CENTRAL BANK OF ICELAND

GUIDELINES
ON THE CONTENT OF SIMPLIFIED RECOVERY PLANS

CENTRAL BANK OF ICELAND

GUIDELINES

on the content of simplified recovery plans

Issued on the basis of the second paragraph of Article 8 of Act No. 87/1998, on official supervision of financial activities.

No. 1/2024

June 2024

Table of contents

Introduction 4

1 Scope, definitions and entry into force 5

2 Credit institutions and securities firms that are authorised to prepare a simplified recovery plan 6

3 Elaboration of the content of simplified recovery plans 7

4 Content of simplified recovery plans 8

4.1. Summary of information to be included in simplified recovery plans 8

4.2. Summary of the key elements of a simplified recovery plan 9

4.3. Governance 9

4.4. Strategic analysis 9

4.5. Description of the entities covered by the recovery plan 10

4.6. Recovery options 10

4.7. Actions, arrangements and measures of recovery options 10

4.8. Impact assessment 11

4.9. Feasibility assessment 11

4.10. Continuity of operations 11

4.11. Communication and disclosure plan 12

4.12. Preparatory measures 12

5 Approval, submission and assessment of simplified recovery plans 13

Introduction

According to Article 82 e of Act No. 161/2002, on financial undertakings, the Financial Supervision of the Central Bank of Iceland (the Financial Supervisory Authority) determines whether a credit institution or securities firm is authorised to prepare a simplified recovery plan. In these guidelines, the provisions of Commission Delegated Regulation (EU) 2016/1075, cf. Rules No. 666/2021, on the entry into force of regulations of the European Union regarding technical standards on resolution and recovery plans of credit institutions and securities firms, and Article 2 of Regulation No. 780/2021, on information in recovery plans, information gathering for resolution plans and assessment of the resolvability of credit institutions and securities firms, have been elaborated to clarify what obligations rest on credit institutions and securities firms that are authorised to prepare a simplified recovery plan.

When preparing simplified recovery plans, credit institutions and securities firms may take account of the principle of proportionality and adapt the requirements under these guidelines to their operations. A simplified recovery plan should therefore reflect and take account of factors such as the size of the financial undertaking concerned, the nature and scope of its operations and how complex the operations are.

1

Scope, definitions and entry into force

1. These guidelines apply to credit institutions and securities firms that the Financial Supervisory Authority has determined are authorised to prepare a simplified recovery plan, cf. the first sentence of the first paragraph of Article 82 e of Act No. 161/2002, on financial undertakings.

2. The term securities firm in these guidelines refers only to securities firms that are required to maintain an own funds base of EUR 730 thousand in Icelandic krónur, in accordance with the second paragraph of Article 14 a of the Act on financial undertakings. Other terms in these guidelines have the same meaning as in the Act on financial undertakings and administrative instructions issued on the basis thereof.

3. These guidelines, which are issued on the basis of the second paragraph of Article 8 of Act No. 87/1998, on official supervision of financial activities, enter into force immediately. At the same time, Guidelines No. 2/2020, on the same subject, are repealed.

Credit institutions and securities firms that are authorised to prepare a simplified recovery plan

4. The second sentence of the first paragraph of Article 82 e of the Act on financial undertakings states that the Financial Supervisory Authority determines whether credit institutions and securities firms are authorised to prepare a simplified recovery plan. When assessing whether a simplified recovery plan may be prepared, the Financial Supervisory Authority considers whether operational difficulties or the resolution of such financial undertakings will have significant negative effects on the economy, the financial system, the intermediation of capital within the financial system or other credit institutions and securities firms.

5. When assessing whether credit institutions and securities firms are authorised to prepare a simplified recovery plan, the Financial Supervisory Authority takes account, in accordance with the third paragraph of Article 82 e of the Act on financial undertakings, of the provisions of Commission Delegated Regulation (EU) 2019/348, cf. Rules No. 666/2021.

6. The Financial Supervisory Authority will, as provided for in the criteria discussed in items 4 and 5, carry out an assessment of these exemptions regularly and no less frequently than every two years. According to the second paragraph of Article 82 e of the Act on financial undertakings, the Financial Supervisory Authority may at any time withdraw its decision on the preparation of a simplified recovery plan.1

[1] Upon the issuance of the older Guidelines No. 2/2020, on the same subject, all credit institutions and all securities firms that met the criteria specified therein were authorised to prepare a simplified recovery plan. Upon the issuance of the guidelines, this concerned all such financial undertakings, other than commercial banks.

