1A good wind-down plan is most likely to be supported by an effective risk management framework. This may include:
a clear risk appetite that has been approved and validated by the governing body;
analysis of wind-down scenarios;
appropriate reporting and monitoring of management information, risk metrics and early warning indicators; and
any potential recovery options.
A clear risk appetite, as well as an effective risk identification and assessment approach, are important parts of wind-down planning. They can help to identify the risk metrics that need to be monitored and to set the appropriate thresholds.
Well-structured management information can help to identify emerging risks that could lead to a wind-down scenario. For instance:
Good reporting processes can help ensure that the firm can assess emerging situations as soon as possible and intervene appropriately (i.e. in an attempt to recover).
Firms may consider potential options for recovery in the face of adverse business conditions, such as selling part of the business or seeking a capital injection. This is known as recovery planning. Even if a firm has carried out recovery planning, wind-down planning can still be relevant as there is no guarantee that recovery options would save the firm’s business.