Banking Alert | Adapting the risk framework to macroeconomic vulnerabilities

One of the lessons learned from the recent financial crisis was that many banks were not adequately prepared to cope with weaker market conditions. When a bank becomes distressed, the time window for adopting countermeasures to prevent an insolvency or resolution is short. For this reason, it is necessary to develop adequate measures to ensure a bank’s viability and to document those measures in a recovery plan before a crisis event may materialize. In this material, we will discuss the main recent economic and geopolitical factors that can be considered by banks in development of the recovery plans.

The Bank Recovery and Resolution Directive (BRRD) stipulates that each recovery plan should include a range of scenarios of severe macroeconomic and financial distress, varying in their severity, including system-wide events, legal entity-specific stress and group-wide stress.