Recovery & Resolution Planning

Why this chapter matters

A bank can run out of time before it runs out of accounting capital. Depositors may withdraw funds, wholesale lenders may decline to renew funding, collateral calls may increase, or confidence may weaken after losses. A plan written before stress gives decision-makers a way to identify feasible actions, their consequences, and the information needed to act. A plan assembled during a crisis often discovers its own assumptions too late.

This chapter distinguishes a bank's attempt to restore financial strength from an authority's response to bank failure. It uses global principles and clearly identified UK and European Banking Union examples, reviewed on 2 October 2026. Local law determines which firms must prepare plans, the conditions for resolution, creditor treatment, reporting, and deposit protection. The fictional exercise below illustrates decision-making; its amounts and timing are training assumptions.

Recovery, resolution, and ordinary insolvency

Recovery planning prepares management to restore the bank's viability during severe stress. Options may change funding, capital, exposures, costs, or the business model. The bank remains responsible for its decisions, subject to supervision and applicable law. Resolution planning prepares for a situation in which the bank cannot recover and statutory intervention may be needed. Resolution seeks an orderly outcome for important financial services and financial stability; preserving the existing owners or the entire business is not its purpose.

The Financial Stability Board's Key Attributes provide the international reference for effective resolution regimes. The consolidated version is dated 25 April 2024; that revision added guidance on financial resources and tools for central counterparty resolution without changing the twelve original Key Attributes. The standard calls for resolution powers, safeguards, planning, information access, and cross-border cooperation. It aims to maintain vital functions while allocating losses appropriately, without an expectation of public solvency support. It becomes legally operative through jurisdictional implementation, rather than through an FSB document alone. FSB Key Attributes, 2024.

Ordinary insolvency remains a possible outcome under local law. In the European Banking Union, resolution requires the relevant legal conditions and public-interest assessment; failure does not automatically mean that every bank enters resolution. The preferred resolution strategy is prepared by the resolution authority, with bank information and operational cooperation. A recovery trigger inside a bank's plan does not itself confer resolution powers on management. SRB introduction to resolution planning; SRB resolution conditions and public interest.

Who owns the work

The bank's board and senior management own recovery preparedness. Treasury understands available funding and collateral; finance assesses capital and losses; business teams understand assets and customers; operations and technology establish execution capability; legal advisers identify contractual and jurisdictional constraints. Risk provides challenge to assumptions and options. Internal audit can assess whether preparedness and controls operate as intended. Committee review cannot replace named execution owners.

The resolution authority owns its statutory strategy and decisions. The prudential supervisor, deposit insurer, central bank, and other relevant authorities have distinct roles under local arrangements. The bank provides reliable data and builds capabilities necessary for the preferred strategy. It cannot promise the authority will select a particular tool or that a foreign authority will recognise an action automatically. A group plan must account for legal entities, local obligations, and restrictions on moving funds across borders.

For a UK example, the PRA's SS9/17 sets expectations for recovery plans for firms within the Recovery Planning Part of its Rulebook. Its current version was published on 26 March 2026 and became effective on 1 April 2026. These dates concern UK supervisory expectations, not a worldwide deadline. Teams using this example should inspect the current statement and their firm's scope before assigning a review calendar. PRA SS9/17.

Indicators, triggers, and decisions

A recovery indicator tells management that financial strength or the ability to deliver an option may be deteriorating. Useful categories include capital, liquidity, profitability, asset quality, and market signals. Internal thresholds should allow enough time for analysis and execution. A trigger set only at a legal minimum may leave no practical room to act. Qualitative events can matter even while quantitative ratios appear healthy.

The plan should explain who receives an alert, who convenes the decision forum, what information is required, and how decisions and regulatory communications are recorded. Crossing an internal threshold should activate assessment and escalation according to the plan. It does not mean every preselected option must be executed mechanically. Management must judge the stress, speed of deterioration, feasibility, and interactions between actions. Legal reporting obligations must be met separately from internal escalation.

Consider two fictional signals: a liquidity ratio falls after a known seasonal payment cycle, while the bank's largest wholesale lender unexpectedly withdraws access. The first may be explainable and manageable; the second may invalidate an important recovery option. A dashboard that shows only the ratio misses the loss of capacity. The team should assess usable resources and the time remaining, not simply whether a cell has turned red.

