'.

BANGKO SENTRAL NG PILIPINAS

OFFICE OFTHE GOVERNOR

CIRCULAR NO. II58

Series of 2o.22

Subject: Guidelines on Recovery Plan of Banks

The Monetary Board, in its Flesolution No. 1506 dated '13 October 2022, approved
the amendments to the guidelines governing the submission of recovery plans of banks
as well as the prudential measures under the lnternal Capital Adequacy Assessment
Process (ICAAP) and Supervisory Fleview Process.

Section l. Section 156 and Appendix 15O (Annex A of this Circular) of the Manual
of Regulations for Banks (MORB) shall be created to provide the guidelines governing the
recovery plan of banks. Annex D of Appendix IIO of the MORB on the Guidelines on
Flecovery Plan of a Domestic Systemically lmportant Bank (D-S|B) shall be deleted
accordingly.

I55 GUIDELINES ON RECOVERY PLAN OF BANKS

Poticy StZtement Flecovery planning is an important process to reduce the

potentially significant risks posed by a bank's distress or disorderly failure to the stability
of the financial system and the economy. Flecovery planning is a fundamental element
of a risk management framework as it enables banks to respond quickly, effectively, and
credibly to situations of financial stress to protect depositors and other customers as well
as to promote viability and maintain shareholder value.

In this regard, the Bangko Sentral expects all banks to undertake recovery
planning and to develop a concrete and reasonable recovery plan that is linked to their
risk management framework, internal capital adequacy assessment process or capital
planning, liquidity plans, and business contingency plans. Flecovery plans should be
informed by a bank's risk appetite statement and results of its stress testing. The recovery
plan shall set out the governance arrangements, recovery options, and communication
strategies in periods of extreme stress scenarios to maintain or restore the viability of
banks and ensure continuity of operations.

Banks are expected to adopt a recovery plan that is commensurate to their size,
nature and complexity of operations, overall risk profile, and systemic importance.

Scope of Application. A]l banks, including government-owned banks, shall

maintain a recovery plan on a solo and group-wide basis, as applicable. The group-wide
recovery plan shall cover the parent bank and all its material entities, including subsidiary
banks.

Foreign bank branches may refer to the recovery plan developed by their
respective Head Offices and adopt relevant policies and strategies that are consistent
with applicable provisions of this Section and commensurate to the scale of operations
in the Philippines.

Definition of Terms. For purposes of this Section, the following definitions shall
apply:

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 a. Control of an enterprise shall refer to the definition under ltem "d" of Section l3l
(Definition of Terms).

b. Material enfi?'esshall refer, at a minimum, to the bank's subsidiaries and affiliates,

as defined under Sec. l3l (Definition of Terms), which represent a significant
portion of the balance sheet or business activities of the parent bank.

c. Critical functions shall refer to activities performed by a bank or banking group

for its clients, where failure to carry out the same would have a material negative
impact on a significant number of its depositors and other clients. Critical
functions may include retail and commercial banking, trading, payment and
settlement, and asset management, among others.

d. Critical services shall refer to internally and externally provided services needed
to enable the performance of critical functions and management of the bank.
Critical services may include but not limited to internal processes, lT systems,
clearing and settlement facilities, supplier and employee contracts, and
outsourced services.

Cuiding Principles and Components of the Recovery Plan. The detailed guiding
principles and components of the recovery plan are provided in Appendix l5O. The
recovery plan shallcontain the following:

a. An executive summary which provides a brief overview of the recovery plan

covering the governance arrangements, summary of triggers and indicators, key
recovery strategies and the corresponding operational plan for its
implementation, among others. ln the case of D-SlBs, the summary shall also
indicate the material changes in the recovery plan from the last submission to the
Bangko Sentral;

b. Governance arrangemenfs which cover the responsibilities of the board of

directors, senior management, business units and self-assessment functions
encompassing the entire recovery planning process, including the activation and
implementation of recovery options and communication strategy, among others;

c. Critical functions and seruices which cover the critical activities of the bank and
services enabling the performance of such critical activities;

d. Triggers and earlywarning indicatorswhich discuss the set triggers and indicators
as well as the procedures related to monitoring, escalation, and approval process;

e. Restoration points which speciflT the identified financial indicators relating at a

minimum to capital and liquidity as well as the timeline for restoration for such
indicators:

f. Recoveryoptionswhich describe the menu of feasible and credible options based

on exogenous and entity-specific assumptions;

g. Stress scenarios which cover entity-specific and system-wide scenarios and a

combination thereof as well as the recovery strategies for each scenario, drawing
from the menu of recovery options;

h. Preparatory measures which set out the operational and legal pre-positioning
needed to implement recovery options;

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 i. Testing and simulation exercises which set out the areas that should be covered
in the exercise and the type of assessments that may be conducted, including
reporting and corrective mechanisms; and

j. Review of the recovety plan which includes its elements, relevance and
applicability.

