PRA publishes Dear CEO letter on non-systemic firms' recovery planning thematic review

(3 min read)

On 15 May 2024 UK Prudential Regulation Authority (PRA) published a Dear CEO letter giving its feedback following a thematic review of recovery planning requirements for non-systemic banks and building societies. The letter sets out the areas for improvement, planned next steps, and effective practice examples. Firms are expected to consider the actions outlined in this letter and update their recovery plans to meet the relevant requirements.

On 15 May 2024, the Prudential Regulation Authority (PRA) published a Dear CEO letter: Non-systemic firms' recovery planning thematic review: Industry feedback.

Over the last 18 months, the PRA has reviewed the recovery planning capabilities of around 70 non-systemic UK banks and building societies. This letter sets out the areas for improvement, planned next steps, and effective practice examples. The PRA states that its review found that, although many firms understand the basics of recovery planning, there are significant areas for improvement, most notably related to the development of recovery scenarios and the calculation of recovery capacity.

Areas for improvement include:

Firms should ensure scenarios are sufficiently severe and bring the firm close to its point of non-viability (PONV). Firms should provide analysis outlining how they define and calculate their PONV.
Recovery capacity calculations for each scenario should reflect the parameters of the stress: for example, macro/ market conditions, firm’s operational capabilities, and consideration given to dependencies/ interdependencies between recovery options.
Firms should look to understand and utilise the methodology for calculating recovery capacity correctly.
Recovery capacity should also be quantified in terms of Common Equity Tier 1 (CET1) capital, Leverage Ratio, and Liquidity Coverage Ratio (LCR) percentage points and relevant nominal amounts for each scenario. The impact on balance sheet and profitability should also be considered.

The PRA states it will engage with firms and trade associations as appropriate to discuss the findings of this letter in H2 2024, and will include this as a topic for discussion at the June CEO conference. Firms are expected to consider the actions outlined above and update their recovery plans to meet expectations outlined in SS9/17.

From October 2025, non-systemic firms must meet the rules and expectations introduced in policy statement (PS 5/24): Solvent exit planning for non-systemic banks and building societies and expectations set out in supervisory statement (SS 2/24): Solvent exit planning for non-systemic banks and building societies.