Circular dated September 2, 2021 regarding instructions for recovery plans

Cairo on 2 2021/9/

Dear Mr. / Chairman of the Board of Directors of Tahya Bank,

Greetings,

In the context of the Central Bank's commitment to applying international best practices to support the safety and stability of the Egyptian banking sector, and in accordance with Article 94 of the Central Bank and Banking System Law issued by Law No. 194 of 2020, which addresses banks preparing recovery plans to ensure their readiness and enhance their ability to respond effectively to any potential economic or financial pressures, thereby strengthening the banking sector's capacity to confront crises, the Board of Directors of the Central Bank decided in its meeting held on August 31, 2021 the following:

"Issuing the attached supervisory instructions regarding recovery plans, with banks required to submit their first recovery plan to the Supervision and Oversight Sector of the Central Bank within 90 days from the end of the 2022 financial year."

Please be kind enough to emphasize strict compliance with the attached instructions, and accept our highest regards,

Tarek Amer

Recovery Plan Instructions

Table of Contents

Section	Page
1- Introduction
2- Scope of Application
3- General Rules
4- Recovery Plan Contents:
4-1 Plan Summary	1-4
4-2 Bank Strategic Analysis	2-4
4-3 Plan Indicators	3-4
4-4 Recovery Options	t - t
4-5 Assessment of Recovery Options	o _ t
4-6 Plan Scenarios	"1 - t
4-7 Disclosure and Communication Plan	V-4
4-8 Governance Requirements	^-4
4-9 Plan Simulation	9-4
5- Plan Implementation Guide:

These instructions aim to consolidate a crisis management culture within banks by establishing general rules for preparing recovery plans, which international standards have emphasized as playing a key role in enhancing the banking sector's capacity to confront crises and ensuring banks' readiness and ability to respond effectively to any economic or financial pressures they may face.

The Recovery Plan is considered a comprehensive and detailed plan that includes a set of assumptions to manage serious events that may occur in the banking system or at the bank, and probabilities of its exposure to financial problems affecting its financial solvency, liquidity, or profitability, and the corrective measures necessary to restore its financial safety in the event any of those assumptions materialize.

Banks are required to prepare the recovery plan in addition to the emergency plans and business continuity plans they prepare, as well as the internal capital adequacy assessment process, given that this plan specifically aims to enable the bank to deal with crises of all kinds in the best possible manner, by providing decision-makers at the bank in advance with the data and measures necessary to deal with those events and the options available to it, ensuring the bank's restoration of stability and its passage through those shocks.

2- Scope of Application:

1-2 These instructions apply to all banks operating in the Arab Republic of Egypt, as follows:
1-1-2 On a consolidated basis for the Banking Group considered as a single business entity, which includes the bank and all its branches and financial companies (excluding insurance companies) that the bank owns directly or indirectly with the ability to control their financial and operational policies, or has an ownership share exceeding 50% of their shares or voting rights, including branches and companies inside and outside the Arab Republic of Egypt, subject to the following:
1-1-1-2 The possibility of application on an individual basis (instead of consolidated) if there are strong justifications for the bank, provided that prior approval is obtained from the Central Bank through a request submitted to the Supervision and Oversight Sector.

2-1-1-2 The Central Bank may request separate plans for the bank or one of its branches or subsidiaries, if it deems fit.

2-1-2 On an individual basis for banks that do not have subsidiaries, which includes the bank's foreign branches

• if any exist.
  2-2 Regarding branches of foreign banks operating in the Arab Republic of Egypt, reliance on the recovery plan prepared by their head office is permitted, after ensuring its suitability for the branch's operations in the Arab Republic of Egypt and that it meets all requirements contained in these instructions. In case of incompatibility, the branch must prepare a separate plan in coordination with its head office.

