Seminar Workshop on Recovery Planning for Cooperative Banks

Atty. Mickel M. Borigas, RSW, REB, REA, LPT, EnP, MAED , MBA, Th.D., J.D., FICD

Comprehensive Implementation of Recovery Planning for Banks

I. Understanding Recovery Planning for Bank and Establishing Framework

II. Introduction to Recovery Planning

III. Overview, objectives and significance of Recovery Planning of recovery planning in

the banking sector
IV. Key components and scope of the Recovery Plan as mandated

V. Governance Structure and Responsibilities/ Governance arrangements

Roles and responsibilities of the board of directors, senior management, and other stakeholders
in recovery planning
Establishing an effective governance structure for recovery planning
Ensuring accountability and oversight

VI. Critical Functions and Services

VII. Identification of Triggers and Stress Scenarios

Types of triggers and early warning indicators

Methodologies for identifying potential stress scenarios

VIII. Restoration Points

IX. Recovery Options
X. Scenarios
XI. Preparatory Measures and Implementation Plan
XII. Testing and Simulation Exercise
XIII. Review and Updating of the Recovery Plan
XIV. Communication Strategy
INTRODUCTION TO RECOVERY PLANNING AND BSP CIRCULAR 1158

OVERVIEW, OBJECTIVES AND SIGNIFICANCE OF RECOVERY PLANNING OF RECOVERY

PLANNING IN THE BANKING SECTOR

Financial institutions are required to develop and maintain robust recovery plans to ensure the
continuity of their operations in the event of disruptions caused by various factors such as
natural disasters, technological failures, or other emergencies.

Recovery Planning is essential for financial institutions to ensure their resilience and ability to
continue serving customers and fulfilling their obligations, even in challenging circumstances.
Recovery planning in the banking sector, as mandated by BSP Circular 1158 issued by the
Bangko Sentral ng Pilipinas (BSP), involves adhering to specific guidelines and requirements set
forth by the central bank of the Philippines. Here's an overview of recovery planning in the
banking sector in line with BSP Circular 1158:

Comprehensive Risk Assessment: Financial institutions are required to conduct thorough risk
assessments to identify potential threats and vulnerabilities that could disrupt their operations.
This includes assessing risks related to natural disasters, technological failures, cyberattacks,
and other emergencies.

Business Impact Analysis (BIA): Banks must perform a BIA to evaluate the potential
consequences of disruptions on their critical business processes, services, and infrastructure.
This helps prioritize recovery efforts and resource allocation.

Development of Recovery Strategies: Based on the risk assessment and BIA, banks develop
recovery strategies to mitigate the impact of disruptions. BSP Circular 1158 emphasizes the
importance of having robust recovery strategies in place, including backup systems, alternate
facilities, and crisis communication protocols.

Business Continuity Planning (BCP): Financial institutions are required to develop and maintain
comprehensive BCPs that outline procedures for maintaining essential functions during
disruptions. This includes protocols for employee safety, data backup and recovery, customer
communication, and regulatory compliance.

Disaster Recovery Planning (DRP): BSP Circular 1158 also emphasizes the importance of DRP,
particularly for restoring IT systems and infrastructure following a disruptive event. Banks must
have procedures in place for data recovery, system restoration, and testing of backup systems.
Testing and Exercises: Financial institutions are required to conduct regular testing and
exercises to evaluate the effectiveness of their recovery plans. This includes tabletop exercises,
simulations, and full-scale drills to identify weaknesses and areas for improvement.

Regulatory Compliance: Banks must ensure that their recovery plans comply with the specific
requirements and standards outlined in BSP Circular 1158. Failure to comply with these
regulations can result in penalties and other regulatory actions by the BSP.

Collaboration and Coordination: BSP Circular 1158 also encourages collaboration and
coordination among financial institutions, government agencies, and industry partners. This
helps ensure a cohesive response to large-scale disruptions that may affect the entire financial
system.

Continuous Improvement: Recovery planning is an ongoing process, and financial institutions

must continuously review and update their plans to address emerging threats and changes in
the operating environment. BSP Circular 1158 emphasizes the importance of continuous
improvement and adaptation to evolving risks.

SOME GUIDING PRINCIPLES IN CRAFTING RECOVERY PLAN FOR BANK BASED ON BSP
CIRCULAR

1. Recovery planning is an important process to reduce the

potentially significant risks posed by a bank's distress or disorderly failure to the stability
of the financial system and the economy.

2. Recovery planning is a fundamental element

of a risk management framework as it enables banks to respond quickly, effectively, and
credibly to situations of financial stress to protect depositors and other customers as well
as to promote viability and maintain shareholder value.

3. Reasonable recovery plan that is linked to their

risk management framework, internal capital adequacy assessment process or capital
planning, liquidity plans, and business contingency plans.

4. Recovery plans should be

informed by a bank's risk appetite statement and results of its stress testing. The recovery
plan shall set out the governance arrangements, recovery options, and communication
strategies in periods of extreme stress scenarios to maintain or restore the viability of
banks and ensure continuity of operations.

5. Banks are expected to adopt a recovery plan that is commensurate to their size,
nature and complexity of operations, overall risk profile, and systemic importance.
COMPONENTS OF RECOVERY PLAN AS MANDATED

a. An executive summary which provides a brief overview of the recovery plan

covering the governance arrangements, summary of triggers and indicators, key
recovery strategies and the corresponding operational plan for its
implementation, among others.

b. Governance arrangements which cover the responsibilities of the board of

directors, senior management, business units and self-assessment functions
encompassing the entire recovery planning process, including the activation and
implementation of recovery options and communication strategy, among others;

c. Critical functions and services which cover the critical activities of the bank and
services enabling the performance of such critical activities;
d. Triggers and early warning indicators which discuss the set triggers and indicators
as well as the procedures related to monitoring, escalation, and approval process;

e. Restoration points which specify the identified financial indicators relating at a

minimum to capital and liquidity as well as the timeline for restoration for such
indicators:

f. Recovery options which describe the menu of feasible and credible options based
on exogenous and entity-specific assumptions;

g. Stress scenarios which cover entity-specific and system-wide scenarios and a

combination thereof as well as the recovery strategies for each scenario, drawing
from the menu of recovery options;

h. Preparatory measures which set out the operational and legal pre-positioning
needed to implement recovery options;

i. Testing and simulation exercises which set out the areas that should be covered
in the exercise and the type of assessments that may be conducted, including
reporting and corrective mechanisms; and

j. Review of the recovery plan which includes its elements, relevance and
applicability.

REGULATORY REQUIREMENTS AND COMPLIANCE TIMELINES

Detailed examination of regulatory requirements outlined in BSP Circular 1158

A. GOVERNANCE ARRANGEMENTS

Under BSP Circular 1158, the Bangko Sentral ng Pilipinas (BSP) outlines supervisory
expectations regarding the governance arrangements for the preparation of the
recovery plan. Here are the key supervisory expectations related to governance
arrangements:

1. Board Oversight: The recovery plan should have oversight from the board of
directors or its equivalent governing body. The board should be actively involved in
the approval, review, and oversight of the recovery plan, ensuring that it aligns with
the institution's overall risk appetite and strategic objectives.

2. Senior Management Responsibility: Senior management, including the chief

executive officer (CEO) and other senior executives, should have clear responsibility
for the development, implementation, and maintenance of the recovery plan. They
should ensure that the plan is effectively communicated throughout the
organization and that appropriate resources are allocated for its execution.

3. Clear Roles and Responsibilities: The recovery plan should define clear roles and
responsibilities for individuals and departments involved in its development and
implementation. This includes specifying the duties of key personnel, such as the
recovery plan coordinator and members of the crisis management team.

4. Coordination with Risk Management Functions: The governance arrangements

should ensure close coordination with the institution's risk management functions,
including operational risk, IT risk, and business continuity management.
Collaboration with these functions helps ensure that the recovery plan adequately
addresses the institution's risk profile and vulnerabilities.

