Yesterday, 4th March, the Council published a compromise proposal detailing a possible final draft of the Recovery and Resolution Directive (RRD). Firms can breathe a mild sigh of relief as the document relents on some of the most stringent requirements. However, the proposal extends the rules in other areas creating a mixed picture overall.
The most significant easing of the rules is the apparent end of recovery ‘triggers’. A change in the phrasing of Article 8 from ‘triggering recovery plans’ to ‘recovery plan indicators’ means that, under this iteration, firms are to be given much greater discretion as to when to implement their recovery plans. This is a vast improvement on the old rules, where firms were obliged to implement their recovery plans as soon as the criteria were fulfilled (or ‘triggered’), regardless of the wider market context. The new compromise recognises the danger inherent in having automatically triggered market reactions, and the feedback issues these create, and opens up more room for discussion between firms and regulators. This lends itself to a more pragmatic, and less arbitrary, response to market instability.
Firms’ operational systems in times of stress come under specific scrutiny in this proposal. In terms of the actual RRP documents themselves, the new compromise adds two new subheadings that must be included in the resolution plan. The first is a description of the operations and systems essential for maintaining continuity in the institution’s back-office functions. The scope of this requirement will need clarification further down the line.
However, in some ways the inclusion of operations and technology is positive as it demonstrates a welcome recognition of the importance of the back-office to market stability. However, it also requires institutions to have a clear and holistic view of the submerged part of the iceberg: data, risk, finance, HR etc. This will require the greater involvement of IT and other staff with key skills in the drafting of resolution plans.
But, disturbingly, this could be read as a way of laying the groundwork for greater regulatory intervention. In order to be effective, Europe’s new approach to large bank resolution – a ‘no prisoners’ takeover through the single supervisory mechanism – requires better oversight of all the bank’s critical functions. Therefore, these new measures are designed to assist the ECB in effecting that approach.
However, ultimately, a clearer picture of how the bank’s critical functions are carried out will be mutually beneficial. Firms should look at how these requirements can bring them efficiency savings, and find alignment with other regulatory change programs, such as MiFID II, where the outsourcing rules may require a similar review of critical functions.
Recommended Further Reading: