Setting the framework of recovery plan indicators
The framework of recovery plan indicators should be established by institutions and assessed by the competent authority taking into consideration the criteria laid down in these guidelines.
The recovery plan should contain detailed information on the decision-making process with regard to the activation of the recovery plan as an essential element of the governance structure, based on an escalation process using the indicators set out in the relevant framework and in accordance with Article 9(1) of Directive 2014/59/EU.
In defining this framework, institutions should consider that indicator breaches do not automatically activate a specific recovery option but indicate that an escalation process should be started to decide whether to take action or not.
Institutions should include recovery plan indicators of both a quantitative and qualitative nature.
While setting the quantitative recovery plan indicator thresholds, consistently with its overall general risk management framework in accordance with Article 5(4) of Commission Delegated Regulation (EU) 2016/1075, the institution should use progressive metrics (‘traffic light approach’) in order to inform the institution’s management body that such indicator thresholds could potentially be reached.
Categories of recovery plan indicators
Institutions should include in the recovery plan at least the following mandatory categories of recovery plan indicators as further specified in these guidelines:
Institutions should include in the recovery plan the two following categories of recovery plan indicators as further specified in these guidelines, unless they provide satisfactory justifications to the competent authorities as to why such categories are not relevant to the legal structure, risk profile, size and/or complexity of the institution (i.e. a rebuttable presumption):
Institutions should include specific recovery plan indicators included in the list per category provided in Annex II to these guidelines, unless they provide satisfactory justifications to the competent authorities as to why such specific indicators are not relevant to the legal structure, risk profile, size and/or complexity of the institution or they cannot be applied due to characteristics of the market in which the institution operates (i.e. a rebuttable presumption).
When an institution is rebutting the presumption as set out in paragraph 23 for any of the indicators specified in Annex II, where possible it should replace it with another indicator from the same category which is more relevant for this institution. Where replacement is not possible for each indicator from Annex II, institutions should include in their recovery plans at least one indicator from each of the categories set out in paragraph 21.
Institutions should not limit their set of indicators to the minimum list set out in Annex II, and should give consideration to the inclusion of other indicators following the principles and in line with the description of the categories laid down in these guidelines. With this aim, Annex III includes a non-exhaustive list with examples of additional recovery plan indicators broken down by categories.
The framework of recovery plan indicators should:
be adapted to the business model and strategy of an institution and be adequate to its risk profile. It should identify the key vulnerabilities most likely to impact the institution’s financial situation;
be adequate to the legal structure, size and complexity of each institution. In particular, the number of indicators should be sufficient to alert the institution of deteriorating conditions in a variety of areas. At the same time, this number of indicators should be adequately targeted and manageable by institutions;
be aligned with the overall risk management framework and with the existing liquidity or capital contingency plan indicators, and business continuity plan indicators;
allow for regular monitoring and be integrated into the institution’s governance and within the escalation and decision-making procedures; and
include forward-looking indicators.
Requirements for the calibration of recovery plan indicators
For the calibration of the indicator framework the institution should take into account the following:
The overall recovery capacity of available options: institutions with a more limited overall recovery capacity should consider an earlier breach of recovery plan indicators to maximise chances of successful implementation of their more limited recovery options.
The timeframe and complexity of the implementation of recovery options, considering governance arrangements, regulatory approvals required in all relevant jurisdictions and potential operational impediments to execution. Institutions which rely on options that are more complex to execute and are likely to take more time to implement should have indicators calibrated accordingly in a more conservative way, to allow sufficient advance warning.
At which stage of the crisis the recovery option can realistically be used effectively. In considering this aspect, the institution should take account of the fact that for some types of options the full benefits could be difficult to reach later in the stress situation as opposed to early implementation. For example, in the case of the recovery option of ‘raising capital in the market’ an institution should consider if and when this can realistically be achieved. Institutions should acknowledge that it might become more difficult to raise external capital the closer the institution comes to breaching its capital requirements.
The pace of deterioration in a crisis. Institutions should acknowledge that, while the pace of deterioration will ultimately depend on the specific circumstances of the crisis, specific institutions’ profiles, including but not limited to institutions with a less diversified business model as well as other individual circumstances, may result in swifter deterioration of the institution’s financial position and in a shorter timeframe being available for the implementation of recovery options. In this respect, institutions should also consider using indicators showing deterioration over time to detect situations in which a rapid and substantial deterioration of an institution`s financial position (e.g. capital) occurs. Moreover, monitoring the change in a metric should be considered where it is difficult to define a single point in time where escalation is needed.