5. Independent Review and Validation: The governance arrangements should include

provisions for independent review and validation of the recovery plan. This may
involve engaging internal audit, risk management, or external consultants to assess
the effectiveness and completeness of the plan.

6. Regular Reporting to the Board: Senior management should provide regular updates
and reports to the board on the status of the recovery plan, including any significant
developments or changes in the institution's risk profile. Adoption and
implementation of communication plan is necessary to ensure that the board
remains informed and can provide appropriate guidance and oversight.
 7. Recovery planning process: These processes should fully be integrated into the
bank's business-as usual risk management framework. This is to ensure that the
recovery plan
shall be designed as a comprehensive document that will complement
the existing capital, liquidity, and business contingency plans but shall
have an end view of the bank recovering from extreme stress situations.
The plan shall also cover the established contingency arrangements that
would allow the bank to continue to operate and maintain critical
functions and services as it implements the recovery measures, The
recovery plan shall be consistent with the bank's existing stress testing
exercises as required under Sec.l5l and other risk management guidelines
covering specific risk areas

8. Management Information System: Adequate Management information Systems

(MlS) should be maintained and is
capable of generating necessary information on a timely and accurate
basis to enable the board of directors and the senior management to
effectively discharge their respective responsibilities.

9. Training and Awareness Programs: Governance arrangements should include

provisions for training and awareness programs to ensure that employees
understand their roles and responsibilities under the recovery plan. This helps
promote a culture of preparedness and resilience throughout the organization.

10. Compliance with Regulatory Requirements: The governance arrangements should

ensure that the recovery plan complies with all regulatory requirements, including
those set forth in BSP Circular 1158. Institutions should regularly review and update
the plan to address any changes in regulations or the operating environment.

B. CRITICAL FUNCTIONS AND SERVICES

1. In developing the recovery plan, the bank needs to identify core information crucial
for recovery planning purposes:

a. Critical Functions and Services: The bank must identify and describe critical functions
and services, mapping them to specific entities or units. It should outline actions
necessary to operate and maintain them during plan activation. Additionally, the
bank must ensure compliance with any additional requirements to maintain
membership in financial market infrastructures during crisis situations.

As defined in the circular :

 Critical functions shall refer to activities performed by a bank or banking group
for its clients, where failure to carry out the same would have a material negative
impact on a significant number of its depositors and other clients. Critical
functions may include retail and commercial banking, trading, payment and
settlement, and asset management, among others.

Critical services shall refer to internally and externally provided services needed
to enable the performance of critical functions and management of the bank.
Critical services may include but not limited to internal processes, lT systems,
clearing and settlement facilities, supplier and employee contracts, and
outsourced services.

b. Material Entities: This involves providing detailed descriptions of material entities and
their activities, along with criteria for determining their materiality.

As defined in the circular:

Material entities shall refer, at a minimum, to the bank's subsidiaries and affiliates,
as defined under Sec. l3l (Definition of Terms), which represent a significant
portion of the balance sheet or business activities of the parent bank.

c. Core Business Lines and Operating Model: The bank should give an overview of the
business model of its material entities, identify core business lines, and assess the
viability of these lines in a recovery scenario. It must also identify processes for
determining the value and marketability of these business lines, operations, and assets.

d. Dependencies: The bank must outline key dependencies of material entities, including
internal and external dependencies, and describe governing contractual arrangements.
Key dependencies are those whose sudden and disorderly failure would seriously
impede critical functions and services.

Additionally, the bank should identify linkages between its parent company (if
applicable) and its material entities, as well as operational data such as asset
encumbrance, liquid assets, and off-balance sheet activities.

2. In relation to MlS, the bank shall:

a. Maintain a detailed inventory, including description and the location of the

key MIS used in its material entities, mapped to its critical functions and
services.

b. Identifies and address legal constraints on the exchange of management

information among the material entities within the group; and
 c. Maintain specific information at a legal entity level, including, for example,
information on intra-group guarantees and intra-group trades booked on
a back-to-back basis.

