Robots to the rescue: How robotic process automation enables bank recovery planning
What is recovery planning, or RP? Simply put, it’s an extension of Basel II/III-era stress testing, which involves development and implementation of an action plan to manage severe stress. It focuses on ensuring that critical bank services are quickly restored and/or avoid severe impact. Like many existing risk management processes such as scenario generation, stress testing can be reused or repurposed for RP—which is generally handled by specially constituted teams with support from risk and other functions.
But what if the operating model for RP could be bolstered in process efficiency? Here we’ll look at the feasibility of adopting robotic process automation (RPA) and intelligent robotic process automation (IRPA) in the context of the current regulatory landscape.
The U.S., UK, and Europe (along with Hong Kong) represent the forefront of framing regulations in the recovery planning area. Key highlights of global recovery planning regulations are:
- Office of the Comptroller of the Currency (OCC) guidelines on recovery planning standards in 2016 apply to all banks with a total consolidated asset size of $ 50 billion or more.
- Prudential Regulatory Authority’s (PRA) supervisory statement on recovery planning, released in December 2017, set outs expectations on recovery planning activities and is applicable for UK banks, building societies, PRA-designated investment firms and qualifying parent undertakings.
- European Banking Authority’s (EBA) bank recovery and resolution directive of 2017 outlines the recovery planning requirements applied to all EU credit institutions.
Supervisory reviews conducted by global regulators (mentioned above) in banks have observed key challenges pertaining to the following:
- identifying critical functions and processes
- reducing qualitative or judgmental based decisions
- encouraging quantitative and informed decisions
- absence of clearly defined recovery scenarios covering all business lines
- siloed recovery scenarios not integrated to stress testing
- presence of generic and non-specific recovery options
Though regulators focus on various elements of recovery planning, all global regulatory bodies highlight certain core facets. These boil down to identifying early warning indicators for stressed scenarios and developing a playbook. That “playbook” is a dynamic repository that contains a list of all possible recovery options and steps to execute. To do this effectively, recovery management systems must interact with all of a bank’s internal applications (risk, finance, compliance, treasury systems) and external ones (third-party systems that provide details of macroeconomic indicators such as interest rates, inflation, GDP)—and then identify the potential early warning signals and triggers for initiating recovery options. The list of early indicators should interface with regulatory stress scenarios used by the bank and cover areas such as capital, liquidity, profitability, asset quality, and macroeconomic factors.
How do RPA/IRPA help in recovery planning?
Recovery planning in banks involves multiple stages; hence, an incremental and phased-in RPA/IRPA approach is suggested as the way forward. Repetitive, recurring processes of recovery planning could benefit from RPA using standard techniques, and the adoption of IRPA could be explored for other value chain processes to replicate human cognizance.
Key recovery processes encompass:
- creation of recovery plan and review
- risk analysis
- conducting mock drills
- triggering of recovery
- monitoring and control
- communication and reporting
Key sub-processes that could be explored for RPA/IRPA are:
- Sourcing data points: Extracting granular level data elements for the identified recovery scenarios from banks internal and external source systems (RPA).
- Creating templates and dashboards: Sourced data points are used to generate templates and visualization for informed decision making (IRPA).
- Categorizing early warnings: Thresholds identified for each recovery dimension are categorized into low, medium and high risk (IRPA).
- Integrating playbook: Identified risk factors are integrated with the playbook to initiate appropriate recovery options to restore financial stability (IRPA).
- Implementing communication plan: A recovery plan should outline a clear approach for internal and external stakeholder communication, in the event that a recovery option is triggered (RPA).
Putting it all together: RPA and IRPA the smart way
Through adoption of RPA/IRPA, existing manual processes can be transformed into a near real-time, alert-driven system. This will result in:
- shorter timescales to respond, if a recovery process is triggered
- a more integrated approach
- tangible outputs in terms of productivity improvement
- cost benefits for informed decision making
- timely communication to avoid negative market movements while recovery in under way
Overall, the idea is to proceed with RPA and IRPA in a thoughtful, deliberate way that avoids rushing each critical step. Just because your bank cannot afford to fail a stress test doesn’t mean you have to subject your mission-critical employees to one.
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Dr. Subramanian Venkataraman is a senior consultant in the risk management practice of Tata Consultancy Services’ Banking Financial Services and Insurance Business Unit. Sasidharan Chandran is a domain consultant with the risk and regulatory compliance practice of the Banking, Financial Services and Insurance (BFSI) unit at Tata Consultancy Services.