Reponing and Notification Requirements.The recovery plan shall be submitted

to the appropriate supervising department of the Bangko Sentral every 3O June of each
year. The recovery plan shall be distinct and separate from the ICAAP document as
prescribed under Sec. l30.

In cases of breach of an internally-set trigger level, the bank shall notiff, within 24
hours from the discovery of the said breach, the appropriate supervising department of
the Bangko Sentral. The notification shall indicate the nature of the breach and other
information relevant to the breach.

The bank shall also notiry the appropriate supervising department of the Bangko
Sentral of its decision on whether or not to activate the recovery plan, within 24 hours
from the date of the decision by the designated authority, as defined in the recovery plan.
The notification shall include, at the minimum, the events and circumstances leading to
the breach of the recovery threshold or triggers, and management actions that have been
taken and/or intended to be taken, including the implementation of recovery options or
reasons for the decision not to activate and implement measures under the recovery
plan.

In case the recovery plan was activated, the bank concerned shall submit a
monthly progress report to the appropriate supervising department of the Bangko
Sentral which shall commence one (l) month after the activation of the recovery plan,
and monthly thereafter or more frequently, as necessary, until the bank reaches the
identified levels of restoration points. The monthly progress report shall be submitted
within ten (lO) banking days from the end of the reference month.

Ba ng ko Sentra I Review of the Recove ry Plan.The Ba n g ko Sentra I sha I I review t he

recovery plan, at least annually, as part of the overall supervisory process, focusing on
assessing the recovery plan's robustness, credibility, and feasibility of effective
implementation. Banks shall be required to adopt appropriate measures should the
Bangko Sentral find the submitted recovery plan inadequate. The activation of the
recovery plan earlier than expected may be required by the Bangko Sentral when
warranted.

Section 2. Section 128 of the MORB is hereby amended, as follows:

I28 DOMESTIC SYSTEMICALLY IMPORTANT BANKS (D-SIBs)

It is the thrust of the Bangko Sentral to ensure that its capital adequacy
framework is consistent with the Basel principles. x x x

xxx
The framework for dealing with D-SlBs including the guidelines on data
requirements and reports, schedule of restriction on distribution of dividends during the
phased-in implementation period of the HLA requirement are shown in Appendix llo.
The guiding principles and components of the recovery plan of banks are provided in
Appendix l5O.

Page 3 of5
',': 'Jr

Section 3. Section 126-Q and Appendix Q-68 of the MORNBFI are hereby deleted.
Moreover, the Report on Selected Accounts and Activities for the Banks (Consolidated
Basis) as indicated in Appendix Q-3 of the MORNBFI is hereby deleted. All references to
Section 126-Q and Appendix Q-68 of the MORNBFI shall be changed to Section '156 and
Appendix 15O of the MORB, respectively.

Section 4. Section'l30 and Appendix 95 of the MORB on Internal Capital Adequacy

Assessment Process and Supervisory Fleview Process are hereby amended, as follows:

l3o INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS AND SUPERVTSORY

REVIEW PROCESS

A bank's board of directors and senior management are ultimately responsible for
ensuring that the bank maintains an appropriate level and quality of capital
commensurate with its risk exposures. Hence, a bank must have in place an internal
capital adequacy assessment process (ICAAP) that takes into account risks covered by
the Risk-Based Capital Adequacy Framework and all other material risks.

The guidelines on banks' ICAAP and Bangko Sentral's supervisory review process
(SRP) are shown in Appendices 94, 95, and 96, respectively.

The ICAAP guidelines shall apply x x x.

