Competent authorities’ assessment of the ORC
Section I. Assessment of the ‘scenario-specific recovery capacity’
To assess the ‘scenario-specific recovery capacity' provided by the institutions under each severe macroeconomic and financial stress, competent authorities should review the overall adequacy of the scenarios put forward by the institutions in accordance with Article 5(6) and Article 7(6) of Directive 2014/59 as specified in the EBA Guidelines on the range of scenarios to be used in recovery plans(17) and in line with Title 4 of these guidelines.
In particular, competent authorities should assess whether scenarios are severe enough with respect to the criteria defined in paragraph 20. In the exceptional case under paragraph 21, competent authorities should assess the detailed explanation provided by the institutions (to still consider such a scenario severe enough) and decide whether the severity of the scenario is sufficient considering, inter alia, the overall risk profile of the institutions. In cases where competent authorities consider that the scenario envisaged by the institutions is not severe enough, they could require institutions, where appropriate, to make adjustments, including the resubmission of the recovery plan as a result of the material deficiency assessment in accordance with Article 6 of Directive 2014/59/EU. Competent authorities should not take into account the institutions’ ‘scenario-specific recovery capacity’ based on such a scenario when assessing the ORC.
Competent authorities should assess the credibility and feasibility, including the timeframe, the impacts and any constraining factors of the recovery options selected by the institutions and should challenge, in the context of the severe macroeconomic and financial stress, the extent to which institutions would be able to restore their viability and financial position.
Competent authorities should review, where appropriate and feasible, the assessment and calculation performed by the institutions covering in particular the following areas:
feasibility/probability that a recovery option would be successfully implemented, including by reviewing the feasibility of the recovery options where these are assumed to be unrealistic or not driven by a proper assessment in line with paragraphs 16 to 18;
the timeframe for the implementation of the recovery options, including by lengthening the expected timeframe for their implementation if the institution’s assessment is considered unrealistic. In cases where the recovery options timeframe would exceed the timeframe as defined in paragraph 24, only the effects observed within the relevant timeframes should be considered for the ORC assessment by the competent authority;
assessment of the quantitative impact of the recovery options, including by adjusting the impact downwards or by applying haircuts to the quantification provided by institutions where the likely impact of the recovery options is not based on realistic and plausible assumptions and quantifications;
additional constraining factors related to the simultaneous or sequential implementation of recovery options, as specified in paragraph 29, including by removing or adjusting the impact of specific options downwards where an interconnection between some of them is detected, giving priority, inter alia, to options with the highest feasibility level and/or with the most material impact in the given implementation period.
Competent authorities should take into consideration, where appropriate and available, peer group analysis in order to facilitate amongst other things:
cross-institutional comparison of the type of recovery options to be implemented under the different scenarios, thereby identifying whether some specific types of options have been missed by an institution;
peer group comparison of the expected financial impact from each type of recovery option under different stressed scenarios;
cross-institutional comparison of the expected time required to implement a recovery option and to realise its benefits;
cross-institutional comparison of the expected impediments and preparatory measures for each type of recovery option.
Section II. Assessment of ORC – ‘adjusted ORC’
Competent authorities should ensure that the ORC is calculated by the institutions as the range between the lowest and the highest ‘scenario-specific recovery capacity’ both in terms of capital (including leverage) and liquidity ‘relevant RP indicators’ in line with the criteria set out in paragraph 31.
Based on the assessment of the institutions’ ‘scenario-specific recovery capacity’, competent authorities should determine the ‘adjusted ORC’ of the institutions as a range both in terms of capital ‘adjusted ORC’ and liquidity ‘adjusted ORC’ and perform an overall quantitative and qualitative assessment of the ORC.
The ‘adjusted ORC’ should reflect the competent authorities’ assessment of the institutions’ ORC having considered and reviewed the relevant elements underlying its determination. Based on the outcome of this assessment, competent authorities’ ‘adjusted ORC’ should be either lower than or equal to the ORC determined by institutions.
ORC score
Competent authorities should assess the ‘adjusted ORC’ specified in accordance with paragraphs 39 and 40, assigning the following levels considering the ‘relevant RP indicators’ thresholds and the related regulatory requirements:
‘satisfactory’ – in cases where the ‘relevant RP indicators’ of the institutions after the inclusion of the ‘adjusted ORC’ are above their thresholds defined in line with the Guidelines on recovery plan indicators;
‘adequate with potential room for improvement’ – in cases where the ‘relevant RP indicators’ of the institutions after the inclusion of the ‘adjusted ORC’ would fail to be above the thresholds defined in line with the Guidelines on recovery plan indicators, but they would still be equal to or higher than institutions’ capital including leverage and liquidity regulatory requirements referred to in paragraph 20 adding all applicable regulatory buffers;
‘weak’ – in cases where the ‘relevant RP indicators’ of the institutions after the inclusion of the ‘adjusted ORC’ would fail to meet the institutions’ capital (including leverage) and liquidity regulatory requirements referred to in paragraph 20 adding all applicable regulatory buffers.
In cases where the ‘adjusted ORC’ would result between different levels under paragraph 41, competent authorities should select the most appropriate classification taking into consideration, in particular, the severity of the scenarios and the number of ‘relevant RP indicators’ positioned at the different levels.
To complement their ORC assessment, competent authorities should take into account general qualitative considerations, not already reflected in the ‘adjusted ORC’, on the ORC framework. This may result in an upward or downward adjustment of the indicative scoring under paragraph 41 by the competent authorities when they consider that it does not fully represent the ORC position of the institutions, taking into account, in particular, the following elements:
the difference between institutions’ ORC determination and the competent authorities ‘adjusted ORC’;
overall evidence or lack of past implementation experience;
the presence or absence of any preparatory measure ahead of the implementation of options;
additional information related to the level of concentration, the timeframe for implementation, the feasibility and credibility of the recovery options as well as the level of stress applied by the institutions;
institutions’ ability with regard to data availability, quality and aggregation as well as institutions’ governance in terms of crisis management preparedness.
‘Weak’ ORC should lead either to the assessment of a material deficiency in the recovery plan in accordance with Article 6 of Directive 2014/59/EU or to the identification of a specific area of improvement related to the ORC in the competent authorities’ assessment of the institutions’ recovery plan.
‘Adequate with potential room for improvement’ ORC may lead to the identification of a specific area of improvement related to the ORC in the competent authorities’ assessment of the institutions’ recovery plan.
When carrying out the assessment of the identification of a material deficiency or a specific area of improvement in the recovery plan related to the ORC according to paragraphs 44 and 45, competent authorities should take into account the following non-exhaustive situations:
whether the institution already operates in severe stressed conditions, including where a capital conservation plan in accordance with Article 142 of Directive 2013/36/EU has been requested;
whether the institution has already improved the ORC compared to previous recovery plans and there is no longer room for ORC potential improvement given the size, business model and risk profile of the institution;
whether the institution’s capital, leverage and/or liquidity position displays sound headroom with respect to the regulatory requirements and therefore the scenarios employed by the institution are extremely severe and thus too penalising with respect to peers.
The classification referred to in paragraphs 41 to 43 should support the assessment of the ORC by competent authorities as a relevant component of their overall recovery plan assessment.