3 Elaboration of the content of simplified recovery plans

7. When assessing what the content of simplified recovery plans should be, the Financial Supervisory Authority relies on the obligations regarding recovery plans under Commission Delegated Regulation (EU) 2016/1075, cf. Rules No. 666/2021, and Regulation No. 780/2021. The provisions on the content of simplified recovery plans take account of the fact that the operations of undertakings that are authorised to prepare such a plan, cf. Chapter 2, are simpler than is assumed in the regulations.

8. The provisions of Part II, Chapter I of Commission Delegated Regulation (EU) 2016/1075, cf. Rules No. 666/2021, and Article 2 of Regulation No. 780/2021 apply to a simplified recovery plan with the elaboration provided for in Chapter 4.

Content of simplified recovery plans

4.1. Summary of information to be included in simplified recovery plans

9. A simplified recovery plan shall contain the following information:

a. A summary of the key elements of the plan, cf. Chapter 4.2, and a summary of the overall recovery capacity,

b. a summary of important changes in the credit institution or securities firm since the last recovery plan was submitted,

c. a communication and disclosure plan, cf. Chapter 4.11, which explains, among other things, how the undertaking intends to respond to possible negative market reactions,

d. a strategic analysis, cf. Chapters 4.4 – 4.10, and the scope of the financing and liquidity measures that must be taken to maintain or restore the viability and financial position of the credit institution or the securities firm,

e. estimated timetables for the implementation of each material element of the plan,

f. a description of material obstacles to the effective and timely implementation of the plan, including consideration of the effects on other entities in the group, customers and counterparties,

g. identification of critical operations,

h. a description of the procedures for determining the value and marketability of core business lines, other activities and assets of the credit institution or information on governance, cf. Chapter 4.3, and a description of how the preparation of the recovery plan is integrated with the governance of the credit institution or the securities firm, as well as the policy and procedure for approval of the recovery plan and identification of the parties responsible for the preparation and implementation of the plan,

i. measures to preserve or restore the own funds base of the credit institution or the securities firm,

j. measures to ensure that the credit institution or the securities firm has sufficient access to contingency funding arrangements,2 including possible ways to obtain liquid funds, an assessment of available collateral and an assessment of the possibility of transferring liquid funds between entities of the group and business lines, to ensure that the credit institution or the securities firm can continue its operations and meet its obligations when they fall due,

k. measures to reduce risk and leverage,

l. measures to restructure liabilities,

m. measures to restructure business lines,

n. measures that are necessary to maintain stable access to financial market infrastructures,

o. measures that are necessary to maintain the stable functioning of the operational processes of the credit institution or the securities firm, including infrastructures and IT services,

p. preparatory arrangements to facilitate the sale of assets or business lines within an appropriate timeframe to restore a sound financial position,

[2] In Delegated Regulation (EU) 2016/1075 the term emergency funding arrangement is used.

q. other actions or plans to restore a sound financial position and the intended financial effects of those actions or plans,

r. preparatory measures that the credit institution or the securities firm has taken or intends to take, to facilitate the implementation of the recovery plan, cf. Chapter 4.12, including those that are necessary to make timely refinancing of the credit institution or the securities firm possible, and

s. a framework for indicators that indicate at what stage the relevant actions referred to in the plan may be taken.3

4.2. Summary of the key elements of a simplified recovery plan

10. The summary of the key elements of the recovery plan shall include a discussion of the following items:

a. information on governance in the recovery plan,

b. overall recovery capacity,4

c. significant changes to the credit institution or investment firm, the group or the recovery plan since the previous version of the recovery plan was submitted to the financial supervisory authority,

d. a plan for communication and information provision in the recovery plan, and

e. the preparatory measures set out in the recovery plan.

11. Significant changes means changes that could affect the ability of the credit institution or investment firm or its parent undertaking in the European Economic Area (EEA) or one or more of its subsidiaries to implement the recovery plan or to implement one or more recovery options in the recovery plan.

4.3. Governance

12. The information on governance shall include at least a description of the following: Conditions and processes necessary to ensure the timely implementation of recovery options, including the following:

a. a description of the internal process for raising the level of alertness and the action and decision-making process that applies when indicators have been reached to examine and determine which recovery options might need to be used to respond to realised financial stress scenarios, including at least:

1. the roles and scope of activity of the parties involved in this process, including a description of their accountability roles or, where a committee is part of this process, the roles, accountability roles and scope of activity of the committee members,

2. a description of the procedures to be followed,

3. time limits for the decision on whether to use recovery options and when and how the relevant competent authorities will be notified that indicators have been reached,

b. a description of indicators that reflect potential weaknesses, vulnerabilities or threats to at least the capital position, liquidity position, profitability and risk profile of the entity or entities covered by the recovery plan.