The Bangko Sentral may implement any of the following supervisory actions if it
considers that a bank's ICAAP does not adequately reflect its overall risk profile, or does
not result in the bank having adequate capital:

a. Requiring the bank to improve its internal control and risk management
frameworks:
b. Requiring the bank to reduce the risk inherent in its activities, products, and
systems;
c. Restricting or limiting the business, operations, or network of the bank;
d. Limiting or prohibiting the distribution of net profits and requiring that part or all
ofthe net profits be used to increase the capital accounts ofthe bank; and
e. Requiring the bank to increase or hold capital beyond the minimum
capitalization requirements under Section 121 or minimum capital ratios under
Sections 125 and 127, as may be required by the Monetary Board.

APPENDIX 95

GUIDELINES ON THE BANGKO SENTRAL'S SUPERVISORY REVIEW PROCESS

(Appendix to Sec.l3O)

A. Introduction
xxx
D. Guidelines on prudential measures
lf the Bangko Sentral considers that a bank's ICAAP does not adequately reflect
its overall risk profile, or does not result in the bank having adequate capital, then
consideration should be given to applying prudential measures.

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 't.
The measures available to the Bangko Sentral include those enumerated under
Sec. l30.

2. The choice of prudential measures should be determined according to the

severity and underlying causes of the situation and the range of measures and
sanctions available to the Bangko Sentral. Measures can be used individually or in
combination. x x x

xxx
Section 5. Transitory Provision. The following provision shall be incorporated as
a footnote to Section '156 of the MORB on the guidelines on recovery plan of banks.

Non-Domestic Systemically lmportant Banks (Non-D-SlBs), including subsidiary

banks of D-SlBs that are required to submit the recovery plan for the first time, shall be
given a transition period of two (2) years to develop the same. The first recovery plan of
said banks shall be submitted to the appropriate supervising department of the Bangko
Sentral on or before 30 June 2024.

Meanwhile. D-SlBs that are already required to submit a recovery plan shall
submit the same consistent with the new guidelines on or before 50 June 2023.

Section 6. This Circular shall take effect fifteen (15) calendar days following its
publication either in the OfficialCazette or in a newspaper of generalcirculation.

G. FONACIER

Itr october 2o22

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 APPENDIXISO
(AnnexA of Circular)

GUIDING PRINCIPLES AND COMPONENTS OF THE RECOVERY PLAN OF BANKS

(Appendix to Sec.156)

The supervisory expectations in the preparation of the recovery plan, including its
components are provided in the following sections:

A. GovernanceArrangements

l. The board of directors is primarily responsible for the adoption and approval of
the recovery plan, and for overseeing the implementation thereof.

2. The board of directors shall ensure that the recovery planning process is
supported by a robust governance structure and adequate resources. The board
of directors shall likewise ensure that:

a. Responsibilities of the board of directors, the senior management,

business units, and the self-assessment functions are clearly defined both
in normal times and during a crisis. The recovery plan shall also speciff the
following:

l) Flesponsibilities of the board of directors or appropriate board-level

committee, or equivalent management committee in the case of
branches of foreign banks, in relation to the review and approval of
the recovery plan and any updates thereon. These include the
responsibility to vet and challenge the assumptions used in the
document:

2) Responsibilities of the senior management in the preparation,

maintenance, and updating of the recovery plan. These include the
responsibilities of the designated officerA, who is/are the lead
ownerA of the recovery plan. The officer/s to be designated must
have sufficient stature and authority (e.g., President/Chief Executive
Officer/Chief Risk Officer) within the organization;

3) Responsibilities of the self-assessment functions and the board-level

audit committee or its equivalent in the independent review or
assessment of the recovery plan; and

4l Responsibilities of the board of directors, senior management,

including the designated officerft who are the lead owner/s of the
recovery plan, and relevant business units in the activation of the
recovery plan and implementation of the appropriate recovery
options as wellas the implementation of the communication plan.

b. Flecovery planning process is fully integrated into the bank's business-as-

usual risk management framework. This is to ensure that the recovery plan
shall be designed as a comprehensive document that will complement
the existing capital, liquidity, and business contingency plans but shall
have an end view of the bank recovering from extreme stress situations.
The plan shall also cover the established contingency arrangements that
would allow the bank to continue to operate and maintain critical
functions and services as it implements the recovery measures, The
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 recovery plan shall be consistent with the bank's existing stress testing
exercises as required under Sec.l5l and other risk management guidelines
covering specific risk areas; and

c. Adequate Management lnformation Systems (MlS) are maintained and

capable of generating necessary information on a timely and accurate
basis to enable the board of directors and the senior management to
effectively d isc harge thei r respective responsi bi ities.
I

B. Critical Functions and Seruices

3. In developing the recovery plan, the bank shall identifu core information, which
is necessary for recovery planning purposes, namely:

a. Critical functions and services

The bank shall identiff and describe the critical functions and services that
shall be mapped to the entities or units that perform such functions or
provide such services and set out the actions necessary to operate and
maintain them in case the recovery plan is activated.

The bank shall ensure that it complies with any additional requirements
to which it may potentially be subject during crisis situations in order to
maintain its membership in financial market infrastructures, (e.9., as
regards prefunding or collateralizing of positions). lt shall also identifo
options for addressing the additional requirements.

b. Material entities together with a description of the activities of each

material entity in more detail. The bank shall also provide the criteria
adopted to determine the materiality of these entities.

c. Core business lines and operating model

The bank shall include an overview of the business model of its material
entities, and identiff the business lines which are core to the material
entities' operations, profitability, and franchise value. lt shall explain the
activities conducted by these material entities in the Philippines or abroad.

It shall include an assessment of the viability of any business lines, which

may be subject to separation in a recovery scenario, as well as the impact
of such separation on the remaining group structure and its viability.

The bank shall also identiff processes for determining the value and
marketability of the material business lines, operations, and assets.

d. Dependencies

The bank shall provide an overview of the key dependencies of material

entities, explain the criteria and assessment used to identiff these key
dependencies, and describe the governing contractual arrangements.

Key dependencies (internal and external) shall refer to support or services,

the sudden and disorderly failure of which would present a serious
impediment to the performance of critical functions and services by the
bank and its materialentities.

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 The bank shall also identifu linkagest between and/or among its parent
company (if applicable) and its material entities, and operational data,
such as the extent of asset encumbrance, amount of liquid assets, off-
balance sheet activities, etc.

4. In relation to MlS, the bank shall:

a. Maintain a detailed inventory, including description and the location of the

key MIS used in its material entities, mapped to its critical functions and
services.

b. ldentifu and address legal constraints on the exchange of management

information among the material entities within the group; and

c. Maintain specific information at a legal entity level, including, for example,

information on intra-group guarantees and intra-group trades booked on
a back-to-back basis.

5. The bank shall maintain up-to-date details of financial contracts entered into by
the bank, including records of counterparties. Similarly, the bank shall maintain
up-to-date details of non-financial contracts pertaining to its critical functions
and services.

6. The bank shall establish appropriate contingency arrangements that will enable
its critical functions and services to continue to operate while recovery measures
are being implemented. Such arrangements may include, but are not limited to
arrangements that would enable the continuous functioning of internal
processes, lT systems, clearing and settlement facilities, and supplier and
employee contracts; and ensure continued rights of use and access to
operational assets such as property and office space.

7. The bank shall put in place adequate measures such that outsourcing
arrangements, which support critical functions and services can be maintained
in crisis situations and in the recovery process. The underlying contracts should
include provisions that prevent termination from being triggered by recovery
events and facilitate the transfer of the contract to a bridge institution or a third-
party acquirer where necessary should some form of the resolution be required
in the bank cannot restore itself to viability.

C. EarlyWarning Indicators and Triggers

8. The recovery plan shall enable a bank to take preemptive actions at an early
stage of stress to avoid breach of minimum regulatory requirements.

9. The recovery plan may be activated when a bank breaches any of the identified
triggers relating to capital, liquidity, asset quality, profitability, or credit rating.
The triggers shall be set above the minimum regulatory requirements but below
or at more severe levels than the triggers applicable in activating the capital and
liquid ity contingency plans.

lO. Banks shall notiff the Bangko Sentral in case of a breach in any of the internally
set triggers. Said breach shall prompt senior management to evaluate the
situation and decide whether to take action under the recovery plan or refrain
from taking such action. This preparatory mechanism, including the operational

I For continuous functioning of internal processes, lT systems, clearing and settlement facilities. supplier and
employee contracts, etc.
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 procedures, monitoring, escalation, and approval process, should be clearly
defined in the recovery plan.
'll. The recovery plan shall utilize earlywarning indicators (EWls)with specific levels
relating to each trigger (i.e., quantitative indicators which may be supplemented
with qualitative indicators). EWls should be designed to provide early-stage
indicators of stress which shall be set above the) triggers for activating the
recovery plan and shall not necessarily cause the recovery plan to be activated.
A breach of EWls shall enable a bank to take remedial actions outside of the
scope of the recovery plan, such as adjustments to minimum risk tolerance,
mod ifications of risk behavior, tightening of risk controls, and preparation for the
possible future activation of recovery options. EWls shall be regularly calibrated
to ensure that indicators remain robust to alert the bank of stress or adverse
circumstances and enable the bank to undertake appropriate recovery options.

