What are recovery and resolution plans ('living wills'), and how do they differ from each other?

Recovery and resolution planning (RRP) is a cornerstone of the post-crisis 'too big to fail' reform agenda. While both are about preparing for severe financial distress, they address fundamentally different scenarios and are prepared by different parties.

Recovery Plan vs. Resolution Plan

Recovery Plan Details

The recovery plan is the bank's playbook for self-rescue. It must include:

1. Recovery Indicators (Triggers)

Quantitative thresholds that signal deterioration:

• CET1 ratio falls below 8%
• Liquidity coverage ratio falls below 110%
• Share price declines more than 40% in 30 days
• Credit rating downgraded below investment grade

2. Recovery Options

Specific actions the bank can take, each with:

• Description and timeline
• Estimated capital/liquidity impact
• Execution risks and impediments
• Whether it requires regulatory approval

Examples for Cartwright Banking Group:

• Sell the asset management division (generates $3B CET1, 6-month timeline)
• Issue contingent convertible bonds ($2B, 3-month timeline)
• Reduce dividend to zero (saves $800M annually)
• Exit derivatives market-making ($1.5B RWA reduction)

3. Scenario Testing

Recovery options must be tested against:

• Idiosyncratic stress (bank-specific crisis)
• System-wide stress (financial crisis)
• Combined scenario

Resolution Plan Details

The resolution plan is prepared by the regulator and describes how the bank would be resolved if recovery fails.

Key resolution tools:

1. Bail-in — Write down or convert unsecured debt to equity. Losses are imposed on shareholders and creditors, not taxpayers.
2. Bridge institution — Transfer critical functions to a temporary entity while the failed bank is wound down.
3. Sale of business — Sell viable parts to healthy acquirers.
4. Asset separation — Transfer toxic assets to a 'bad bank' entity.

MREL / TLAC

To ensure bail-in is feasible, systemically important banks must maintain a minimum amount of bail-inable liabilities:

• TLAC (Total Loss-Absorbing Capacity) — FSB standard for G-SIBs: minimum 18% of RWA
• MREL (Minimum Requirement for Eligible Liabilities) — EU equivalent, applies to all banks

These liabilities must be subordinated and long-dated enough to absorb losses in resolution without triggering contagion.

FRM exam tip: Remember that recovery is the bank's own plan (it stays in control), while resolution is the regulator's plan (the bank has failed and the authority takes over).

For more on bank regulation and resolution, check our FRM Part II course.