic objectives and characteristics: (a) Deposit Taking, (b) lending and loan servicing; (c) payments, clearing custody and settlement, (d) lending and borrowing to and from financial institutions; and (e') Capital markets and investment activities.

          July 2018

        • DS-2.1.20

          Critical shared services are activities performed within the bank or by another unit within the group or outsourced to third parties and their 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.

          July 2018

        • DS-2.1.21

          Critical shared services are related to the critical functions a bank performs. They provide the internal and essential infrastructure the bank needs to continue operating. Their designation should therefore follow from the identification of the critical functions. The prioritising of the critical shared services, starts with answering the following questions first:

          a) How severe are the consequences of the failure of a particular service on one or more critical functions?
          b) How quickly will the failure of a particular shared service lead to a collapse of one or more critical functions?
          July 2018

        • DS-2.1.22

          For the purposes of this analysis, there should be a clear understanding of the following aspects of the shared services at legal entity level:

          i. the provider and the recipient of the services;
          ii. the nature of the services being provided;
          iii. the financial terms on which those services are offered;
          iv. the existence of service level agreements and the validity of such agreements in the event of failure; and
          v. the impact of default on the ability of the bank to maintain these services.
          vi. the substitutability of the services being provided (see above).
          July 2018

        • DS-2.1.23

          Bahraini conventional bank licensees must ensure that key Service Level Agreements (SLAs) can be maintained in crisis situations and in resolution, and that the underlying contracts include provisions that prevent termination triggered by recovery or resolution events, and facilitate transfer of the contract to a bridge institution or a third party acquirer.

          July 2018

        • DS-2.1.24

          Nothing in this Module will preclude CBB from devising other resolution strategies, options or plans recognised under the CBB Law should it believe it is necessary under the circumstances.

          July 2018