D. Restoration Points

12. The recovery plan shallspeciff minimum restoration points and the timeline for
restoration for key indicators, which shall at least cover capital (e.9., CETI, Tier I
capital, or capital adequacy ratios) and liquidiW (e.S., ratio of high-quality liquid
assets, Liquidity Coverage Ratio). The minimum restoration points refer to the
level to which the selected key indicators shall be restored post-recovery. As
applicable, restoration points may also be considered in terms of profitability
(e.9., a target return on assets and return on equity), as well as restoration levels
relating to asset quality (e.9., a maximum tolerable level of non-performing
loans, non-performing assets or restructured loans ratios). Restoration points
may also include reference to a target credit rating (if applicable), defined
measures of market confidence in the bank, depositor and other stakeholder's
satisfaction, and resumption of business-as-usual operation of all critical
functions and services.

The restoration points shallguide the extent and nature of the recovery actions.
These shall be determined in relation to the desired risk appetite for each key
indicator and shall be set above the defined quantitative EWls in order to provide
a reasonable assurance that future breaches of triggers are prevented and to
maintain stakeholder confidence in the bank.

E. RecoveryOptions

13. A bank shall adopt a menu of feasible and credible recovery options based on
underlying exogenous and entity-specific assumptions that it can take in a
timely manner in a range of stress scenarios to stabilize and restore its financial
resources and viability. The range of possible recovery measures may include,
but not be limited to the following:

a. Measures to strengthen or conserve the bank's/group's capital position,

e.9., recapitalization, issuance of capital instruments, suspension of
dividends and discretionary payments of remunerations, and reduction of
high risk-weighted credit exposures;

b. Sale of assets, subsidiaries, and spin-off of business units;

c. Voluntary restructuring of liabilities through debt-to-equity conversion;

and

d. Measures to secure adequate liquidity or funding while ensuring sufficient

diversification of funding sources and adequate availability of collateral.
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 14. Each recovery option should be comprehensively described, including the
maximum time needed to implement such an option, the levelof authorization
and actions required for each recovery option to be implemented, the maximum
amount that the recovery option could contribute to capital and/or liquidity
restoration and the probability of success or effectiveness to address the stress
scenario. The recovery plan shall also speciff the intended sequencing of
recovery options.
't5. Flecovery options shall at all times include actions to address capital and
liquidity shortfalls. The menu of options would vary among banks. The selection
of which recovery option to implement will depend on the type and severity of
the stress scenario. The following shall be laid down and discussed for each
recovery option:

a. Estimated benefitsz or outcomes that would be derived from the recovery

option, any assumptions made to quantiff the benefits, and the reasonable
time frame within which the bank is able to restore its financial strength
and viability;

b. Negative effect if any, on the financial condition, franchise value, credit

ratings, as well as relevant stakeholders or associated risks (e.9., potential
disruption to its normal business operations and services) brought by the
deployment of the recovery options3;

c. Long-term impact on the viability of the bank/group to ensure that the

recovery option does not only offer a short-term "quick fix" response to a
stress situation:

d. Preparatory actions to ensure that the recovery options can be

implemented effectively and in a timely manner;

e. Process to implement or carry out the recovery option, including the

escalation, level of authorization, and decision-making process, indicating
the ownerA of the process to instill responsibility and establish
accountability, which is crucial in times of stress;

Circumstances or factors that could render the recovery option

unavailable/ infeasible or could hinder the effectiveness of the recovery
option, as well the remedial measures to be undertaken to overcome these
impediments including the time frame to accomplish the remedial
measures. This is to ensure the timely and effective implementation of
remedial measures that will improve the credibility of the recovery plan;
and

