Recovery and Resolution Planning (RRP) is a framework that ensures banks—especially large, systemically important ones—can either recover from financial distress or be resolved in an orderly manner without disrupting the financial system or needing taxpayer bailouts.
🔄 1. Recovery Plan
A Recovery Plan is prepared by the bank itself. It outlines strategies and actions the bank will take to restore its financial health in case of stress or a crisis.
Key components of a Recovery Plan:
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Increasing capital (e.g., issuing shares)
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Reducing risk-weighted assets
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Selling non-core businesses or assets
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Enhancing liquidity or access to funding
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Suspending dividends or bonuses
📌 Objective: Avoid failure by taking early corrective measures.
🛠 2. Resolution Plan
If recovery fails, regulators (like a central bank or resolution authority) step in with a Resolution Plan to handle the failing bank in a way that minimizes systemic risk and protects depositors.
Key resolution tools include:
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Bail-in: Shareholders and certain creditors absorb losses.
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Bridge bank: A new temporary bank takes over critical functions.
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Asset separation: Problematic assets are moved to a “bad bank”.
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Sale of business: Healthy parts of the bank are sold to another institution.
📌 Objective: Ensure the bank’s critical functions continue without relying on public funds.
🌐 3. Why Is RRP Important?
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Protects taxpayers from bank bailouts
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Maintains public confidence in the banking system
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Ensures financial system stability
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Encourages responsible risk management by banks
⚙ 4. Tools Used in Resolution
| Tool | Description |
|---|---|
| 🧾 Bail-in | Converts debt into equity or writes down liabilities to absorb losses |
| 🏛 Bridge Bank | Temporary bank to continue key operations |
| 🧨 Bad Bank | Segregates toxic or non-performing assets |
| 🤝 Sale of Business | Transfers viable parts of the bank to another institution |
🧭 5. International Standards
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FSB (Financial Stability Board): Sets global RRP principles, especially for Global Systemically Important Banks (G-SIBs)
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BRRD (EU Bank Recovery and Resolution Directive): EU regulation mandating RRPs for significant banks
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Basel III/IV: Enhances capital, liquidity, and leverage requirements to reduce bank failures
🇺🇿 Example: What about countries like Uzbekistan?
Emerging markets are gradually aligning with global standards by:
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Strengthening supervision and early intervention frameworks
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Encouraging risk management in banks
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Drafting local resolution frameworks to protect financial stability
✅ Summary
| Plan Type | Goal | Who Creates It |
|---|---|---|
| Recovery Plan | Bank recovers on its own | The bank |
| Resolution Plan | Regulators resolve failing bank | Regulatory authorities |