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In response to the latest global financial crisis, many countries now require banks and other important financial institutions to prepare recovery and resolution plans—or living wills.
The purpose of these living wills is to mitigate the likelihood and impact of a future failure of a bank or other important financial institution.
Accenture looks at the nature of the proposed regulations, and argues that institutions should see beyond compliance to generating value and ultimately driving high performance.
Following the global financial crisis, important financial institutions are required to prepare “living wills” (recovery and resolution plans). In addition, the Financial Stability Board (supported by the G20) has also set a series of requirements for Systemically Important Financial Institutions (SIFIs) that need to be in place by the end of 2012, including living wills for the 29 SIFIs globally.
What is a living will? While there are some jurisdictional differences, all regulators have agreed on a two-tiered approach, the first, “recovery” (restoring the institution to health and stability, if possible) and the second “resolution” (affecting an “orderly” failure, whether through sale, divestiture or other means).
The recovery plan outlines the steps management plans to take to prevent the institution from failing, and to restore capital and liquidity. In the recovery plan, management may outline a range of actions including exiting certain businesses, selling subsidiaries or raising additional capital. Creating the recovery plan requires analysis of these issues in advance, and helps identify and pre-empt events that may lead to failure of one or more of the institution’s business units.
The resolution plan outlines how management will prepare for the failure of the firm, with procedures in place to manage the process in a controlled manner. The resolution plan serves as a guide for regulators intervening in a crisis which the financial institution will not survive, thus providing an orderly process for actions in the event the firm or part of the firm needs to be unwound. For example, the resolution plan must identify the data that regulators will need, to help them quickly segregate non-essential operations from elements that are systemically important and need to stay in business.
Accenture believes that financial institutions should not see the living will as an unwelcome regulatory intrusion. Rather they should see it as an opportunity to review their own structures, and to articulate their plans for sustaining future profitability.
To achieve these benefits, Accenture believes that institutions should be guided by three key principles:
Allow sufficient time and resources. Developing a plan will be time-intensive, and that does not take into consideration additional time spent on coordinating the plans with the institution’s own strategic and contingency plans.
Think holistically. If they have not done so already, financial institutions should begin the process of incorporating recovery and resolution planning into the broader strategic, operational and business planning process.
Take the initiative. Financial institutions should not expect a tremendous amount of detailed guidance from regulators. They should be prepared to go beyond the outlines of what has been asked and provide as much detail as they would expect from their clients when reviewing their sources of funds and deciding whether to extend investments. They should also realize that regulators are also likely to anticipate some level of reworking after their initial reviews of the plans.
Accenture has a wealth of experience helping some of the world’s top financial institutions achieve high performance.
Steve Culp is the managing director for Accenture Risk Management. Based in London, he has more than 20 years of global experience working with clients to define strategy and execute change programs across risk management and the broader finance function. Culp has responsibility for leading our Risk Management practice across all dimensions, from setting the strategic direction through enabling the full breadth of our corporate capabilities. In addition, he leads our efforts on large scale transformation projects across Finance and Risk for our largest financial services clients. With his extensive risk management, performance management experience and business acumen, Steve guides executives and their teams on the journey to becoming high-performance businesses.
Samantha Regan is a senior manager in Accenture Risk Management. Based in New York and with 14 years of industry and consulting experience in the banking and capital markets sectors, she is focused on US regulatory practices. Specializing in regulatory reform and compliance, enterprise risk management, Basel II, credit risk and operational risk, Regan advises clients on enhancing their regulatory and compliance management capabilities on their journey to high performance.
Simon Clayton is a manager in Accenture Finance and Enterprise Performance. Based in London and with over 25 years of industry, regulatory and consultancy experience in the financial services sector, he is focused on regulatory, risk and finance change management programs. As a banking industry specialist with deep experience in all aspects of operating models, he guides clients through change management initiatives that help businesses on their journey to high performance.
John Morrison is a manager in Accenture Risk Management. Based in London and with 25 years of industry and consultancy experience in the investment and retail banking sectors, he is focused on developing risk management solutions for the front, middle and back office. Specializing in risk evaluation and analysis, market and credit risk management and risk culture, he advises forward-looking clients on their journey to high performance.
December 6, 2011
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