1-3 Banks are required to prepare, review, and update the recovery plan every two years, and whenever a fundamental change occurs in the bank's activities, structure, allocations, or in the assumptions used in preparing the plan that would affect the bank's ability to apply the plan effectively, with systemically important banks - according to the Central Bank's classification - required to update the plan every year, given their size, activities, and impact on the banking sector. 2-3 The contents of the recovery plan and the degree of its detail must be commensurate with the bank's business model, the size of its activities, the complexity of its organizational structure and banking operations, as well as the risks it is exposed to, its level of solvency and liquidity, and the extent of the bank's interconnection with the banking sector and other financial institutions. While ensuring the plan is supported by good documentation of all relevant data and information.

The extent of compatibility is fundamentally part of the bank's risk management process, and therefore it must include a comprehensive explanation of the relationship between them and the bank's strategy, the general framework of governance and risk management, and capital planning. The plan must also be consistent with relevant supervisory requirements, such as instructions on the minimum capital adequacy ratio standard, liquidity management monitoring, emergency and business continuity plans, as well as governance and internal control instructions, and internal capital adequacy assessment (for example, ensuring there is no conflict between the results of stress tests regarding capital and liquidity needs assessment and any measures decided to be taken by senior management with those contained in the recovery plan).

4-3 The Central Bank will review and evaluate the recovery plan and the implementation guide contained in item 5 to verify the following:
1-4-3 The plan meets all requirements contained in these instructions.

2-4-3 The quality, credibility, and completeness of the plan with all necessary data.

3-4-3 The feasibility of the plan and its ability to restore the bank's stability, maintain its financial safety, and ensure the continuity of its activities.

4-4-3 The impact of applying the plan on the bank and the banking sector as a whole.

5-4-3 Any other aspects such as the suitability of the plan for the bank's activity and the size of the bank and the banking group as a whole.

5-3 Banks are committed to modifying the plan according to what the Central Bank deems fit, without prejudice to the provisions of the law. The Central Bank also has the right to compel the bank to implement one or more of the measures contained in the plan in the event any of the cases requiring early intervention by the Central Bank according to the provisions of the law materialize.

The recovery plan must contain the following items at a minimum:
1-4 Plan Summary
The recovery plan must include a summary of the main elements contained in it, in addition to the following:
1-1-4 Any fundamental changes that have occurred in the bank or in the recovery plan - compared to the last approved plan - and their reasons.

2-1-4 The bank's assessment of its ability to face financial pressures with sufficient justification for this assessment.

3-1-4 A summary of the results of the plan test and the preparatory and precautionary measures taken or to be taken by the bank to ensure the effective implementation of the recovery plan and to remove any obstacles that prevent its application.

2-4 Bank Strategic Analysis

1-2-4 The recovery plan must include comprehensive information about the bank, including all of the following:
1-1-2-4 The bank's shareholder structure, the bank's investments in its subsidiaries and sister entities.

2-1-2-4 The bank's business model and strategy, and its activities, clarifying the following:
a. The bank's core business lines, which are those that contribute significantly to the bank's revenues, or which require prior identification to ensure the bank's operations, profits, or value are not negatively affected as a result of applying the recovery plan. These businesses can be identified by studying the extent of their contribution to the bank's revenues or profits, or the return on assets or capital ratio, or the expected growth rate of the business, or funding sources, or market share.

b. Important functions are the activities, services, and operations whose cessation could disrupt services that would negatively affect economic activity and financial stability. The recovery plan must include a detailed explanation of the mechanism for identifying those functions (for example, by studying supply and demand sides to determine the extent of their concentration among a limited number of parties and the availability of alternatives for those functions, or by evaluating the impact of their sudden cessation on customers and the banking sector, taking into account the bank's size, its market share, and the complexity of its operations and its interconnection with the banking/financial sector).

3-1-2-4 Recent and detailed data on the bank's financial position.

