Central Bank asks banks to prepare ‘recovery plans’

The Central Bank (BDL) has asked banks to prepare a ‘recovery plan’ as an additional step to bring the banking sector further in line with international regulatory standards, according to basic circular 141.

The plan, which is to be used in times of crisis, is part of the ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ set by the Financial Stability Board (FSB). The FSB is an international organization that monitors the global financial system and promotes financial stability and reform of financial regulations.

The banks are required to prepare the recovery plan within six months at the local level and within their subsidiaries and branches abroad. Local units of foreign banks also have to prepare plans.

Once completed the recovery plan should be submitted to BDL’s Banking Control Commission of Lebanon (BCCL).

The plan should include quantitative and qualitative indicators to highlight any deviation from a bank’s business plan. While establishing these indicators, a bank must take into consideration its financial soundness indicators, as well as general economic and capital market indicators. The banks’ financial soundness indicators include such ratios as the liquidity ratio, the capital adequacy ratio, and the asset quality ratio.

The banks should also establish a set of financial indicators that act as early warning indicators that could be used for assessing emerging risks.

The plan also involves stress tests that will be used to determine recovery options. These tests should include general systemic scenarios and idiosyncratic scenarios specific to each bank. The tests should also include stringent assumptions that trigger the implementation of the recovery plan.