Setting the framework of overall recovery capacity (ORC) for institutions
Following the definition of the previous components, institutions should determine the ORC as a range of the ‘scenario-specific recovery capacities’ for all the relevant scenarios of severe macroeconomic and financial stress considered in the recovery plan, where the ‘scenario-specific recovery capacity’ is defined as the sum of the quantitative impacts of each recovery option that would be available and appropriate under each specific scenario, quantified in terms of institutions’ relevant recovery plan indicators referring to capital (including leverage) and liquidity listed in paragraph 26 (‘relevant RP indicators’).
Section I. ORC basic components
List of credible and feasible recovery options
The starting point for the determination of the ORC should be a comprehensive full list of credible and feasible recovery options, each one of them considered independently from the others and without any reference to the recovery plan’s specific scenarios. From this list, institutions should select all the recovery options that could be used under each specific scenario showing their ‘scenario-specific recovery capacity’.
To ensure that the ORC effectively represents the ability of the institutions to restore their financial position following a significant deterioration, only recovery options that are deemed to be credible and feasible by the institutions in accordance with Title II, Chapter I, Section II of Directive 2014/59/EU, in accordance with Articles 8 to 12 of Commission Delegated Regulation 2016/1075 and in line with the general factors set out in paragraph 18 should be considered when determining the ORC.
The general factors for the credibility and feasibility assessment of the recovery options to be considered by the institutions when determining the ORC should take into account the type of option, the specific business profile of the institutions and the ongoing macroeconomic environment in which they operate and should include in particular the following elements:
the expected external impact on the key stakeholders as well as any anticipated impact of the execution of the recovery option on the financial system;
past experience from the implementation of the recovery option by the institution or its peers provided there is available information;
level of preparedness for implementing the recovery option;
assessment of the continuity of operations following the implementation of the recovery option, including all the arrangements to maintain access to financial markets and the functioning of the internal processes;
the expected financial impact on the institution’s relevant capital, liquidity, profitability and risk profiles on the basis of clear and transparent key assumptions ensuring the credibility of the estimation;
the anticipated timeline for the implementation of the recovery option;
presence of any operational, legal, reputational and financial impediments as well as any other impediments to the implementation of the recovery option.
Range of scenarios of severe macroeconomic and financial stress
The other component of the ORC is the ‘range of scenarios of severe macroeconomic and financial stress’. In order to determine the ORC, institutions should calculate their recovery capacity specific for the relevant scenarios envisaged in the recovery plan (i.e. the so-called ‘scenario-specific recovery capacity’).
To calculate the ‘scenario-specific recovery capacity’, institutions should assume that the scenario results in them breaching their total SREP capital or leverage ratio requirement (TSCR or TSLRR) as defined in the EBA guidelines on common procedures and methodologies for the supervisory review and evaluation process (‘SREP guidelines’)(13) or their minimum regulatory liquidity requirements as determined by the most recent SREP assessment.
In the exceptional circumstances where an institution argues that it is not able to draw up a plausible severe scenario that would lead to a breach of the capital or leverage requirements as specified in paragraph 20, the institution should provide a detailed explanation to the competent authorities on why that specific scenario should still be considered severe enough to threaten its failure unless recovery measures were implemented in a timely manner.
Section II. Calculating ‘scenario-specific recovery capacity’
Starting point
Institutions should consider as the starting point for the calculation of the ‘scenario-specific recovery capacity’ the breach of any recovery plan indicator that, according to the recovery plan, would result in a decision by the institution to implement one or more recovery options.
Timeframe
When assessing the expected timeframe for the recovery option as referred to in Article 12(2)(c) of Commission Delegated Regulation (EU) 2016/1075, for the purposes of calculating the ‘scenario-specific recovery capacity’ institutions should have regard to the specific features of the recovery options and the type of events included in the scenario (e.g. system-wide, idiosyncratic, combined).
Institutions should calculate the effects of the implementation of their recovery options, for an impact on their capital (including leverage) position over an 18-month time horizon and for an impact on the liquidity position over a 6-month time horizon, from the starting point determined in accordance with paragraph 22.
For recovery options with a longer timeframe than the ones set out in paragraph 24, only the impact observed within the identified timeframes set out in that paragraph should be included in the calculation of the ‘scenario-specific recovery capacity’.
Representation
Institutions should express their ‘scenario-specific recovery capacity’ at least for the following ‘relevant RP indicators’(14):
Common Equity Tier 1 (CET1) ratio;
total capital ratio;
leverage ratio;
liquidity coverage ratio (LCR);
net stable funding ratio (NSFR).
In cases where the listed indicators were not included by the institutions in their recovery plan indicators framework based on the rebuttable presumption provided by the EBA Guidelines on recovery plan indicators(15), the ‘scenario-specific recovery capacity’ should be expressed in terms of the respective substitute indicators. Institutions should include in their recovery plans the nominal amounts underlying the computation of the relevant indicators (numerator and denominator) to allow competent authorities to properly assess and challenge the reported figures.
Institutions should express their ‘scenario-specific recovery capacity’ by reporting the sum of the impacts of the recovery options as defined in paragraph 15 to determine the extent to which they would be able to recover in that scenario. The impacts should be represented in terms of the ‘relevant RP indicators’ over time, including the relevant time buckets, in line with the timeframe determined in accordance with paragraph 24.
Section III. Determining the ORC
Step 1 – Selection of recovery options
To calculate the ‘scenario-specific recovery capacity’, institutions should select from the list of the recovery options which are credible and feasible in accordance with paragraphs 16 to 18 all the options that would be available and appropriate under that specific scenario. Recovery options with low/limited probability of successful implementation should not be included by institutions when calculating their ‘scenario-specific recovery capacities’.
Step 2 – Adjustment of recovery options: additional constraining factors
When selecting recovery options appropriate to a specific scenario, institutions should take into account in particular the following additional constraining factors related to the simultaneous or sequential implementation of recovery options:
mutual exclusivity – whether some recovery options are mutually exclusive;
interdependencies – whether activating one recovery option could affect the subsequent or simultaneous implementation of another option;
operational capability to implement a multitude of recovery options simultaneously;
increased reputational effects – whether implementing several recovery options in combination could reduce their impact and lead to impediments or relevant reputational effects;
consequences for their business model or profitability when more than one recovery option that alone does not have a significant impact is applied together or sequentially with others (combined consequences).
Step 3 – Calculation of ‘scenario-specific recovery capacity’
When calculating the ‘scenario-specific recovery capacity’, institutions should employ a dynamic balance sheet approach and, therefore, the impacts stemming from recovery options under a specific scenario should consider the effects of the recovery options used previously, if any, under the same scenario. In particular, the effect of a capital issuance should consider the total risk exposure amount (TREA) base at the moment of its implementation under the stress scenario. If recovery options such as risk reduction had been carried out previously under the same scenario, then the TREA base would be more favourable.
Step 4 – Determination of the ORC range
To determine the ORC range, institutions should consider the highest and lowest ‘scenario-specific recovery capacity’ respectively in terms of capital including leverage (capital ORC) and liquidity (liquidity ORC) ‘relevant RP indicators’ using the relevant scenarios for each of these dimensions. In this context, institutions should consider as relevant those scenarios where a depletion in terms of capital including leverage (for capital ORC) and/or liquidity (for liquidity ORC) ‘relevant RP indicators’ has occurred.