4-1-2-4 Detailed data on the bank's branches, companies, and subsidiary entities included in the plan and its financial structure, clarifying the core business lines and important functions shared among the group, as well as an explanation of the financial interconnection between those entities (including legal structure [voting rights and profit and loss transfer agreements], and operational interconnection [central functions such as treasury or risk management or information systems]), as well as an explanation of any external interconnection (significant allocations and liabilities with external parties).

3-4 Plan Indicators

The bank must determine accurate and forward-looking indicators within the recovery plan, through which it can identify any risks that may negatively affect the bank during a sufficient period of time, allowing it to take the necessary measures to restore stability, maintain financial safety, and ensure the continuity of its core business lines and important functions, without the need for Central Bank intervention, subject to the following:
1-3-4 Determining quantitative and qualitative indicators for the recovery plan, as well as the maximum or minimum limit for each indicator, such that exceeding those limits reflects the existence of risks threatening the bank's stability, which may require activating one or more of the recovery options contained in item 4-4, while ensuring the methodology used to determine those limits is included in the plan.

2-3-4 Determining early warning levels for recovery plan indicators that warn of potential risks and pressures at an early stage and before exceeding the decided limits for recovery plan indicators, thereby alerting officials responsible for implementing the recovery plan to any increase in the level of risks the bank is exposed to within a suitable timeframe.

3-3-4 Establishing graded levels for exceeding each indicator of the recovery plan indicators and recommendations regarding the necessary measures and proposed recovery options for each level of exceedance.

4-3-4 Recovery plan indicators must reflect all risks the bank is exposed to, commensurate with its business model, the size of its activities, and its level of solvency and liquidity, and these indicators must not be limited to regulatory ratios only. In the event that an indicator is one of the supervisory requirements (for example, the capital adequacy ratio standard), an appropriate level for the maximum or minimum limit of the indicator must be determined to allow the bank to address the matter before exceeding the regulatory ratios.

5-3-4 Monitoring recovery plan indicators is a fundamental part of the bank's risk management, and it is necessary to ensure the availability of mechanisms and systems for the nature of all of them. Appropriate information for monitoring the levels of those indicators, as well as determining the frequency of monitoring according to the nature of each. 6-3-4 The following quantitative and qualitative indicators must be included in the recovery plan as a minimum, with the necessity of including actual values according to the last value / available position before the date of plan approval:
1-6-3-4 Quantitative Indicators: a. Capital indicators: Reflect the level of the bank's capital and its quality (for example, but not limited to: capital adequacy ratio indicators, leverage ratio).

b. Liquidity indicators: Reflect the bank's liquidity position and financial structure (for example, but not limited to: liquidity coverage ratio, net stable funding ratio, loan-to-deposit ratio, local and foreign currency liquidity ratios, sectoral and individual deposit concentration indicators, deposit withdrawal rates, and the extent of concentration of liquidity and funding sources).

c. Profitability indicators: Such as operating profit margin, return on assets, return on equity, net interest margin, bank's cost of funds rate, and losses resulting from operational risks.

d. Asset quality indicators: Such as the total loan growth rate, the ratio of non-performing loans to total loans, the non-performing loan growth rate, the ratio of total provisions to total non-performing loans, sectoral and individual concentration indicators for the bank's credit portfolio, and default rates in different sectors.

e. Market indicators: Reflect the bank's position regarding financial markets (such as: the ratio of market risk to total assets and contingent liabilities weighted by risk weights, ratios of deficits and surpluses in currency positions, decline or fluctuation in the bank's share price, and decline in the bank's credit rating, and the bank's credit default swap prices).

f. Macroeconomic indicators: Reflect the macroeconomic conditions (such as: GDP growth rate, public debt ratio, unemployment rate, inflation rate, and the credit rating of the country in which the bank operates), in addition to indicators of economic sectors related to the bank's allocations.

