Recovery and resolution planning for systemically important banks

Systemically important financial institutions can put entire economies at risk in a crisis. That is why recovery, restructuring and resolution mechanisms were developed for such institutions in the wake of the 2008 financial crisis, with the aim of ensuring that systemically important institutions can be stabilised, restructured or removed from the marketplace without jeopardising systemic stability.

The failure of systemically important financial institutions can have serious repercussions for national economies as key financial services would no longer be available. Such institutions are referred to as "too big to fail" because the government could not afford to let them collapse.

Following the 2007/08 financial crisis, recovery and resolution planning (RRP) thus featured prominently on the international regulatory agenda and became firmly anchored in Swiss law.

The aims of RRP are to identify risks to the stability of the financial system due to systemically important banks and to find viable ways to deal with the impact of a crisis.

Systemically important banks require recovery, emergency and resolution plans. FINMA and the institution have different tasks when it comes to drafting and reviewing these plans.

Resolution comes into play in a crisis – with a view to a successful resolution – when recovery efforts have failed. FINMA can order corporate actions whereby bondholders play a part in rescuing the institution by means of a bail-in. This is intended to remove the need for a bail-out (funded by the state and the taxpayer) for financial institutions.

The principles governing recovery and resolution planning are basically uniform at an international level, although the actual rules differ in some respects among the different countries. Banks in the US are – unlike in Switzerland – under no legal obligation to establish a recovery plan. However, they do have to establish a resolution plan with details of their orderly resolution under current insolvency law. In the European Union, on the other hand, banks must have a recovery plan, as in Switzerland, in accordance with the Bank Recovery and Resolution Directive. The resolution plan is also issued by the relevant authority.