3. The bank shall maintain up-to-date details of financial contracts entered into by
the bank, including records of counterparties. Similarly, the bank shall maintain
up-to-date details of non-financial contracts pertaining to its critical functions
and services.

4. The bank shall establish appropriate contingency arrangements that will enable
its critical functions and services to continue to operate while recovery measures
are being implemented. Such arrangements may include, but are not limited to
arrangements that would enable the continuous functioning of internal
processes, lT systems, clearing and settlement facilities, and supplier and
employee contracts; and ensure continued rights of use and access to
operational assets such as property and office space.

5 . The bank shall put in place adequate measures such that outsourcing
arrangements, which support critical functions and services can be maintained
in crisis situations and in the recovery process. The underlying contracts should
include provisions that prevent termination from being triggered by recovery
events and facilitate the transfer of the contract to a bridge institution or a third-party
acquirer where necessary should some form of the resolution be required
in the bank cannot restore itself to viability.

C. EARLY WARNING INDICATORS AND TRIGGERS

1. Preemptive Actions: The recovery plan should facilitate preemptive actions by the bank
at an early stage of stress to prevent breaching minimum regulatory requirements.

2. Activation Triggers: The recovery plan may be activated when specific triggers related to
capital, liquidity, asset quality, profitability, or credit rating are breached. These triggers
are set above minimum regulatory requirements but below or at more severe levels
than those for activating capital and liquidity contingency plans.

3. Notification and Evaluation: Banks must notify the Bangko Sentral in case of a breach of
internally set triggers. Senior management evaluates the situation and decides whether
to take action under the recovery plan or not. The recovery plan should define
operational procedures, monitoring, escalation, and approval processes clearly.
 4. Early Warning Indicators (EWIs): The recovery plan utilizes EWIs with specific levels for
each trigger, including quantitative and possibly qualitative indicators. EWIs provide
early-stage indicators of stress set above trigger levels, which may not necessarily
activate the recovery plan. Breach of EWIs allows the bank to take remedial actions such
as adjusting risk tolerance, modifying risk behavior, tightening risk controls, and
preparing for potential activation of recovery options. Regular calibration of EWIs
ensures they remain robust to alert the bank of stress or adverse circumstances and
enable appropriate recovery actions.

Banks should emphasize the importance of having mechanisms in place to detect and
respond to early signs of stress, allowing banks to take proactive measures to mitigate risks and
maintain stability.

D. RESTORATION POINTS

1. Minimum Restoration Points and Timeline: The recovery plan must specify minimum
restoration points and timelines for key indicators, covering areas such as capital
(e.g., CET1, Tier 1 capital, or capital adequacy ratios) and liquidity (e.g., ratio of high-
quality liquid assets, Liquidity Coverage Ratio). Restoration points indicate the level
to which selected key indicators should be restored post-recovery.

2. Additional Restoration Points: Depending on the situation, restoration points may

also be considered for profitability (e.g., target return on assets and return on
equity) and asset quality (e.g., maximum tolerable level of non-performing loans,
non-performing assets, or restructured loans ratios). Other factors such as target
credit rating, measures of market confidence, depositor and stakeholder
satisfaction, and resumption of critical functions and services may also be included.

3. Guidance for Recovery Actions: Restoration points guide the extent and nature of
recovery actions. They are determined based on the desired risk appetite for each
key indicator and are set above the defined quantitative Early Warning Indicators
(EWIs). This ensures reasonable assurance that future breaches of triggers are
prevented and maintains stakeholder confidence in the bank.

Banks should highlight the importance of setting clear restoration points and timelines
in the recovery plan to guide recovery actions effectively, ensuring the restoration of
key indicators and maintaining stakeholder confidence in the bank's stability and
resilience.
E. RECOVERY POINTS

1. Adoption of Feasible Recovery Options: Banks should establish a menu of credible

recovery options based on underlying assumptions to stabilize and restore financial
resources and viability. Options may include measures to strengthen capital
position, asset sales, debt restructuring, and securing adequate liquidity.