2-6-3-4 Qualitative Indicators:

Include, for example, but not limited to, risks arising from the early recovery of funding sources or the inability to obtain funding at prevailing market prices, in addition to strategic risks, cyber risks, reputation risks, and any other risks that may arise from violating legal or supervisory requirements, or lawsuits filed against the bank, as well as employee turnover rate.

4-4 Recovery Options

Recovery options are considered the tools and means available to the bank to face potential pressures, through which the bank can be returned to a stable position and maintain its financial safety, as well as maintain the continuity of its core business lines and important functions. It is necessary to adhere to the following when determining those options:
1-4-4 Including a sufficient and diverse number of recovery options to face different types of pressures, while determining graded levels regarding those options commensurate with the severity of those pressures, so that they are not limited only to routine measures such as cost reduction, diversification of funding sources, or increasing capital, but extend to include non-routine measures such as modifying the bank's business model or selling strategic assets owned by the bank.

2-4-4 Ensuring that recovery options are realistic, with the necessity of determining and documenting the stages and steps of implementation accurately to ensure their feasibility and applicability, as well as determining alternatives in the event that any of the recovery options cannot be applied.

3-4-4 Determining the time frame necessary to implement each of the recovery options - including the period necessary to make decisions and obtain all approvals - as well as the expected time period to achieve the desired results from them. While ensuring that this time frame is realistic and ensures minimizing the repercussions of pressures on the bank's financial position and ensuring its restoration of stability.

4-4-4 That the options be executable by the bank itself, without including any exceptional measures in the options such as obtaining financial support from the state or exceptional funding from the Central Bank.

5-4-4 Ensuring the determination of funding sources for different currencies within the recovery options.

6-4-4 For recovery options that involve obtaining funding from other parties, the necessary conditions and guarantees for that must be studied in advance and included in the plan (if possible).

7-4-4 For recovery options that involve selling some of the assets owned by the bank, the bank must determine potential buyers, establish a suitable mechanism to evaluate those assets periodically, in addition to studying the supervisory or legal requirements to complete the sale process.

5-4 Assessment of Recovery Options

The bank must evaluate the recovery options to determine the extent of their feasibility and their ability to achieve the desired objectives, through the following:
1-5-4 Conducting a study to determine the feasibility of implementing recovery options by evaluating the following:
1-1-5-4 The assumptions used and their realism.

2-1-5-4 The expected time frame for applying recovery options.

3-1-5-4 The conditions that must be met in recovery options to ensure successful application, as well as any obstacles - legal, supervisory, or operational - that prevent their implementation, with clarification of the bank's plan to overcome those obstacles.

2-5-4 Conducting a detailed study to evaluate the quantitative and qualitative impact resulting from applying recovery options - each individually - on the following items as a minimum:
1-2-5-4 The bank's capital, including core continuous capital and the leverage ratio.

2-2-5-4 Liquidity and funding sources, including the liquidity coverage ratio and net stable funding ratio.

3-2-5-4 Asset quality.

4-2-5-4 Bank profitability.

5-2-5-4 Bank activities and the continuity of core business lines and important functions.

6-2-5-4 Credit rating - if available.

7-2-5-4 Supervisory requirements and the extent of the bank's compliance with them.

8-2-5-4 Any other significant effects.

While ensuring that this study includes an evaluation of the impact resulting from application in the long term, in addition to considering any overlap or conflict between the options and each other.

3-5-4 Studying and evaluating the risks arising from applying recovery options, including financial risks, operational risks, reputation risks, and any other risks (for example, increased cost of funds in the event of relying on non-routine funding sources).

It is necessary that the studies mentioned above include all necessary data to enable the Central Bank to evaluate them and determine their accuracy.

