Guidelines on Core Information Requirements for Resolution Planning

1. Introduction

1.1. The purpose of a resolution plan is to determine the critical functions of a bank, identify and address any impediments to its resolvability and prepare for its possible resolution in an orderly manner. A resolution plan is a comprehensive document, which details the characteristics of a bank and describes the preferred resolution strategy for that bank, including which resolution tools to apply, such as, bail-in of liabilities, reconstruction, amalgamation, use of bridge bank, etc. It concludes with a resolvability assessment so as to identify and to address any impediments to the resolution of the bank. Such impediments may include insufficient loss-absorbing capacity, inability to maintain operational continuity, inability to avoid disorderly early termination of financial contracts, etc.

1.2. In line with Financial Stability Board’s (FSB) key attributes for effective resolution regimes, the State Bank of Pakistan (SBP) has been empowered under section 42C(1)(i) of the Banking Companies Ordinance (BCO), 1962 to prepare resolution plans for banks, in order to meet the objectives of overall financial stability and to protect depositors’ interest. Moreover, under section 42C(1)(iii) of BCO, the SBP is empowered to direct the banks to demonstrate that there is no impediment to their resolvability. Accordingly, banks (or their group companies/entities) are required to provide information, records or documents for resolution planning and resolvability assessment purposes.

1.3. The information for resolution planning is categorized into core and supplementary information. The core information includes details of the bank’s corporate group structure and other material entities within it, their key financial indicators, core business lines and the key legal, financial and operational dependencies. Whereas, the supplementary information will be required depending upon the preferred resolution strategy. For example, where a resolution strategy involves a bail-in of liabilities, information regarding the location of liabilities eligible for bail-in within the bank’s group, their position in the creditors’ hierarchy and the form of their subordination will be required.

1.4. The information sought for the purpose of resolution planning may be similar to that already collected in other regulatory reporting submissions. However, existing reporting returns do not typically request information from a resolution planning perspective, and therefore, the information being currently collected through various returns may not be entirely suitable for this purpose. Hence, SBP considers it important to have information for resolution planning purposes provided on timely basis and as prescribed in this document.

2. Core Information Requirements

Following are the four main constituent parts of the core information required for resolution planning purposes: a. Relevant entities and material entities; b. Core business lines and operating model; c. Dependencies; d. Financial functions.

2.1 Relevant Entities and Material Entities

i. For the purpose of resolution planning, SBP requires a bank to identify any of its group companies/ entities that the bank assesses to be relevant to its resolution (“relevant entities”). At a minimum, the following should be given due consideration for determining relevant entities: a. Any holding company/entity of the bank; b. Any subsidiary, associates or affiliates, or any branch (including overseas) of the bank; c. Any group company/entity of the bank that performs financial functions, either independently or together with any other group companies/entities; d. Any group company/entity of the bank on which its material entities have key legal, financial or operational dependencies; e. Any group company/entity of the bank that is licensed, authorized, approved, designated or otherwise supervised or regulated by the Securities and Exchange Commission of Pakistan.

ii. In addition to above, the bank may also identify any other entity as a relevant entity if it considers such entity to be pertinent for its resolution planning, including, for example, any group company/entity that plays an important role within the group by performing functions that directly or indirectly affect the bank or other group companies/entities on which the bank is dependent.

iii. The bank is also required to identify the relevant entities that the bank considers material to the revenue, profitability, operations or effective functioning of its group (“material entities”). In this regard, any entity (domestic or overseas) that represents at least 5% of the bank’s group assets may be considered as “material”.

2.2 Core Business Lines and Operating Model

The banks are required to provide an overview of the operating model of its material entities and identify the business lines which are core to the material entities’ operations by taking into account factors such as revenue, profitability and franchise value (“core business lines”). The franchise value of a core business line represents its contribution to the overall value of the bank’s group, including its networks, international linkages, access to markets, etc.

2.3 Dependencies

Key dependencies (internal and external) refer to support or services provided to the material entities, the sudden and disorderly failure/ disruption of which would present a serious impediment to the performance of critical financial functions by the material entities. The dependencies could be financial, operational or legal/structural in nature. For instance, disruption of support/ services provided to material entities by bank’s group companies/ entities (“internal dependencies”) could materially affect the funding or operations of the banks. Similarly, disruption in provision of operational services by the external service providers (“external dependencies”) could affect the ability to maintain continuity in the provision of any critical financial functions by the material entities, e.g., access to Financial Market Infrastructures (FMIs), payments or IT services, etc.

2.4 Financial Functions

i. In line with FSB’s document [“Guidance on Identification of Critical Functions and Critical Shared Services”], core information on a bank’s financial functions is to be provided under five (05) broad categories: a. Deposits; b. Lending & Loan Servicing; c. Payments, Clearing, Custody & Settlement; d. Wholesale Funding Markets; e. Capital Markets & Investments.

ii. The Annex-II provides a non-exhaustive list of the potential financial functions of a bank. In respect of each financial function which the bank (or its group) conducts or undertakes, the bank should provide information as required under Annex-II with respect to each of its material entities.

2.5 Critical Financial Functions

i. Critical financial functions are activities or operations carried on, or services provided, by a material entity on which third parties rely and where such activities, operations or services, if discontinued, would likely: a. lead to the disruption of services that are essential to the economy; b. undermine the general confidence of participants in the financial market; or c. give rise to contagion within the financial system; for any reason including the size, interconnectedness, substitutability, complexity or cross border activities of, or the market share held by, the material entity.

ii. The following criteria may be considered for determining the criticality of financial functions performed by the bank: a. Concentration – whether the bank holds a significant market share in certain functions, such that there may be consequent implications in terms of substitutability and interconnectedness. b. Substitutability – the availability of, and the ease with which, the provision of the function could be replaced by other substitute players in the market. c. Interconnectedness – the extent to which a certain function may be interconnected or co-mingled with other functions or shared services such that the disruption of that function would likely to cause contagion to the wider financial system. d. Impact – how a sudden discontinuation of a function could impact markets, including customers, other market participants, and infrastructure.

iii. The banks are also required to provide their views on the criticality of their financial functions with reasoned justifications.