Recovery plan vs resolution plan: who writes each, and who acts

Who writes each, and who acts#

A recovery plan is written by the institution, executed by the institution, and assumes the institution survives. A resolution plan is prepared by an authority — with information the institution supplies — executed by that authority, and assumes the institution has failed. Everything else that distinguishes the two follows from that single difference in premise.

They are frequently bound into one document and referred to by a single acronym, which is administratively convenient and conceptually costly, because the two halves rest on opposite assumptions about who is in control.

The premise gap#

The premise gap is the whole subject. A recovery plan operates in a world where management retains authority, shareholders retain their claim, the franchise is worth preserving, and options that require counterparties to cooperate are still worth listing.

A resolution plan operates in a world where those things have stopped being true: the options were exhausted, unavailable or too slow, and an authority has determined that the institution can no longer be allowed to continue in its present form.

Confusing the two produces documents that are wrong in characteristic directions — a recovery half that quietly assumes rescue arrives, or a resolution half that assumes management will still be free to choose.

Different objectives#

Their objectives differ accordingly. A recovery plan aims to restore the institution to viability, and success means it continues to exist recognisably.

A resolution plan aims at something the institution itself would not necessarily choose:

• to keep critical functions running
• to protect covered depositors
• to preserve financial stability
• to allocate losses to shareholders and creditors in a defined order rather than to public funds

Preserving the institution as it stands is not among those aims.

An institution that reads its resolution planning as an extension of its own strategy has misread the document.

What sets each in motion#

What sets each in motion is different in kind, not merely in degree. Recovery is triggered internally and gradually: indicators the institution has chosen breach thresholds it has set, escalation follows a path it has designed, and the institution decides when and whether to act.

Resolution is triggered by a determination that the institution is failing or likely to fail, that no private action will prevent it within the time available, and that intervention is in the public interest. That determination is not the institution’s to make, and by the time it is made the recovery plan has already either worked or been overtaken.

Different tools#

The tools differ too. Recovery tools are the ordinary instruments of corporate management applied under pressure: raise capital, sell assets or businesses, reduce risk-weighted exposures, retain earnings, cut costs, draw contingent funding, restructure.

Resolution tools are powers the institution does not possess and cannot exercise on itself: transferring business to a purchaser or a bridge entity, separating assets, writing down or converting liabilities in a defined creditor hierarchy.

The practical implication is that the resolution half of a combined document cannot be a longer list of the same actions — it describes what someone else would be able to do.

Where the two meet#

They meet at the point of non-viability, and the handover deserves more thought than it usually receives. In a well-ordered sequence, recovery indicators fire early enough that options still exist, the institution escalates, acts, and either restores itself or exhausts what it can do. The transition to resolution is then a decision taken with information, not a surprise.

In a poorly ordered one, indicators sit so close to regulatory minimums that they fire when nothing is left to do, and the two regimes touch only at the moment of failure. That is why indicator calibration is a recovery-planning question with resolution consequences: an institution that gives itself no runway hands the authority a harder problem.

The same analysis underneath#

Despite the opposite premises, the two rest on the same underlying analysis, which is the strongest practical argument for doing that analysis properly once.

Both need to know:

• which functions are critical
• which business lines are core
• how the legal entity structure holds licences and capital
• which systems, staff and contracts are shared across entities
• how intragroup exposures and guarantees would unwind
• how quickly reliable data can be produced on positions and counterparties

Recovery uses that map to establish which options are executable. Resolution uses the same map to establish what could be transferred, separated or continued.

Institutions that build the underlying analysis once and maintain it get two documents from one effort; institutions that build it twice usually build it badly twice.

Resolvability#

Resolvability is the concept that connects the two from the institution’s side, and it is worth attending to even where no formal regime compels it.

Resolvability asks whether, if the institution had to be resolved, it could be:

• whether critical services would continue when entities are separated
• whether contracts survive a transfer
• whether a buyer could be given enough reliable information in a weekend to price what it was acquiring
• whether operational dependencies on other group entities would break

These are questions about the institution’s own structure and data, and the answers rarely improve on their own. Where an authority does assess resolvability, obstacles it identifies tend to arrive back as directives about structure, contracts and systems, which is a considerably more expensive way to learn the same thing.

The confusions that cause real damage#

The confusions that cause real damage are three.

1. Treating resolution as somebody else’s problem, which leaves structural obstacles in place until an authority converts them into mandatory remediation.
2. Letting a combined document blur the premises, so that recovery options quietly assume the kind of support only resolution provides — the most common single defect in a recovery plan, and the one that makes its option menu unusable.
3. Less discussed, letting resolution’s fatalism colonise the recovery half, producing a plan whose implicit conclusion is that nothing much can be done, which defeats the purpose of writing one.

The practical discipline#

The practical discipline is simple to state.

1. Keep the premises separate on the page, even when the covers are bound together: this section assumes we are still in control, that section assumes we are not.
2. Build the structural analysis once, to a standard both halves can use, and maintain it as the group changes.
3. Calibrate recovery indicators so that they fire while the institution still has choices, because that is the only lever it holds over how the two regimes eventually meet.

Done that way, resolution planning stops being a compliance burden imposed from outside and becomes what it structurally is — the constraint that tells an institution how much runway its own recovery plan needs to create.