Some Recovery measures :

a. Capital Strengthening Measures:

Recapitalization: Injecting additional capital into the bank to bolster its financial
position and meet regulatory requirements.

Issuance of Capital Instruments: Issuing new shares or other capital instruments to

raise funds and increase capital reserves.

Suspension of Dividends and Discretionary Payments: Temporarily halting dividend

payments and discretionary remunerations to retain capital within the bank.

Reduction of High Risk-Weighted Credit Exposures: Mitigating risk by reducing

exposure to high-risk assets, thus improving the bank's capital adequacy.

b. Asset Management Strategies:

Sale of Assets: Selling non-core assets or underperforming assets to generate

liquidity and strengthen the balance sheet.

Sale of Subsidiaries: Divesting subsidiaries or non-core business units to streamline

operations and release capital.

Spin-off of Business Units: Creating separate entities for specific business units to
enhance efficiency and focus resources on core operations.

c. Liability Restructuring Options:

Debt-to-Equity Conversion: Restructuring liabilities by converting debt obligations

into equity, potentially reducing debt levels and improving financial flexibility.

d. Liquidity Management Measures:

 Securing Adequate Funding: Accessing alternative funding sources such as lines of
credit, interbank borrowing, or issuance of debt securities to ensure liquidity needs
are met.

Diversification of Funding Sources: Broadening the sources of funding to reduce

reliance on any single funding provider or instrument.

Availability of Collateral: Ensuring sufficient collateral is available to support funding

arrangements and meet regulatory requirements.

2. Comprehensive Description of Recovery Options: Each recovery option should be

thoroughly described, including implementation time, required authorization level,
potential contribution to capital and liquidity restoration, and probability of success.
The plan should also specify the intended sequencing of recovery options.

3. Inclusion of Capital and Liquidity Shortfall Solutions: Recovery options should always
address capital and liquidity shortfalls. The selection of options depends on the
stress scenario's type and severity. The plan should discuss estimated benefits,
negative effects, long-term impacts, preparatory actions, implementation processes,
potential impediments, and disposal conditions for assets or businesses.

The following shall be laid down and discussed for each

recovery option:

a. Estimated Benefits and Time Frame:

Discussion on the potential positive outcomes of each recovery option, including

assumptions made to quantify benefits.
Evaluation of the reasonable time frame within which the bank can restore its
financial strength and viability using the chosen option.

b. Negative Effects:

Analysis of any adverse effects on the bank's financial condition, franchise value,
credit ratings, and relevant stakeholders.
Consideration of potential disruptions to normal business operations and services
resulting from the deployment of each recovery option.

c. Long-term Impact:

Assessment of the long-term viability of the bank/group to ensure that the chosen
recovery option offers more than just a short-term solution.
 Examination of whether the option addresses underlying issues or merely provides a
temporary fix.

d. Preparatory Actions:

Identification of preparatory actions needed to ensure effective and timely

implementation of the recovery options.
Discussion on steps required to be taken in advance to facilitate smooth execution.

e. Implementation Process:

Description of the process to implement or carry out each recovery option, including
escalation procedures, authorization levels, and decision-making processes.
Identification of the responsible owner of the process to establish accountability and
ensure responsibility during times of stress.

f. Circumstances and Remedial Measures:

Identification of circumstances or factors that could render the recovery option

unavailable or ineffective.
Discussion on remedial measures to overcome impediments, including the time
frame for their implementation.
Focus on ensuring timely and effective execution of remedial measures to enhance
the credibility of the recovery plan.

g. Disposal of Assets or Business:

Specification of conditions for executing the disposal option, considering potential

unfavorable conditions.
Emphasis on making conservative assumptions to account for the possibility of
disposing below market value.