9. For the option to dispose of assets or business, the conditions for execution
and steps to be taken should be specified; and the bank should be mindful
that the disposal may take place under unfavorable conditions where it
may be pressured to dispose below market value; thus, assumptions
should be made in a highly conservative manner.

lmpact or effect on bank's financial condition if the recovery option becomes successful, which may be on
capital, risk-weighted assets/risk profile, liquidity, leverage and other measures of financial strength, as well
as impact on customers, counterparties and market confidence.
The bank should set out how the continuity of its material services and functions can be maintained while
recovery actions are being implemented.
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 '16. The focus of recovery options should be on actions that a bank itself or the
material entities within its group can directly take, otherwise, conditions to
ensure execution should be specified in the recovery plan. In addition,
considering that several key steps may be involved to execute a recovery option
and a combination of a number of recovery options may be required to address
a stress scenario, the recovery plan should include estimates of the prioritization
and sequencing of recovery actions and the time needed to implement each.

17. For banks with simple operations, the range of credible options could be limited
or less complex, but they should still consider an adequate range of feasible
recovery options. In the case of foreign bank subsidiaries or branches, they may
play a role in the recovery options in the group recovery plan and/or be impacted
by their implementation; or a sudden and material deterioration in the level of
regulatory capital of the Head Office/banking group could be a trigger for
implementing certain recovery options at the level of the Head Office and the
branch. Thus, the local recovery planning of foreign banks should consider said
possible interactions and impacts as well as include appropriate recovery
triggers and options to address such circumstances. lt is essential that foreign
banks can demonstrate that the risks posed to their local operations have been
adequately considered and incorporated in the recovery planning process at
both the local and group levels. This should include, but is not limited to:

a. Describing whether, and how the major recovery options in the parent
group recovery plan, if deployed, would impact the operations in the
Philippines, either directly or indirectly;

b. Demonstrating how the recovery plan and actions at the parent group
level may be triggered by the occurrence of severe stress events in its
operations in the Philippines;

c. Describing the process for activating the parent group recovery plan for
foreign banks, speciffing the roles, authorities, and responsibilities of its
officers in the recovery planning process and outlining the conditions for
execution of recovery options (such as the steps, estimated time, and cross-
border considerations); and

d. lllustrating how the recovery options are expected to restore the financial
soundness and viability of the operations in the Philippines.
'18. The bank's recovery plan shall also set out the types of actions that it would take,
apart from recovery options, to address the underlying cause/s of the stress
event/s that may have caused the bank to activate its recovery plan, which may
include, but not limited to:

a. Establishing a process for internal reviewa of the cause/s of the adverse

event and identifoing appropriate remedial measures;

b. Appointing an independent party to conduct a reviews and make

recommendations: and

Fleporting to the board and key stakeholders the results of the review
process and the necessary actions taken or to be taken to address the
underlying cause/s of the stress event/s.

4 The internal review may be done by the unit involved in the creation of the Flecovery Plan.
5 The independent review may be conducted by a unit internal to the Bank but should not be involved in the
creation of the Flecovery Plan.
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 '19. The recovery plan of banks, except for government banks, shall not include an
assumption for any access to or receipt of government/public financial
support/aid provided by the Philippine National Government and its offices,
agencies, and instrumentalities to preserve or restore their viability, solvency or
liquidity, which may include, among others, financial assistance in the form of
loans and advances extended by the Bangko Sentral, pursuant to Sections 83
and 84 of Republic Act No.7653 (The New Central Bank Act), as amended.

F. Scenarios

20. A bank shall identifu and adopt scenarios that are plausible but sufficiently
severe as to cause a breach in minimum regulatory requirements (e.9., capital or
liquidity ratios). This is to ensure that the bank has considered different types of
stress events that may threaten its ongoing viability. Banks shall use these
scenarios to inform recovery triggers, estimate adverse impacts and cost
considerations, and establish recovery actions to stress events.

21. The recovery plan shall include entity-specific scenarios (in which the
bank/group has been impacted by a stress event unique to that bank/group, but
the financial system is operating normally), system-wide stress scenarios (in
which the financial system is assumed to be under considerable stress), and a
combination thereof, considering the bank's risk profile, complexity of
operations, and business strategy. Each stress scenario, including all relevant
assumptions, shall be comprehensively described in the recovery plan and shall
include a detailed assessment of the impact on capital, liquidity, profitability,
and asset quality.

