Benchmarking for better recovery plans

Benchmarking is an essential and highly effective tool for ECB Banking Supervision – including in the context of the recovery plans prepared by banks to weather periods of severe financial stress. Having a view across all significant banks’ plans helps supervisors ensure consistency in their recovery plan assessment, identify best practices and see which plans or parts of plans are most in need of work. ECB Banking Supervision shares the results of recovery plan benchmarking with the banks so they can better understand their relative strengths and weaknesses, and improve the quality of their plans accordingly.

Sharing benchmarking results is just one of the ways in which ECB Banking Supervision engages in open and transparent dialogue with banks on the subject of recovery plans. It also hosts interactive workshops and publishes material on its website to support banks in their planning. For example, in July 2018 ECB Banking Supervision published a report on recovery plans, which shared key findings and best practices from previous assessment cycles. In addition, it held two workshops on recovery plans, the first in 2018 on playbooks and dry runs, and the second in 2019 on overall recovery capacity, each attended by over 160 bank representatives. Most recently, ECB Banking Supervision launched a new web page dedicated to recovery planning, which will make key information more visible and accessible to banks.

To date, ECB Banking Supervision has carried out five benchmarking exercises based on recovery plan assessments and has shared the key outcomes with the industry. The latest benchmarking exercise was carried out in 2019 and identified room for improvement in three key areas. First, banks should improve the range and timeliness of options aimed at swiftly restoring liquidity. Second, banks need to provide a more credible calculation of their overall recovery capacity. Third, the usability of the plan – the extent to which it enables the banks to implement the recovery options effectively and in a timely manner – remains an issue for some banks.

At the same time, supervisors have observed improvements in banks’ recovery plans. Some of these can be attributed to sharing benchmarking outcomes with banks. For example, previous benchmarking exercises showed that many banks set a threshold for one of their capital indicators, the Common Equity Tier 1 ratio, that left too little room above their combined Pillar 1 and Pillar 2 requirements. Thresholds should be set at a level that, when breached, gives the bank sufficient time to respond. The latest benchmarking results confirm that most banks have significantly improved in this area. Similarly, after ECB Banking Supervision shared the finding that globally significant banks had very few asset sale options compared with all other peer groups, there was a notable increase in the number of such options offered by these banks in the next assessment cycle. These improvements demonstrate how being open and transparent about benchmarking results helps banks to better prepare for situations that they hope never to encounter, but cannot rule out.