6-4 Plan Scenarios

Banks must prepare scenarios that include serious events that could threaten the bank's continuity, to test all aspects of the recovery plan - financial and non-financial - appropriately and verify the effectiveness of the elements contained in it and their ability to enable the bank to pass through crises. It is necessary to consider the following:
1-6-4 The possibility of relying on the stress tests that banks conduct as part of the capital and liquidity needs assessment when designing plan scenarios, while taking into account that those scenarios must be more dangerous and severe than the tests mentioned, as these scenarios must be highly severe and lead to a sharp decline in capital, profitability, and liquidity, and a decline in financial safety indicators, constituting a threat to the bank's continuity. Also, considering the possibility of conducting reverse stress tests to determine appropriate scenarios, through assuming negative results and deducing the events that could lead to these results.

2-6-4 That plan scenarios be consistent with the bank's business model, the size of its activities, the complexity of its banking operations, the risks it is exposed to, and its level of solvency and liquidity, and banks are committed to preparing one scenario as a minimum within each of the following levels:
1-2-6-4 A scenario for pressures at the bank or banking group level - (Idiosyncratic Stress Scenario) (for example, but not limited to: achieving large operational losses, or losses at the level of the bank's credit portfolio, or losses resulting from legal disputes, or the bank being exposed to fraud or cyber attacks or a crisis harming its reputation).

2-2-6-4 A scenario for pressures at the banking sector or economy as a whole level - (System-wide Stress Scenario) (for example, but not limited to: crises occurring at the level of local or global financial markets, or the default of one of the systemically important financial institutions affecting financial stability, lack of liquidity in the interbank market, or unfavorable changes in exchange rates, or deterioration in macroeconomic indicators).

3-2-6-4 A scenario that combines pressures at the bank level as well as the banking system or economy as a whole – (Combined Stress Scenario).

3-6-4 Banks must prepare scenarios with different time horizons and rates of development, by addressing rapid-rate pressures that have a short-term impact (over a year or less) as well as others that may extend their impact over long periods (up to 3 years).

4-6-4 Banks must disclose all details of each scenario and its impact on the bank's operations and available recovery options (for example, the prices of some of the bank's assets may be affected in the event of pressures at the level of the banking sector or economy as a whole). Including those details in the plan as follows:
1-4-6-4 The methodology used in determining the scenarios.

2-4-6-4 The assumptions used in each scenario.

3-4-6-4 The expected impact of each scenario on the bank's operations and recovery indicators.

4-4-6-4 The proposed recovery options for each scenario and the time frame for activating them and the results of their application.

5-6-4 Banks must address any shortcomings in the recovery plan that become apparent from the results of the scenarios and correct them to ensure the effectiveness of the plan and achieving the desired objectives within a suitable timeframe, before submitting it to the Central Bank.

7-4 Disclosure and Communication Plan

The recovery plan must include specific procedures regarding notifying interested parties within a suitable timeframe in the event any of the recovery options are activated, subject to the following as a minimum:
1-7-4 Working to manage any repercussions that may arise from applying any of the recovery options that could harm the bank's interest (or the banking system as a whole) and affect its reputation.

2-7-4 Determining the interested parties for communication, whether inside or outside the bank, regarding each of the recovery options (for example: shareholders, or the Central Bank).

3-7-4 The appropriate amount of data and information to be disclosed according to the recovery options and the interested parties, without prejudice to any legal or supervisory disclosure requirements, and in a manner that does not affect the bank's (or the banking system as a whole) reputation and stability.

8-4 Governance Requirements

Banks must establish an effective governance framework regarding all aspects of the recovery plan as follows:
1-8-4 Preparation of the Recovery Plan
1-1-8-4 The recovery plan must include a comprehensive explanation of the policies and procedures followed in preparing, reviewing, updating, and approving the plan.

2-1-8-4 The responsibility for approving the recovery plan and monitoring the executive management's compliance with it and following up on that lies with the bank's Board of Directors, in addition to ensuring the provision of sufficient resources to ensure the success of the recovery plan, as well as determining the responsibilities and duties of all participants in the preparation and implementation stages, while ensuring the involvement of heads of relevant sectors and the departments responsible for implementing recovery options in the plan preparation and review stage.