22. In designing scenarios, the bank may consider the relevance ol but not be
limited to, the following events:

a. Entity-specific events:
I) failure of significant counterparties;
2l damage to the bank's or banking group's reputation;
5) stress in the operations of the parent bank/head office abroad;
4) severe outflow of liquidity;
5) adverse movements in the prices of assets to which the bank or
banking group is predominantly exposed;
6) significant credit losses;
7) major cyber-security breach; or
8) severe operational risk event/loss.
b. System-wide events:
l) failureofsignificantcounterpartiesaffecting financial stability;
2) decrease in liquidity available in the interbank lending market;
3) increased country risk and generalized capital outflow from a
significant country of operation of the institution or the banking
group;
4l significant falls in financial markets;
5) significant changes in the interest rate environment; or
6) high-impact events (e.9., pandemic, or climate-related events) and a
severe macroeconomic downtu rn.

A bank may refer to its existing stress testing program as a foundation for
building scenarios. lt may adopt more than one scenario for each scenario type
to test the impact of stress events particularly for systemically important banks
and complex banks.
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23. A bank shall test the adequacy of its recovery plan against a range of stress
scenarios as its planned recovery options may depend on the nature and severity
of stress events. For a system-wide scenario, the bank's recovery options should
consider the possibility of multiple institutions simultaneously seeking to
implement similar recovery measures, resulting in difficulties in implementation
and the time needed to address capital shortfalls and liquidity pressures. On the
other hand, in an entity-specific scenario, the bank may consider the impact of
its recovery actions on the bank's reputation (i.e., in case of suspension of
dividend payment). For combined scenario types, the bank should consider the
inter-relationship between the two. Scenarios should likewise be subject to
reverse stress tests, particularly those that would threaten the bank's ongoing
viability and breach its minimum regulatory capital and liquidity ratios.

Banks with simple operations may test at least one scenario that is most relevant
to their individual circumstances under each of the scenario types and may use
qualitative assessment to complement scenario analyses of specific risks for
recovery planning purposes.

25. In the case of foreign bank subsidiaries or branches, they may refer to the parent
group recovery framework for the relevant and appropriate elements of stress-
testing exercise in the context of recovery planning. However, foreign banks'
management in the Philippines shall assess the suitability of the group recovery
stress scenarios in the context of its local operations. Otherwise, additional
recovery stress scenarios that are appropriate in the local setting must be
developed and tested.

26. Banks shall keep adequate documentation of the stress-testing activity in its
recovery plan (or include in the recovery plan a cross-reference to separate
documentation), which should include, but not limited to:

a. discussion on the overall approach to stress-testing for recovery planning

purposes;
b. identification of all relevant assumptions used under each scenario;
c. quantitative and qualitative methods used in the stress testing exercise;
d. breach of recovery triggers;
e. financial projections for key financial and risk indicators for a period of at
least two years, including the financial and risk indicator results of recovery
actions:
f. recovery actions assumed to be taken in respect of the scenarios;
g. quantitative assessment of the impact of each scenario on the bank or
banking group, including capital, liquidity, profitability, and asset quality;
and
h. qualitative assessment of the suitability of each relevant recovery option
deployed under the scenarios.

27. The plan shall detail the corresponding recovery strategies for each identified
scenario which may involve the implementation of several recovery options.
Accordingly, the recovery capacity of each recovery option shall be assessed to
determine the aggregate impact of the same under each scenario. Flecovery
capacity must be measured in quantitative terms by calculating the amount of
capital and liquidity that can be rebuilt during or following stress.

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G. Preparatory Measuresfimplementation Plan

28. The recovery plan shall include information on the nature and analysis of
preparatory measures necessary to implement the plan or to improve its
effectiveness together with a timeline for implementing those measures.

29. Banks shall identiff potentiallegal and operational impediments to the effective
implementation of recovery options laid out in the plan. Preparatory measures
shall include any measures necessary to overcome these impediments.
Preparatory measures include, but are not limited to the development of
indicative term sheets and documentation for capital issuance and
underwriting, the sale of assets, and legal and operational procedures required
to access funding and augment liquidity.

30. The recovery plan shall outline the escalation process upon the occurrence of a
trigger event, including the mechanisms for decision-making process and the
roles and responsibilities of key personnel involved. The level of authority with
respect to the activation of the recovery plan and the determination of recovery
options to be implemented shall likewise be specified in the plan.

