With European Banking Authority’s (EBA) final Guidelines on the determination and assessment of the overall recovery capacity (ORC) in recovery planning coming into force on 27 October 2023, this blog builds on our previous article published when the guidelines were still under consultation.
As part of developing firms’ further thinking and work around enhancing their overall recovery capacity, the present blog reflects emerging good practice and key implementation considerations.
Firms now need to develop a more detailed and credible assessment of their recovery capacity, ensuring a more realistic picture of what could be achieved in a severe stress. This would entail, for instance, performing an accurate ORC calculation, assessing market-appetite, considering additional recovery options and addressing any capacity insufficiencies.
The Guidelines give the authorities a much more prominent role in evaluating the overall ORC and determining the ORC score which could also have significant implications for firms’ capital and liquidity requirements.
Ultimately, the supervisory authority will likely provide more challenge to a number of the key judgements within the recovery planning, by reviewing banks’ self-assessed recovery capacity, grading them, and where necessary, adjusting the score for ORC to avoid overestimations of financial resilience. Essentially, the new approach seeks to standardize recovery capacity assessment across firms, and regulators but may make judgements in areas like operational capabilities and timeframes, potentially through peer comparisons.
In response to the new requirements, our previous blog provided more detail on the purpose and technicalities from the regulatory perspective. As a summary, the diagram below sets out an outline of the approach and methodology as per the Guidelines:
A potential consideration for financial institutions with insufficient ORC is that it may result in a need to increase financial BAU requirements.
1. First, it is important for banks to develop a robust method for calculating their overall recovery capacity, as posed by the diagram above. While the EBA suggested methodology comprises a good validation approach, firms could question whether this is the appropriate one to calculate their ORC based on their distinctive nuances.
2. In ensuring that the severity of scenarios reflect the challenges and risks brought by an unprecedented crisis, firms could consider further indicators and actions when developing a fully-fledged approach on ORC, based on lessons learnt from recent events.
3. Solve the executability challenge:
Another important consideration is the removal of impediments and increasing capacity as regards the executability of the identified recovery options. Firms are encouraged to ensure they have the bandwidth to actually implement these actions, especially when the entire market is under pressure. By reducing operational capacity concerns, overall recovery capacity can be calculated more accurately, also demonstrating to the regulators that the executability of options is feasible.
Firms are also encouraged to include time constraints considerations in their ORC assessments so as to reflect any changes in capabilities and prove workable even in fast-burn situations.
Additional operational considerations could include the cost of executing the options, given the expected increased costs of specialist support, retaining key staff and the impact which this may have on navigating through recovery.
4. Consider external support:
Other support from outside the organisation could be brought in to mitigate the above challenges, and validate steps and executability based on how recovery would work practically.
5. Firms could also consider running ‘walkthroughs’ to help identify bottlenecks and enhance confidence in existing options or identify new options. Through these exercises, firms can adjust their strategy and approach using an existing scenario and test the decision-making and capabilities in their recovery capacity, while recognising and discussing impediments which could lead to identifying further actions.
6. An additional consideration may include ensuring alignment between recovery and resolution planning and demonstration of sufficient capabilities. ORC could be utilised as a basis for supporting resolution execution beyond recovery. For example, those recovery actions not completed during recovery may continue during resolution or post-resolution restructuring. This approach could enhance the understanding of the entire capacity that could be deployed during any stressful period, surpassing the minimum needed to recover from a hypothetical recovery plan stress scenario.
In terms of implementation, the expectation is that all new recovery plans post-implementation date (i.e. 27 of October 2023) should contain overall recovery capacity assessments and have regard to the finalised guidelines. This updated approach of determining the ORC should ultimately be helpful for both firms and Boards in successfully navigating out of recovery and ensuring that what remains is a viable business.