4.4. Strategic analysis

13. The strategic analysis shall analyse core business lines and critical functions and set out key elements for maintaining these core business lines and critical functions under financial stress scenarios. The strategic analysis shall include at least the following sub-elements:

a. a description of the entity or entities covered by the recovery plan, as set out in section 4.5, and

b. a description of recovery options, as set out in sections 4.6-4.10.

[3] See the EBA guidelines on recovery plan indicators (e. recovery plan indicators) (EBA/GL/2021/11) for further details.

[4] See the EBA guidelines on overall recovery capacity (e. overall recovery capacity) (EBA/GL/2023/06) for further details.

4.5. Description of the entities covered by the recovery plan

14. The sub-element of the strategic analysis describing the entity or entities covered by the recovery plan shall contain the following information:

a. A general description of the entity or entities covered by the recovery plan, including:

1. a description of their overall strategy and overall risk strategy, and

2. their business model and business plan, a list of the main jurisdictions in which they operate,

b. a description of the legal and financial structure of the entity or entities covered by the plan, including explanations of intra-group relationships, in particular a description of the following:

1. all existing, material intra-group risk exposures and funding links, cash flows within the entity or entities covered by the recovery plan, guarantees

2. within the group that are in place and guarantees within the group that are intended to be in place when a recovery action is needed,

3. legal intra-group relationships, which shall cover material legally binding contracts between entities in the group, including the existence of control agreements and profit and loss transfer agreements,

4. intra-group operational relationships concerning activities that are central to one legal entity or branch and are critical to the activities of other legal entities, branches or the group, in particular central activities in the areas of information technology, treasury, risk management or general management, and

5. all existing intra-group financial support agreements entered into in accordance with Article 109 of the Financial Undertakings Act, including the counterparties, the form of financial support and the conditions linked to the provisions of the financial support,

c. a description of external relationships which includes at least:

1. material risk exposures and commitments to key counterparties, and

2. critical services provided by third parties to the entity or entities covered by the recovery plan.

4.6. Recovery options

15. The sub-element on recovery options shall contain a list of all recovery options and a description of each option, as set out in sections 4.7-4.10.

16. The sub-element on recovery options shall include various recovery options that are intended to address financial stress scenarios and that it is realistic to assume could contribute to maintaining and restoring the viability and financial position of the entity or entities covered by the recovery plan.5

17. Each recovery option shall be described in such a way that the financial supervisory authority can assess its impact and feasibility.

18. Recovery options shall include measures that are unusual in nature and also measures that could be taken in the ordinary course of business of the entity or entities covered by the recovery plan.

19. Recovery options shall not be excluded on the sole ground that they would require changes to the current nature of the business of that entity or those entities.

4.7. Actions, arrangements and measures of recovery options

20. Each recovery option shall specify at least:

a. The scope of the funding and liquidity actions to be taken in order to maintain or restore the viability and financial position of the entity or entities covered by the recovery plan and having as their main objective to ensure the viability of critical functions and core business lines,

[5] See the EBA guidelines on the scenarios to be used when drawing up recovery plans (e. recovery plan scenarios) (EBA/GL/2014/06) for further details.

b. arrangements and measures whose main objective is to protect or restore the own funds of the credit institution or investment firm or the group through external refinancing and internal measures to improve the capital position of the entity or entities covered by the recovery plan,

c. arrangements and measures to ensure that the entity or entities covered by the recovery plan have adequate access to funding response options to ensure that they can continue their operations and meet their obligations as they fall due. With regard to this point, the measures shall include external measures and, where appropriate, measures aimed at reorganising available liquidity within the group. Funding response options shall include possible ways to raise liquidity, an assessment of available collateral and an assessment of whether it is possible to transfer liquidity across entities and business lines within a group,

d. arrangements and measures to reduce risk and leverage or to reorganise business lines, including, where appropriate, an analysis of potential sales of assets, legal entities or business lines, and

e. arrangements and measures whose main objective is to achieve a voluntary restructuring of liabilities without causing default, termination, reduction or other similar consequences.

21. Where a recovery option does not involve actions, arrangements or measures referred to in point 20, the credit institution, investment firm, EEA parent undertaking or subsidiary undertaking that drew up and submitted the plan shall formally document in the recovery options subsection that it has duly considered those actions, arrangements or measures.