3-1-8-4 Banks must update their work policies, procedures, and information management systems to ensure data availability within a suitable timeframe, and submitting necessary reports to the bank's Board of Directors on a periodic basis. A comprehensive explanation must be included in the recovery plan regarding information management systems and their effectiveness in supporting the decision-making process in all stages of the recovery plan.

4-1-8-4 An executive responsible from the bank's senior management must be designated whose responsibility is to ensure the bank meets all requirements contained in these instructions, without prejudice to the responsibilities of the Board of Directors.

5-1-8-4 The persons responsible for preparing the plan and their details must be identified so that the Central Bank can refer to them if necessary.

6-1-8-4 The bank's Internal Audit Sector is responsible for reviewing the recovery plan before submitting it to the Central Bank, to ensure the evaluation of a) the accuracy of the data and information contained in the plan, and b) the quality of the work steps and methodology followed in preparing the plan. All recommendations and proposed corrective measures (if any) must be presented to the Audit Committee and the Board of Directors.

7-1-8-4 Banks are allowed to rely on one of the specialized entities to prepare or review the recovery plan, provided that the report prepared by it is attached to the plan when submitting it to the Central Bank.

2-8-4 Implementation of the Recovery Plan

1-2-8-4 The plan must include a comprehensive explanation of the work procedures related to monitoring the plan indicators contained in item 3-4 (including the escalation policy and decision-making in the event of exceeding the decided limits [including early warning limits] for recovery plan indicators, including determining the responsible persons and the decision-making schedule). While ensuring the following measures are taken before activating any of the recovery options:
a. Evaluating the nature and severity of the impact on the bank.

b. Determining the measures to be taken.

c. Monitoring the implementation of the measures taken and the extent to which they achieve the desired objectives.

2-2-8-4 The Central Bank must be notified in the event of repeated exceedance of the early warning levels for recovery plan indicators.

3-2-8-4 The Central Bank must be notified within 24 hours in the event of exceeding the decided limits for recovery plan indicators, with the necessity of subsequently providing the following:
a. An explanation of the reasons for the exceedance.

b. The measures taken by the bank.

c. The corrective measures planned to be taken by the bank, whether those included in the recovery options or others.

9-4 Plan Simulation

Banks must conduct simulations of all practical aspects of the recovery plan to test it before submitting it to the Central Bank, with the participation of senior management officials and officials responsible for its implementation and under the supervision of the Board of Directors. Those tests must include the following items as a minimum:
1-9-4 Governance measures, including the persons and departments concerned with implementing the plan and the decision-making mechanism.

2-9-4 The executive aspects related to recovery options.

3-9-4 The disclosure and communication plan with interested parties, including notifying the Central Bank.

4-9-4 Information technology systems supporting decision-making related to the plan, and their sufficiency and accuracy.

The results of those tests must be used to identify the bank's weaknesses and address them, with documenting the results and necessary corrective measures (if any), in addition to determining a specific time frame for their implementation.

Banks must prepare a concise guide that includes all aspects of the recovery plan to be used by the Board of Directors and senior management when the need arises to activate the recovery plan, to support the decision-making process, subject to the following:
1-5 The guide must be approved by the Board of Directors, and sent to all departments concerned with the recovery plan, to ensure ease of plan application and its effectiveness.

2-5 Each bank determines the contents of the plan implementation guide. This guide may contain the following information for guidance:
1-2-5 A clear and concise explanation of the core business lines and important functions at the bank.

2-2-5 The decision-making mechanism, including the persons and departments concerned with the recovery plan.

3-2-5 A simplified explanation of the main elements of the plan such as recovery indicators, stress scenarios, recovery options and their feasibility, and the implementation time frame.

4-2-5 A summary of the disclosure plan and the responsibility of different parties.

5-2-5 The preparatory measures necessary for plan implementation.

The implementation guide must be attached to the recovery plan when submitting it to the Central Bank.