4. Focus on Direct Actions: Recovery options should primarily focus on actions that
banks or their material entities can directly take, with conditions specified for
execution. The plan should estimate the prioritization, sequencing, and
implementation time of recovery actions, considering a combination of options may
be necessary.

5. Consideration of an adequate range of feasible recovery options : For bank with

simple operations, the range of credible options could be limited or less complex,
but they should still consider an adequate range of feasible recovery options .
6. Addressing Underlying Causes of Stress Events: The recovery plan should outline
actions, apart from recovery options, to address the underlying causes of stress
events. This may include establishing a process for internal review, appointing
independent parties for reviews, and reporting results to the board and
stakeholders.

a. Internal Review Process:

Discussion on establishing a structured process for internally reviewing the causes of

adverse events.
Consideration of the scope, methodology, and timeline of the review process.
Identification of key stakeholders involved in the review and their roles.
Exploration of methods to identify root causes and contributing factors to adverse
events.

b. Appointment of Independent Party:

Examination of the rationale behind appointing an independent party to conduct

reviews.
Discussion on the selection criteria for the independent party, including their
expertise and impartiality.
Consideration of the scope and objectives of the independent review, ensuring a
thorough and unbiased assessment.
Evaluation of the independence and authority granted to the reviewing party to
make recommendations.

c. Reporting to Board and Stakeholders:

Analysis of the reporting structure and frequency for communicating review results
to the board and key stakeholders.
Discussion on the content and format of the report, ensuring transparency and
clarity.
Consideration of the timeline for reporting, balancing the need for timely
communication with the thoroughness of the review process.
Exploration of the actions taken or proposed to address the identified underlying
causes, including timelines and responsibilities.
Examination of mechanisms for feedback and follow-up to ensure accountability and
effectiveness of remedial measures.
 7. Exclusion of Government/Public Financial Support Assumptions: The recovery plan
should not assume access to government/public financial support to preserve or
restore viability, solvency, or liquidity. This ensures the plan focuses on internal
measures and avoids reliance on external support.

F. SCENARIOS

In identifying and adopting scenarios, the following must be considered in the recovery
plan:

a. Identification and Adoption of Scenarios:

Consideration of plausible but severe stress scenarios that could threaten the bank's
viability.
Use of scenarios to inform recovery triggers, estimate adverse impacts, and establish
recovery actions.
Discussion on how scenarios reflect the bank's risk profile, complexity of operations, and
business strategy.

b. Types of Scenarios:

Analysis of entity-specific and system-wide stress scenarios and their impact on capital,
liquidity, profitability, and asset quality.
Consideration of relevant events for designing scenarios, both entity-specific and
system-wide.

c. Designing Scenarios:

Discussion on the relevance and potential impact of various events for designing stress
scenarios.
Consideration of existing stress testing programs and adoption of multiple scenarios for
testing.

In designing scenarios, the bank may consider the relevance ol but not be
limited to, the following events:

a. Entity-specific events:
I ) failure of significant counterparties;
2l damage to the bank's or banking group's reputation;
5) stress in the operations of the parent bank/head office abroad;
4) severe outflow of liquidity;
5) adverse movements in the prices of assets to which the bank or
banking group is predominantly exposed;
6) significant credit losses;
7) major cyber-security breach; or
8) severe operational risk event/loss.

b. System-wide events:
l) failure of significant counter parties affecting financial stability;
2) decrease in liquidity available in the interbank lending market;
3) increased country risk and generalized capital outflow from a
significant country of operation of the institution or the banking
group;
4l significant falls in financial markets;
5) significant changes in the interest rate environment; or 6) high-impact events (e.9.,
pandemic, or climate-related events) and a
severe macroeconomic downturn.

d. Testing Adequacy of Recovery Plan:

Examination of recovery options against a range of stress scenarios.

Consideration of difficulties in implementation and time needed for recovery in system-
wide scenarios.
Analysis of potential impacts on the bank's reputation in entity-specific scenarios.

e. Testing Scenarios:

Discussion on testing scenarios, including reverse stress tests.

