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EBA Recovery Planning Report Summary

Introduction

The European Banking Authority (EBA) conducted a comparative analysis of recovery plans from 27 European cross-border banking groups, focusing on the identification of critical functions (CFs) and core business lines (CBLs). This analysis supports the EBA's mandate under Directive 2014/59/EU (BRRD) and the EBA Regulation to enhance the quality and consistency of recovery and resolution planning across Europe. The report outlines the current practices and identifies key strengths and weaknesses in how credit institutions approach the identification and treatment of CFs and CBLs.

The analysis is based on a two-step approach, using a set of general questions and assessment criteria derived from the Financial Stability Board (FSB) guidance. The findings aim to support credit institutions, resolution authorities, and national competent authorities in improving their recovery planning practices.

Core Content

1. Preliminary Considerations

• Sample size: 27 recovery plans were reviewed, covering banks in 12 EU Member States, representing approximately half of EU banks' total assets.
• Scope: The core analysis focused on 12 plans for CFs and 17 for CBLs.
• Timeline: Most plans were submitted before the BRRD came into force on 1 January 2015.
• Future work: As the BRRD becomes mandatory, the EBA plans to broaden the sample and conduct more comprehensive comparative analyses.

2. Approach

The EBA used a two-step approach:

• Step 1: Developed a template of general questions to assess the level of detail and granularity in how CFs and CBLs were identified. These questions included definitions, identification criteria, and the relationship with recovery options.
• Step 2: Identified the assessment categories and underlying factors used by banks to determine the criticality of functions. These categories include:
  • Impact assessment: Evaluating the impact of a function's failure on external parties, including systemic effects.
  • Supply-side analysis: Assessing the market for the function, including substitutability and market concentration.
  • Firm-specific test: Evaluating the importance of the function to the institution and the market.

3. Critical Functions

3.1 General Considerations

• Credit institutions have made progress in identifying CFs, though it remains a challenging task.
• Only a limited number of recovery plans included CFs, likely due to the lack of mandatory requirements before the BRRD implementation.
• The EBA found inconsistencies in the level of detail and the use of quantitative analysis in determining CFs.

3.2 Definition

• Most banks used ad-hoc definitions based on official wording.
• Some used national policy documents, the BRRD, or the FSB definition.
• A material weakness was the inclusion of internal importance to the group, which blurred the distinction between CFs and CBLs.

3.3 Assessment Criteria

• Systemic importance and substitutability were the most commonly used criteria.
• Fewer banks considered the impact on external parties and contagion effects.
• Quantitative data was often used to support the assessment, but there was no standardisation of market share thresholds.

3.4 Systemic Importance

• Banks used quantitative indicators such as market share, volumes, number of transactions, and number of customers.
• Market share thresholds varied significantly between banks, reflecting different market structures and CF characteristics.
• For retail deposit services, a market share of 3–5% was generally considered critical.
• For payment and asset management activities, higher thresholds (often above 10%) were used due to the ease of substitution.

3.5 Substitutability

• Factors such as number of providers, market concentration, entry/exit barriers, and speed of substitution were commonly considered.
• Two banks set a 30-day threshold for substitution, focusing on the customisation of products and operational support needed.
• Few banks assessed costs or competitors' willingness and ability to substitute, often relying on qualitative judgments.

3.6 Impact

• Only a few banks assessed the impact on external parties and systemic consequences.
• Banks typically focused on qualitative considerations such as customer impact and market confidence, without providing detailed explanations.
• Interbank exposures and derivative holdings were the only quantitative indicators used to support impact assessments.

3.7 Type/Number of Functions and Criticality Rationale

• The number and type of CFs varied depending on the bank's size and business diversification.

• High-frequency CFs (identified by more than five banks) included:

  • Retail deposit current accounts
  • Retail lending (including mortgages)
  • Payments (cash/wire services)
  • Corporate lending
  • Corporate deposits
  • Clearing and settlement
  • Derivatives (interest rate, FX, equity)

• Medium-frequency CFs (identified by five or fewer banks) included:

  • Secondary market trading
  • Debt capital markets
  • Custody services
  • Retail lending (credit cards)
  • Retail savings accounts
  • Trade finance
  • Asset management
  • Leasing
  • Corporate advisory services
  • Prime brokerage

• The main rationale for criticality was systemic importance and substitutability.

3.8 Mapping

• Seven out of twelve banks mapped CFs to legal entities within the group.
• The mapping was usually a table listing CFs and the entities in which they were carried out.
• The underlying criteria for mapping were not included, and there was no indication of the relative importance of entities in providing a function.
• This lack of detail may limit the usefulness of the mapping in recovery planning.

Core Business Lines (CBLs)

• CBLs were generally better addressed than CFs in recovery plans.
• Definitions were mostly aligned with the BRRD.
• Banks used a mix of quantitative and qualitative criteria to identify CBLs:
  • Quantitative: Contribution to revenue, operating profit, economic capital, market share, etc.
  • Qualitative: Strategic importance, franchise value, market potential, regulatory threats, etc.
• CBLs often aligned with main business lines in annual reports.
• CBLs were generally analyzed at the group level, with some banks also using regional criteria.

Annexes

• Annex I: Provides the general questions used to assess CFs and CBLs in recovery plans.
• Annex II: Lists the assessment categories and underlying factors used to determine the criticality of functions.

Conclusion

The EBA report highlights the ongoing development of recovery planning practices across European banks. While progress has been made, there are notable inconsistencies and gaps in how CFs and CBLs are identified and assessed. The report aims to guide institutions in adopting best practices and aligning their approaches with regulatory expectations.