A credible menu of recovery options

For each option, identify its expected benefit, execution time, prerequisites, decision rights, costs, risks, and impediments. A proposed asset sale needs a plausible buyer, transferable assets, valuation assumptions, legal preparation, and a view of the funding and capital consequences. A secured funding option needs eligible collateral, operational readiness, and access to the relevant facility. Capital issuance needs a realistic investor response under the scenario, not the terms available in ordinary markets.

Options interact. Selling the easiest assets may remove collateral needed for another funding action. Secured borrowing can increase encumbrance and reduce future flexibility. Shrinking assets may improve a ratio while harming earnings and customers. Two options dependent on the same buyer or funding market should not be counted as independent capacity. The assessment must distinguish benefits achievable together from alternatives that compete for the same resources.

The UK PRA's March 2026 statement provides detailed expectations for recovery-option assessment, including credibility and the consideration of asset encumbrance. This is a jurisdiction-specific illustration of why preparation must address execution barriers. A bank should maintain its own option inventory with evidence rather than importing another institution's assumptions. PRA recovery-planning statement, March 2026.

From a strategy to operational continuity

Financial restructuring is ineffective if the bank cannot keep essential services operating. Dependencies include payment and settlement access, staff, technology, data, premises, service contracts, funding, and collateral movements. The preparation question is concrete: which legal entity provides a service, which entity pays for it, who may terminate the contract, and what changes if ownership or capital structure changes?

The Bank of England describes resolution as the means of dealing with bank failure while protecting vital financial services and financial stability. Its published policies and resolvability assessments distinguish the authority's powers from the capabilities firms must maintain. UK examples should therefore be treated as implementation examples, not universal operating instructions. Bank of England resolution resources.

In a fictional service map, a retail bank's account records sit on a platform operated by a group service company. A transfer of the retail bank does not automatically transfer the platform contract, employee permissions, or support funding. Preparation must identify those dependencies. Operations should be able to describe how the customer can check a balance, receive income, make a payment, and obtain support throughout the intended strategy, subject to the authority's actual decisions.

Bail-in, TLAC, and MREL

Bail-in is a statutory resolution tool that can write down or convert eligible liabilities to absorb losses and recapitalise a continuing entity. It operates under the applicable legal framework, creditor hierarchy, exclusions, and safeguards. It is not a bank's ordinary recovery option for unilaterally cancelling customer balances. In the European Banking Union, the SRB explains that covered deposits are excluded from bail-in; other liabilities have different treatment. Learners must distinguish insured deposits, uninsured deposits, secured liabilities, and eligible loss-absorbing instruments. SRB explanation of bail-in; SRB bail-in exclusions.

Total Loss-Absorbing Capacity, or TLAC, is the FSB international standard for global systemically important banks. It addresses resources that support loss absorption and recapitalisation in resolution. External and internal arrangements reflect the resolution strategy and group structure. TLAC is not the same as a normal regulatory capital ratio or a cash buffer. Its scope and eligible instruments must be checked against local implementation; the standard is not a claim that every bank has the same requirement. FSB TLAC principles and term sheet.

Minimum Requirement for Own Funds and Eligible Liabilities, or MREL, is a requirement set by resolution authorities within the European framework described here. In the Banking Union, the SRB sets requirements to support a bank's preferred resolution strategy. The applicable amount, eligible liabilities, location in the group, and supervisory decisions are specific to the framework and institution. TLAC and MREL can interact for a G-SIB, but they are not interchangeable labels. SRB MREL overview.

Depositors and communication

Deposit protection depends on local eligibility rules, coverage limits, account aggregation, exclusions, and the chosen failure-management process. A bank should provide accurate scheme information for the relevant legal entity. Customers should not be told that resolution guarantees uninterrupted access to every service, protects all investments, or makes all creditors whole. Protecting a vital service and protecting every claim are different objectives.

