The FSA has told banks and investment firms they must have definite recovery and resolution plans in place to deal with financial stresses and potential failure.
The regulator has today published a feedback statement setting out draft rules firms will have to follow. The final rules, which are applicable to all deposit takers or investment firms with assets over £15bn, are to be published in the autumn.
The regulator first published its proposals on resolution and recovery in August last year but today’s statement clarifies what is expected of firms. It says it has waited for developments with the Independent Commission on Banking and the anticipated EU Commission proposal on firm resolution to publish its final rules.
Under the rules, firms will be expected to put in place recovery plans and provide information to the regulator so it can develop resolution plans.
The FSA says firms’ recovery plans should include a “sufficient number of material and credible options” to cope with both firm-specific and market stresses and should have options which address capital shortfalls, liquidity pressure and profitability issues.
Firms must also declare the options they would consider in a worst case scenario, such as the disposal of all or parts of the business, raising equity capital, the elimination of dividends, debt exchanges or any other measures.
In addition to putting in place recovery plans, firms must provide the regulator with resolution packs containing details that will assist the FSA in winding down the firm if it fails.
The information will be used to ensure that resolution can be carried out without public solvency support from the taxpayer, to minimise the impact on financial stability and to make the winding down process quicker.
The FSA has been running a pilot scheme with the six biggest banks for the past two years. These firms will need to submit their recovery plans and resolution packs by June, while other large firms will need to put their plans in place by the end of the year.
FSA director of banks and building societies Andrew Bailey says: “The financial crisis laid bare a complete failure in banks globally to think seriously about how they could and would deal with the risk of major instability and even failure. The result has been that taxpayers around the world have had to foot the bill in order to support our banking sectors.
“Major reforms have been taken forward both nationally and internationally to increase the strength and resilience of our banking sectors but we need to maintain the momentum. Recovery and resolution plans require firms to think ahead and plan for the worst. We will be building on what has been put in place since last year and firms must continue to develop their plans.”