4.8. Impact assessment

22. Each recovery option shall include an impact assessment, in particular a description of the processes to determine the valuation and marketability of core business lines, other business activities and assets of the entity or entities to which the recovery option relates and at least a financial and operational impact assessment setting out estimated impacts on solvency, liquidity, funding positions, profitability and operations of the entity or entities falling under the recovery plan. Where applicable, the assessment shall clearly identify the different entities within the group that may be affected by the option or that may participate in its implementation.

4.9. Cost-benefit analysis

23. Each recovery option shall include a cost-benefit analysis which shall contain at least:

a. an assessment of the risks associated with the recovery option, based on experience of implementing the recovery option or equivalent measures,

b. an analysis and description of any significant impediments to the efficient and timely implementation of the plan and a description of whether and how such impediments could be overcome,

c. where applicable, an analysis of potential impediments to the efficient implementation of the recovery option arising from the group's structure or arrangements within the group, including whether there are significant action-related or legal impediments to the rapid transfer of own funds or repayment of debts or assets within the group, and

d. solutions to possible impediments specified in points b and c.

24. For the purposes of point 23, significant impediments shall be considered to be factors that could potentially have a negative impact on the timely implementation of the recovery option, including in particular legal, operational, commercial and financial risks and reputational risks such as the risk of a credit rating downgrade.

4.10. Continuity of operations

25. Each recovery option shall include an assessment of how to ensure continuity of operations during the implementation of that option.

26. This assessment shall include an analysis of internal operations, e.g. information technology systems, suppliers, human resources, the access of the entity or entities covered by the recovery plan to market infrastructures, e.g. clearing, settlement and payment systems. In particular, the following shall be taken into account when assessing response plans:

a. arrangements and measures necessary to maintain continuous access to relevant financial market infrastructures,

b. arrangements and measures necessary to maintain the continuous functioning of the entity or entities covered by the recovery plan, including infrastructure and information technology services,

c. the estimated timeframe for the implementation and effectiveness of the recovery option, and

d. the effectiveness of the recovery option and how adequate the indicators are under different financial stress scenarios that assess the impact of each of these conditions on the entity or entities covered by the recovery plan, in particular on their capital, liquidity, profitability, risk profile and operations.6

27. This assessment shall define the recovery option that would be appropriate for the specific scenario, the potential impact of the recovery option, its feasibility, including possible impediments to its implementation, and the timeframe required for its implementation. On the basis of this information, the assessment shall describe the overall recovery capacity7 of the entity or entities covered by the recovery plan, i.e. the extent to which the recovery options enable the entity or entities to be restored under different scenarios of severe macroeconomic distress and financial stress.

4.11. Communication and disclosure plan

28. The communication and disclosure plan shall cover the following aspects:

a. internal communication, in particular with staff, works councils or other employee representatives,

b. external communication, in particular with shareholders and other investors, competent authorities, counterparties, financial markets, financial market infrastructures, depositors and the public, as applicable, and

c. effective proposals to manage potential negative market reactions.

29. The plan shall consider the need for specific communication needs for individual recovery options.

4.12. Preparatory measures

30. The recovery plan shall include an analysis of the preparatory measures that the entity or entities covered by it have taken or that are necessary to facilitate the implementation of the recovery plan or improve its effectiveness, together with a timeline for the implementation of these measures.

31. Such preparatory measures shall include the necessary measures to overcome impediments to the effective implementation of the recovery options that have been identified in the recovery plan.

[6] See further the EBA guidelines on recovery plan scenarios (EBA/GL/2014/06).

[7] See further the EBA guidelines on overall recovery capacity in recovery planning (EBA/GL/2023/06).

5 Approval, submission and assessment of simplified recovery plans

32. The board of a credit institution or investment firm, which is permitted to prepare a simplified recovery plan in accordance with Chapter 2, shall approve it and submit it to the Financial Supervisory Authority in accordance with applicable requirements for regular data submission at any given time, cf. the second paragraph of Article 82 a of the Act on Financial Undertakings.

33. The Financial Supervisory Authority shall assess a simplified recovery plan, cf. Article 82 b of the Act on Financial Undertakings, and shall, within six months of receipt of the plan, complete the assessment and notify the relevant credit institution or investment firm if it considers there to be significant deficiencies in the plan, cf. Article 82 c of the same Act.

Reykjavík, 10 June 2024
CENTRAL BANK OF ICELAND

Björk Sigurgísladóttir
Deputy Governor of Financial Supervision

Gísli S. Óttarsson
Director
Prudential Supervision