Communication planning should identify who approves statements, who coordinates with authorities, and how staff obtain the current approved facts. A fictional customer asking about a term deposit needs an explanation specific to the product, legal entity, and protection scheme. An investor in bank debt needs a different explanation. Neither should receive an improvised promise of government support. Maintaining confidence requires accurate information, clear uncertainty, and functioning support channels.

Data, valuation, and testing

Preparedness requires access to information at the speed of the intended decision. Important datasets include legal-entity structures, liabilities and creditor classifications, assets and collateral, financial projections, service dependencies, and contractual terms. Reconciliation must establish that management's extracts match relevant records. An eligible-liability total is insufficient if the team cannot identify which entity issued each instrument or explain its maturity and legal terms.

Testing should demonstrate performance under conditions resembling execution. The SRB's operational guidance on resolvability testing describes a programme linking assessment, test priorities, and evidence of operational effectiveness. A completed document review is useful but cannot establish that systems, people, and data can deliver a task during stress. SRB resolvability testing guidance.

An original classroom test could require the team to extract a liability inventory while the normal data owner is unavailable. The reviewer asks whether the backup owner can access the approved source, explain classifications, reconcile totals, and report unresolved differences. Record actual elapsed time and limitations. The result should change the preparation plan: fix access gaps, improve instructions, resolve missing fields, and retest the affected task.

Worked exercise: five days of fictional liquidity pressure

Malla Bank begins a training scenario with 900 million units of unencumbered liquid assets. Management estimates five-day net outflows of 700 million assuming a wholesale funding renewal occurs. If the renewal fails, an additional 250 million must be repaid within the same five days. A recovery indicator has been breached, but the bank remains responsible for evaluating options and meeting its obligations. These figures do not represent regulatory liquidity calculations or a legal resolution threshold.

Ramesh notices that a payment queue includes obligations already counted in treasury's forecast. Gunaditya finds a collateral file that includes assets pledged the previous evening. Treasury must correct both errors before presenting usable resources. Subtracting every queued payment again would exaggerate outflows; counting pledged assets as freely available would exaggerate liquidity. The exercise therefore begins with reconciliation and a clear timestamp, not an immediate asset-sale decision.

The team proposes three actions. Option A is a secured borrowing operation using 300 million of collateral. Option B sells a portfolio for estimated proceeds of 220 million after a discount. Option C seeks additional equity, but its estimated completion is several weeks away. Legal confirms that part of Option A's collateral is issued by the same counterparty whose credit quality is deteriorating. Operations reports that one necessary documentation step has never been tested.

Malla asks the team to calculate the five-day funding position with and without the uncertain renewal. They must identify what portion of Option A is usable after eligibility checks and haircut assumptions, establish whether Option B uses any of the same assets, and decide whether Option C can contribute within the scenario's horizon. They should also explain capital effects, customer implications, and the downside if sale prices deteriorate further.

On the stated assumptions, the opening resources exceed the base net outflows by 200 million. Without the renewal, the net outflows become 950 million and the initial shortfall is 50 million. These are scenario cash positions, not LCR calculations. Option A cannot be counted at its headline amount before collateral eligibility, haircuts and execution readiness are established. Option B must be tested for asset overlap and a willing buyer. Option C supplies no five-day cash if it takes weeks. A calculation therefore identifies the need for action; it does not prove that any proposed option will work.

The decision record names the owner of each assessment and distinguishes confirmed capacity from conditional estimates. It records approvals, contact arrangements, monitoring frequency, and the point at which management must reassess the plan. The team prepares accurate information for the relevant authorities. It does not assert that an internal indicator breach automatically initiates resolution or that emergency public support is available.

A second round removes the expected buyer for Option B and interrupts access to a group service platform. Learners must revisit capacity rather than reuse the first decision pack. They identify which services depend on the platform, whether a workaround is safe, and what evidence the authority would need if recovery became implausible. The exercise ends with an assessment of options and readiness, not a guaranteed rescue outcome.

What to carry into the next chapter

Recovery is management's preparation to restore viability; resolution is a statutory response directed by the relevant authority. Both depend on realistic options, legal-entity detail, usable financial resources, reliable data, and tested continuity. A strong plan names the decisions that must be made and demonstrates the capabilities needed to execute them. It should never rely on a promise that the bank, its shareholders, or every creditor will be rescued.