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Case Study

Recovery Plan Test

FOCUS ON: Case studies, Risk, Finance, Conduct & Compliance,

SUMMARY

The client is an international bank with a significant subsidiary in the UK offering a wide spectrum of financial services. The Prudential Regulation Authority (PRA) requires that firms test the effectiveness of their recovery plan “playbook” through “fire drill” exercises. The board requested the involvement of an external party to execute the “fire drill” following which Avantage Reply was selected.

Avantage Reply was requested to design the crisis scenario, prepare the communication materials and to coordinate the execution of the recovery plan “fire drill”. The test allowed the bank to test its protocols, in particular, the formation of its Crisis Management Committee (CMC) over a three-day period with a multi-stage and multi-entity crisis.

THE CHALLENGE

The client wanted to have a more robust test of its Recovery Plan with a particular focus on the Treasury function.

From a regulatory point of view, the PRA requires recovery plans to be actionable and practical through the use of a “playbook”. Furthermore, in order to test the efficacy of the recovery playbook, a “fire drill” exercise is required. Firms should use the findings of these exercises to improve their plans and demonstrate how the arrangements set out would work in practice.

APPROACH AND SOLUTION

The recovery plan test was a collaboration between the Avantage Reply team and the bank’s risk team. Based on a review of the recovery plan, Early Warning Indicators (EWI), recovery triggers, and liquidity risk dashboards, Avantage Reply proposed an idiosyncratic and system-wide scenario, which formed the basis for a discussion with Risk and the ultimate creation of the scenario for the test.

Avantage Reply created a set of fictitious EWI metrics using the existing reporting metrics and format, which was used in the initial communication of the crisis scenario. Based on the management actions taken, new fictitious data was created at the end of day 1 and day 2 as input for the next day’s meeting.

Avantage Reply devised a structured approach to observe the formation and execution of the CMC. Our findings and recommendations were provided in a report to management covering both our observations of the “fire drill” and comments we had on the recovery plan.

RESULTS AND BENEFITS

Avantage Reply’s independence both in the definition of the stress scenario and in observing the functioning of the Crisis Management Committee allowed us to provide concrete suggestions to improve the recovery plan.

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