This final report presents guidelines on the overall recovery capacity (ORC) in the recovery planning of financial institutions. The ORC is essential for assessing the ability of institutions to restore their financial viability in the event of significant deterioration. Competent authorities must assess the ORC as part of the review of institutions' recovery plans, which requires consistent practices and a…
This document is the final report of the guidelines (GLs) on Overall Recovery Capacity (ORC) in recovery planning, published in 2023 by the European Banking Authority (EBA). It covers financial institutions subject to the obligations of Directive 2014/59/EU, notably credit institutions and investment firms within the European Union, over the period contemporary to 2023. The guide details regulatory requirements, methods for calculating and assessing the ORC, as well as the respective roles of institutions and competent authorities within this framework.
The main topic concerns the harmonized definition and assessment of Overall Recovery Capacity (ORC) in financial institutions' recovery plans, in accordance with Directive 2014/59/EU and Delegated Regulation (EU) 2016/1075. The ORC measures an institution's ability to restore its financial viability under severe macroeconomic and financial stress scenarios. This topic is crucial as it conditions the robustness of recovery plans and the resilience of the European financial system. The main findings reveal a wide diversity of current practices in determining and assessing the ORC, both from institutions and authorities, which undermines comparability and reliability of this indicator. The report concludes on the need for a harmonized framework, presented in these guidelines, which: (i) guides institutions in identifying severe scenarios and credible and feasible recovery measures, (ii) sets precise criteria for ORC calculation, notably a time horizon of 18 months for capital impact and 6 months for liquidity, (iii) frames the assessment by competent authorities, who must adjust the institutional ORC based on quantitative and qualitative analyses, and assign an indicative score (satisfactory, adequate with room for improvement, low). The recommendations concern the mandatory application of these guidelines from 11 January 2024, with rigorous monitoring by authorities, and a proportionate approach according to the size, complexity, and profile of institutions. These measures aim to strengthen coherence, transparency, and effectiveness of recovery plans, thereby contributing to financial stability.
Directive 2014/59/EU requires financial institutions to develop recovery plans to anticipate and manage severe crises. The ORC, summarizing recovery capacity, is a key element of these plans, but its lack of precise definition has led to divergent practices. The EBA observed, via a survey among competent authorities, a lack of homogeneity in the determination and assessment of the ORC, which compromises its value as a 'recoverability' indicator. The objective is therefore to establish a clear and harmonized framework to: (i) guide institutions in selecting severe scenarios and credible and feasible measures, (ii) define a common methodology for ORC calculation, (iii) frame the assessment by authorities to ensure coherent and effective supervision. The scope covers entities subject to Directive 2014/59/EU, with proportionate adaptations for small entities and investment firms. Limitations concern the exclusion of document parts beyond page 38.
Definition and components of the ORC:
- The ORC is based on two fundamental components: a comprehensive list of credible and feasible recovery options, and a set of sufficiently severe macroeconomic and financial stress scenarios (p. 5-6).
- Options must be assessed according to qualitative criteria including past experience, preparedness, financial, operational, legal, reputational impacts, and market constraints (p. 5-6).
- Scenarios must lead, in the absence of action (unmanaged case), to breaches of regulatory capital, leverage, or liquidity requirements, thus ensuring the necessary severity to fully test the options (p. 6, 20).
Methodology for ORC calculation:
- The ORC is calculated as a range between recovery capacities specific to each scenario, expressed in key indicators (CET1, total capital ratio, leverage, LCR, NSFR) (p. 15-19).
- Calculation is done over an 18-month horizon for capital/leverage and 6 months for liquidity, from the options' trigger point (p. 16-17).
- Options must be adjusted to account for constraining factors such as mutual exclusivity, interdependencies, operational capacity, and reputational effects (p. 18).
Role of competent authorities:
- Authorities assess the credibility of options, the severity of scenarios, and the consistency of calculations, and may adjust the institutional ORC downward or confirm it (p. 20-23).
- They assign an indicative score: satisfactory, adequate with room for improvement, or low, which guides supervision and potential corrective measures (p. 21-23).
- Proportionality is applied for small entities and investment firms, with possible partial exemptions (p. 9, 13-14).
Public consultation and adjustments:
- The consultation revealed concerns about scenario severity, deemed too close to resolution, and the burden on small entities (p. 29-33).
- The EBA maintained the required severity, while providing limited flexibility for certain exceptional cases (p. 29-30).
- The application deadline is set for 11 January 2024, without specific extension (p. 31).
Impact and expected benefits:
- Increased harmonization of practices, better comparability, and strengthened supervision (p. 24-28).
- Limited costs for institutions, mainly related to improving existing processes.
- Improved quality and credibility of recovery plans.
Established facts:
- The ORC is a key indicator of institutions' capacity to restore financial viability in severe crisis situations (p. 3).
- Current practices are heterogeneous, both in determination by institutions and assessment by authorities (p. 3-4).
- Scenarios must be sufficiently severe to reach near-default in the absence of action (p. 6, 20).
Assumptions:
- The plausibility of severe scenarios may be difficult to establish for some highly capitalized institutions, justifying limited flexibility (p. 6, 20).
- The 18-month horizon for capital and 6 months for liquidity is appropriate given the nature of recovery options (p. 16-17).
Interpretations:
- Harmonization of methods and assessments will enable better supervision and greater confidence in the ORC as a recoverability measure (p. 24-28).
- Assigning an indicative score facilitates monitoring over time and integration into the SREP process (p. 21-23).
Uncertainties:
- The actual impact of recovery options may vary depending on market conditions and institutional specifics.
- Effective implementation of options remains subject to operational, legal, and reputational constraints sometimes difficult to quantify precisely.
The EBA recommends the mandatory application of the guidelines from 11 January 2024, with a two-month period for competent authorities to notify their compliance (p. 13).
Institutions must:
- Establish an exhaustive list of credible and feasible recovery options, assessed according to precise qualitative criteria (p. 5-6, 15-18).
- Define and use severe stress scenarios leading to breaches of regulatory requirements if no action is taken (p. 6, 20).
- Calculate the ORC as a range between capacities specific to each scenario, respecting the set time horizons (18 months capital, 6 months liquidity) (p. 16-19).
Competent authorities must:
- Assess the credibility of options, severity of scenarios, and consistency of calculations, adjusting the institutional ORC if necessary (p. 20-23).
- Assign an indicative score to the ORC, guiding supervision and detection of deficiencies or areas for improvement (p. 21-23).
- Apply proportionality according to the size, complexity, and profile of institutions, with possible exemptions for investment firms (p. 9, 13-14).
These measures aim to strengthen coherence, transparency, and robustness of recovery plans, contributing to financial stability and more effective supervision.
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