Central Bank releases recovery planning guidelines for supervised financial institutions

The Central Bank of The Bahamas (CBOB) has released its draft recovery planning guidelines that will serve as a general guide to implementing a supervised financial institution’s (SFI) recovery plan. The guidelines also seek to prepare banks to weather any shocks that may disrupt business or threaten the security of depositors’ assets.

The document was issued for a 60-day consultation period.

The guidelines released by the CBOB are meant to “modernize the recovery and resolution framework for banks and credit unions in The Bahamas, in line with international best practices” and allows the CBOB to “use an administrative approach to resolve failing banks”.

“This consultation paper summarizes key elements which the Central Bank expects SFIs to include in their recovery plans. Further, these guidelines address the responsibility of SFIs in developing and testing their recovery plan, ensuring continued governance and accountability and the promotion of financial stability,” the Central Bank stated.

According to the recovery planning guidelines, the CBOB requires a supervised financial institution to include in its plan an executive summary, governance and risk management information, documentation and data, scope, critical functions and services, scenarios, testing, early warning indicators and triggers, recovery options, feasibility, timing, impact and objective; communications, implementation of framework, updating and interaction with other relevant regulatory requirements.

In terms of scenarios and testing, the CBOB said it requires SFIs to develop a wide range of scenarios that “accurately reflect the bank’s specific vulnerabilities” in stress events that test the organizations’ critical functions.

The guidelines said these scenarios should prepare the bank for the eventuality of an occurrence.

“SFIs can select its own set of scenarios but should not be limited to a few options nor to just scenarios that are easy to implement,” the document states.

“SFIs should note that the scenario need not be a detailed narrative but rather focus on the impact the scenario would have on their capital and liquidity. The scenarios should also cover both fast-moving and slow-moving financial crises and should include, but not be limited to, the scenarios used by an SFI for its stress testing.

“Every Bahamian recovery plan should include a scenario contemplating a catastrophic hurricane striking New Providence.”

The idea of stress testing banks came to the fore when Hurricane Dorian devastated parts of Abaco and Grand Bahama in 2019.

Stress test data since then found that banks were able to weather the shock of Dorian. But they were urged to consider a future Dorian-sized storm hitting New Providence.

The guidelines suggest that the banks analyze these scenarios and testing data in order to understand how a shock will affect profitability, capital and liquidity; credit rating and cost of raising funding; external counter-parties, operational capacity, material legal entities, core business lines, critical functions and critical services and group-wide position.

“SFIs should also include detail about the design and planning of the scenario used, a report on how the exercise unfolded and lessons learnt for the development of the recovery plan,” the document states.

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