3'1. The bank shall inform the Bangko Sentral on the progress of the implementation
of these preparatory measures.

Testi ng/Si mu lation Exercises

32. To ensure recovery plans are operationaland options can be implemented in a

timely and effective manner in a stress situation, banks shall establish a
framework to regularly test the feasibility and effectiveness of their recovery
Plan.

33. At a minimum, the following key areas shall be covered in the testing/simulation
exercises:

a. Availability of sufficient information for decision-making, including those

which can be sourced from the bank's MIS;

b. Escalation and decision-making procedures, including coordination of

entities within the group;

c. Operational aspects, such as plausibility of assumed timelines for the

implementation of the most relevant options, and knowledge and
proficiency of personnel involved in the implementation; and

d. Reliability and promptness of communication strategies, both for external

and interna I stakeholders.

34. Testing/simulation exercises shall be conducted on a regular basis.

a. Annual desktop testing. Banks shall undertake tabletop exercises at least

annually to evaluate the feasibility and effectiveness of the recovery plan.
The testing may cover a review of certain components (e.9., triggers,
selection of recovery options) of the recovery plan or walkthrough tests of
processes and procedures for particular scenario/s. The bank shall
designate a facilitator who shall guide the participants through the
discussion and analysis of scenarios in the recovery plan.

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 b. Live simulation exercise. Banks shall undertake live simulation exercises at
least once every five (5) years which shall be participated by all relevant
members of senior management. The exercise may cover a full-scale live
simulation to test the entirety of the recovery plan. Management shall
adhere to timelines adopted that are suited to the scope of the exercise to
create a realistic. stressed test environment.

c. Regular independent review or assessmenf. The internal audit function or

other independent competent units shall perform a regular assessment of
the bank's recovery plan and testing processes.

35. Adequate and timely follow-up mechanisms shall be in place to address any
deficiencies identified during the testing/simulation exercises and ensure that
necessary improvements are incorporated into the recovery plan.

36. Testing/simulation exercises shall take place at a period within which corrective
actions can be timely incorporated during the regular recovery plan update
process. Otherwise, the recovery plan shall be updated as necessary to ensure
that improvements are incorporated into the recovery plan in a timely manner.

37. Banks shall engage an independent observer (e.9., units from the bank's self-
assessment functions or external auditor), during testing/simulation exercises to
ensure a more objective assessment of the outcome of the exercise.

38. The results of testing/simulation exercises shall be reported to the bank's board
of directors and shall be incorporated in the recovery plan to be submitted to
the Bangko Sentral.

Reviewand Updating of the Recovery Plan

39. The recovery plan shall be updated at least annually, and upon the occurrence
of events that materially alter the bank's structure, business model or operations,
strategy, or risk exposure. Updating the recovery plan shall involve:

a. Fleview of the exogenous and bank-specific assumptions the recovery plan

is based upon; and

b. Assessment of the relevance and applicability of the recovery plan.

J. Communication Strategy

4O. The recovery plan shall contain a communication strategy with supervisory
authorities/regulators, the public, financial markets, employees, and other
stakeholders, which shall be tailored based on the specific communication
needs of each recovery option.

K. Group Recovery Plan

41. ln the case of group structures headed by a bank licensed in the Philippines, the
parent bank and its subsidiaries and affiliates considered as material entities
shall adopt a group recovery plan, which shall identiff measures that may be
required to be implemented at the levelof the parent bank and each individual
material entities.

42. The group recovery plan shall aim to achieve the stability of the group as a whole,
or any entity in the group, when it is in a situation of stress. lt shall address or
remove the causes of the distress and restore the financial position of the group,
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or the entity in question while taking into account the financial position of the
other entities in the group.

43. The group recovery plan shall include arrangements to ensure the coordination
and consistency of measures to be taken among the entities in the group.

44. The group recovery plan shall include a range of recovery options setting out
actions to address the scenarios provided in the relevant section above.

45. For each of the scenarios, the group recovery plan shall identiff whether there
are obstacles to the implementation of recovery measures within the group,
including at the level of individual material entities covered by the plan, and
whether there are substantial practical or legal impediments to the prompt
transfer of own funds or the repayment of liabilities or assets within the group.

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