Consideration of recovery options and inter-relationships between different scenario
types.

f. Testing for Banks with Simple Operations:

Examination of relevant scenarios for banks with simple operations.

Use of qualitative assessment to complement scenario analyses.

g. Testing for Foreign Bank Subsidiaries or Branches:

Consideration of parent group recovery framework for stress testing.

Assessment of suitability of group recovery stress scenarios for local operations.

h. Documentation of Stress-testing Activity:

Discussion on the overall approach to stress testing for recovery planning.

Documentation of relevant assumptions, methods, breach of triggers, financial
projections, recovery actions, and impact assessment.
 Banks shall keep adequate documentation of the stress-testing activity in its
recovery plan (or include in the recovery plan a cross-reference to separate
documentation), which should include, but not limited to:

a. discussion on the overall approach to stress-testing for recovery planning

purposes;
b. identification of all relevant assumptions used under each scenario;
c. quantitative and qualitative methods used in the stress testing exercise;
d. breach of recovery triggers;
e. financial projections for key financial and risk indicators for a period of at
least two years, including the financial and risk indicator results of recovery
actions:
f. recovery actions assumed to be taken in respect of the scenarios;
g. quantitative assessment of the impact of each scenario on the bank or
banking group, including capital, liquidity, profitability, and asset quality;
and
h. qualitative assessment of the suitability of each relevant recovery option
deployed under the scenarios.

i. Recovery Strategies for Identified Scenarios:

Assessment of recovery capacity for each recovery option under different scenarios.
Measurement of recovery capacity in quantitative terms to determine aggregate
impact.

G. PREPARATORY MEASURES / IMPLEMENTATION PLAN

1. Nature and Analysis of Preparatory Measures:

Discussion on the types of preparatory measures needed to effectively implement the

recovery plan.
Analysis of the potential impact of preparatory measures on the bank's operations,
financial resources, and viability.
Timeline for implementing preparatory measures to ensure timely readiness in case of a
trigger event.

2. Identification of Impediments:

Identification of potential legal and operational impediments that could hinder the
implementation of recovery options.
 Discussion on measures to overcome these impediments, such as developing
documentation for capital issuance or legal procedures for accessing funding.
Consideration of the complexity and feasibility of overcoming identified impediments
within the specified timeline.

3. Escalation Process and Decision-Making Mechanisms:

Outline of the escalation process to be followed in the event of a trigger event,

including the steps for activating the recovery plan.
Specification of decision-making mechanisms, including the roles and responsibilities of
key personnel involved.
Determination of the level of authority required for activating the recovery plan and
selecting recovery options.

4. Monitoring and Reporting:

Discussion on the monitoring and reporting mechanisms to track the progress of

preparatory measures' implementation.
Reporting requirements to inform the Bangko Sentral (regulatory authority) about the
status of preparatory measures.
Consideration of reporting frequency and the level of detail required to provide
adequate transparency to regulatory authorities.

5. Alignment with Regulatory Requirements:

Alignment of preparatory measures with regulatory requirements and guidelines set

forth by the Bangko Sentral.
Discussion on how the recovery plan addresses regulatory expectations regarding
preparatory measures and implementation timelines.
Consideration of any additional regulatory considerations that may impact the
implementation of preparatory measures.

H. TESTING/SIMULATION EXERCISES

1. Establishment of Testing Framework:

Banks are required to establish a framework for regularly testing the feasibility and
effectiveness of their recovery plan.
The aim is to ensure that recovery plans are operational and can be implemented
effectively during stress situations.
2. Key Areas Covered in Testing/Simulation Exercises:

Availability of sufficient information for decision-making.

Escalation and decision-making procedures, including coordination within the group.
Operational aspects such as implementation timelines and personnel proficiency.
Reliability and promptness of communication strategies for internal and external
stakeholders.

