This publication provides an illustrative example of the ORC determination, aiming to clarify the steps of this procedure for institutions. The example, based on a fictional institution, demonstrates how recovery options can be tested against different financial stress scenarios. It is important to note that this example is purely fictional and does not constitute prescriptive criteria for institutions in…
This document is an explanatory box published by the European Banking Authority (EBA) in 2023. It is an 8-page guide illustrating the practical implementation of the determination of Operational Recovery Capacity (ORC) in recovery plans of banking institutions. The scope covers the methodological steps to assess ORC through a fictitious example of a medium-sized, non-systemic European bank subject to Directive 2014/59/EU. The document focuses on financial and macroeconomic stress scenarios and their impact on regulatory capital and liquidity indicators.
The EBA guide presents a fictitious example illustrating the approach to determine the Operational Recovery Capacity (ORC) of a medium-sized banking institution, called Institution XYZ, subject to the requirements of Directive 2014/59/EU. ORC corresponds to the bank's ability to restore its financial position after significant deterioration by mobilizing credible and feasible recovery options. The example details the selection of eight recovery options (capital increase, entity disposals, risk reduction, asset sales, cost savings, profit retention, liability management, central bank facility access) tested under three stress scenarios: a slow-evolving systemic scenario impacting capital, a rapid idiosyncratic scenario affecting liquidity, and a combined scenario affecting both. The institution assesses the impact of these options on its regulatory indicators (CET1, leverage ratio, LCR, NSFR) considering interdependency and sequencing constraints. The final ORC determination is made by establishing a recovery capacity range specific to each relevant scenario, differentiated between capital and liquidity. This approach allows the institution to demonstrate its ability to maintain regulatory ratios above required thresholds within a 12-month horizon. The document emphasizes the illustrative and non-prescriptive nature of the example, highlighting that each institution must adapt the method to its internal specificities and risk management framework.
This document was drafted to clarify the practical implementation of the ORC determination steps as defined in the EBA guidelines. It responds to the need of banking institutions to better understand how to apply these requirements in their recovery plans, in accordance with Article 5 of Directive 2014/59/EU. The objective is to illustrate, through a fictitious example, the selection, adjustment, calculation, and final determination of ORC based on varied stress scenarios. The guide aims to facilitate understanding of the interactions between recovery options, their impact on regulatory indicators, and the consideration of operational constraints. The document specifies that the example does not constitute a prescriptive framework but a pedagogical tool to support institutions in their own analyses, adapted to their specific characteristics and internal practices.
Definition and role of ORC: ORC represents an institution's ability to restore its financial health after a shock by mobilizing credible and feasible recovery options, evaluated on key regulatory indicators such as CET1, leverage ratio, LCR, and NSFR (p. 1-2).
Selection of recovery options: Institution XYZ identifies eight options covering capital, assets, risks, costs, profits, liability management, and access to central bank facilities. These options are selected based on their credibility, feasibility, and effectiveness in each stress scenario (p. 2-3).
Analysis of constraints and interactions: The institution analyzes interdependencies between options, excluding or adjusting those that are mutually exclusive or conflicting, and specifies the implementation timeline. For example, loan reduction does not affect liability management addressed to institutional investors (p. 3).
Stress scenarios: Three scenarios are considered: a slow-evolving systemic scenario mainly impacting capital, a rapid idiosyncratic scenario affecting liquidity, and a combined scenario impacting both. These scenarios are calibrated to cause breaches of minimum capital or liquidity requirements absent recovery actions (p. 1-2).
Calculation of scenario-specific recovery capacity: The cumulative impact of selected options is quantified on regulatory indicators over time, illustrated by charts for each scenario and indicator (p. 4-6).
Final ORC determination: ORC is defined as a range resulting from recovery capacities specific to relevant scenarios, differentiated between capital (CET1, total capital ratio, leverage) and liquidity (LCR, NSFR). For example, for CET1, the range is 360 to 450 basis points depending on the scenario (p. 6).
Temporal dynamics of ORC: The example shows the institution can restore its regulatory ratios above thresholds within 12 months, confirming the relevance of selected options and their sequencing (p. 7-8).
Findings: The example demonstrates that the institution can restore its regulatory ratios (CET1, leverage, LCR, NSFR) under severe stress scenarios by mobilizing a set of credible recovery options adjusted to operational constraints (p. 4-7). The chosen scenarios cover differentiated impacts on capital and liquidity, allowing a comprehensive resilience assessment.
Assumptions: The impacts of options are estimated fictitiously and simplistically, with some options assumed to have immaterial impact on certain indicators (e.g., options G and H on capital, option E on liquidity) (p. 5-6). The example also assumes a 12-month horizon for ratio restoration.
Interpretations: The approach illustrates the importance of detailed analysis of option interactions and sequencing to maximize recovery plan effectiveness. Determining an ORC range reflects possible variability across scenarios, enhancing evaluation robustness.
Uncertainties: The example stresses that numerical values are purely illustrative and institutions must adapt methods and assumptions to their specificities. Operational constraints and real macroeconomic developments may alter effective recovery capacity.
The document concludes that ORC determination must be a structured process, integrating rigorous selection of credible recovery options, analysis of constraints and interdependencies, quantification of scenario-specific recovery capacity, and definition of an ORC range differentiated between capital and liquidity. The Institution XYZ example illustrates how this approach can be concretely implemented, while emphasizing the non-prescriptive and adaptable nature of the method. Institutions are encouraged to apply these principles considering their own characteristics, internal practices, and risk management framework to ensure robustness and credibility of their recovery plans in accordance with Directive 2014/59/EU.
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