The institution’s risk management framework (including the ICAAP) and risk appetite framework. An institution should ensure that the calibration of recovery plan indicators is consistent with its risk management and risk appetite framework (e.g. early warning framework, contingency and business continuity plans).
An institution should be able to provide the competent authority with an explanation of how the calibrations of the recovery plan indicators have been determined and to demonstrate that the thresholds would be breached early enough to be effective.
The appropriateness of the calibrations of the recovery plan indicators should be regularly monitored and, pursuant to Article 5(2) of Directive 2014/59/EU, updated at least annually or more frequently where the update, as proposed by the institution, is needed due to a change in the financial and business situation of the institution. Any update in the calibration of recovery plan indicators should be promptly and duly notified, explained and justified to the competent authority. Such an update should be agreed by the competent authorities when making their assessment of the recovery plan.
Competent and resolution authorities could decide to implement temporary relief measures in the case of a systemic crisis with the aim of alleviating the regulatory burdens that could adversely impact the institutions’ ability to continue supporting the real economy. Considering the temporary nature and the specific objective of those supervisory and resolution relief measures, their granting should result in no automatic change to the calibration of recovery plan indicators by the institutions.
Competent authorities may agree to the update of the calibration of the recovery plan indicators in duly justified cases such as the following:
The recalibrated indicators comply with the general requirements for the calibration of recovery plan indicators as outlined under paragraph 27.
Those changes reflect changes to the institution’s business and financial profile and are aligned with the internal risk management and risk appetite framework of the institution.
The recalibration does not go against the objectives of supervisory relief measures.
The capital indicators are at all times calibrated at levels exceeding the relevant amount of own funds required pursuant to Parts Three, Four and Seven of Regulation (EU) No 575/2013, Chapter 2 of Regulation (EU) 2017/2402 and point (a) of Article 104(1) of Directive 2013/36/EU as relevant.
Actions and notifications upon breaching an indicator
For indicator breaches to effectively fulfil their warning potential, in line with internal procedures specified in their recovery plans pursuant to Article 5(3)(a) of Commission Delegated Regulation (EU) 2016/1075, institutions should promptly and in any event:
within one business day of the breach of the recovery plan indicator, alert the institution’s management body by activating the appropriate escalation process in order to ensure that any breach is considered and, where relevant, acted upon; and
at the latest within one additional business day following the internal escalation referred to in (a) above, notify the recovery plan indicator breach to the relevant competent authority.
Where a recovery plan indicator has been breached, the management body of the institution should, also on the basis of Article 9(1) of Directive 2014/59/EU, assess the situation, decide whether recovery actions should be taken and notify its decision promptly to the competent authority.
The decision taken by the institution referred to in the previous paragraph should be based on a reasoned analysis of the circumstances surrounding the breach. Where that decision is for the institution to take action in accordance with the recovery plan, the competent authority should be provided with an action plan based on a list of potential credible and feasible recovery options for use in this stress situation and a time plan to remediate the breach. If no action has been decided, the explanation provided to the competent authority should clearly articulate the reasons why and, where appropriate, demonstrate how the restoration of specific types of indicators and their breaches is possible without the use of recovery measures.
Any action or option taken or considered by the institution following an indicator breach, even if previously not included in the recovery plan, should be deemed relevant for the communication with the competent authority. Indicatively, for that purpose, recovery options should include measures which are extraordinary in nature as well as measures that could also be taken in the course of normal business as referred to in Article 8 of Commission Delegated Regulation (EU) 2016/1075 (e.g. from contingency measures to the more extreme and radical recovery options).
The final decision on the potential activation of the recovery plan remains with the institution and it is not automatically triggered by a breach. After the breach notification, the competent authority should actively engage with the institution.
For the purposes of the previous paragraph, the competent authority should monitor (i) the proper and timely activation by the institution of escalation procedures and (ii) whether discussion on the activation of the plan happens at the right management level of the institution. The competent authority should assess whether the underlying reasoning provided by the institution for its decision to implement or not to implement recovery options is transparent and well reasoned.
Arrangements for monitoring recovery plan indicators
The monitoring of recovery plan indicators by the institution should be set at an adequate frequency and allow for the timely submission of the indicators to the competent authority upon request.
When requested by the competent authority, the institution should be able to provide it with values for its full set of recovery plan indicators (breached or not) at least on a monthly basis, even if the values for the indicators have not changed. The competent authority should consider requesting such information with an increased frequency, in particular in crisis situations or where one or more recovery plan indicators have been breached, having regard to the nature and speed of the crisis (fast or slow moving) and the type of indicator (e.g. liquidity indicators).