At a minimum, the following key areas shall be covered in the testing/simulation

exercises:
a. Availability of sufficient information for decision-making, including those
which can be sourced from the bank's MIS;
b. Escalation and decision-making procedures, including coordination of
entities within the group;
c. Operational aspects, such as plausibility of assumed timelines for the
implementation of the most relevant options, and knowledge and
proficiency of personnel involved in the implementation; and
d. Reliability and promptness of communication strategies, both for external
and interna I stakeholders.

3. Frequency and Types of Testing:

Annual desktop testing: Tabletop exercises conducted at least annually to evaluate the
recovery plan's feasibility and effectiveness.
Live simulation exercise: Full-scale live simulations undertaken at least once every five
years, involving relevant senior management.
Regular independent review or assessment: Internal audit function or other
independent units perform periodic assessments of the recovery plan and testing
processes.
4. Follow-Up Mechanisms for Deficiencies:

Adequate and timely follow-up mechanisms are required to address any deficiencies
identified during testing/simulation exercises.
Necessary improvements should be incorporated into the recovery plan based on the
findings.

5. Incorporation of Results into the Recovery Plan:

Testing/simulation exercises should take place within a period allowing timely

incorporation of corrective actions during the regular recovery plan update process.
If necessary, the recovery plan should be updated promptly to ensure improvements are
integrated in a timely manner.
 6. Engagement of Independent Observer:

Banks should engage an independent observer, such as units from the bank's self-
assessment functions or external auditors, during testing/simulation exercises.
This ensures a more objective assessment of the exercise outcome.

7. Reporting and Incorporation of Results:

Results of testing/simulation exercises must be reported to the bank's board of

directors.
Findings should be incorporated into the recovery plan submitted to the Bangko Sentral,
the central bank.

I. REVIEW AND UPDATING OF RECOVERY PLAN

Frequency of Updating:

The recovery plan should be updated at least annually.

Updates are also necessary when significant events occur that materially impact the
bank's structure, business model, operations, strategy, or risk exposure.

Review Process:

The updating process involves a review of both exogenous (external) and bank-specific
assumptions underlying the recovery plan.
Exogenous assumptions may include economic conditions, regulatory changes, or
market dynamics.
Bank-specific assumptions pertain to factors like organizational structure, operational
processes, and risk management practices.

Assessment of Relevance and Applicability:

An assessment is conducted to evaluate the relevance and applicability of the existing

recovery plan.
This assessment ensures that the recovery plan remains effective in addressing potential
stress scenarios based on current circumstances.
It involves considering changes in the banking environment, regulatory requirements,
market conditions, and internal factors affecting the bank's operations and risk profile.

J. COMMUNICATION STRATEGY
The recovery plan shall contain a communication strategy with supervisory
authorities/regulators, the public, financial markets, employees, and other
stakeholders, which shall be tailored based on the specific communication
needs of each recovery option.

Stakeholders Identification:

Identification of stakeholders is crucial, including supervisory authorities/regulators, the

public, financial markets, employees, and other relevant parties.
Each stakeholder group may have distinct communication needs and requirements.
Tailored Communication Strategy:

The recovery plan should outline a communication strategy tailored to address the
specific needs of each stakeholder group.
Different stakeholders may require different types and levels of information,
transparency, and engagement.
Supervisory Authorities/Regulators:

Communication with supervisory authorities/regulators should be clear, timely, and

compliant with regulatory requirements.
It should include reporting on the activation of the recovery plan, ongoing progress, and
any significant developments.
Public and Financial Markets:

Communication with the public and financial markets should focus on maintaining
transparency, credibility, and confidence.
Disclosure of relevant information should be balanced to avoid causing panic or
instability in financial markets.
Employees:

Communication with employees should ensure clarity regarding the activation of the
recovery plan, its implications for the organization, and any necessary actions they need
to take.
Employees should be kept informed about the organization's situation to maintain
morale and trust.
Other Stakeholders:

Other stakeholders, such as customers, suppliers, and creditors, should receive

appropriate communication relevant to their interests and involvement with the bank.