Financial Services Advisory

Understanding the importance of Overall Recovery Capacity (ORC) in recovery planning

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European Banking Authority (EBA) published final report on guidelines on Overall Recovery Capacity (ORC) in recovery planning on 19 July 2023, following a consultation paper in December 2022.

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The main change following the consultation is the implementation timeline for capital recovery options is now longer at 18-months (previously 12-months). These guidelines apply from 3 months after the publication date or 19 October 2023.

ORC is a key outcome of recovery planning. ORC is defined as the extent to which a bank could restore its capital and liquidity in exceptional but plausible crisis situations by implementing credible and plausible recovery options. ORC calculations provide management and supervisors with a good indication of a bank’s resilience.

ORC Framework

In the absence of a specific framework, ECB Banking Supervision observed some banks tended to overestimate their ORC and therefore their resilience. EBA’s guidelines define a consistent approach in determining ORC. The guidelines are in two parts:

  1. Providing banks with guidance on setting the ORC;
  2. Supporting competent authority in their assessment of ORC as part of recovery plans.

Banks calculate ‘scenario-specific recovery capacity’ for a range of severe macroeconomic and financial scenarios. For the calculation, banks should add up the quantitative impacts of the selected options under the specific scenario showing how the recovery capacity accumulates over a timeline of 18 months, for the capital position, and 6 months, for the liquidity position. The starting point is the breach of the recovery plan indicators for capital and liquidity.

Banks should consider additional constraining factors, including whether recovery options are mutually exclusive or impact on longer-term liquidity and capital raising opportunities. For example, Banks need to determine whether the implementation of a Recovery Option under a specific scenario impacts feasibility and credible of other Recovery Options under the same specific scenario.

Competent Authority Assessment

Competent authorities assess the scenario severity, and the credibility, feasibility and quantitative impacts of Recovery Options under each scenario. Competent Authorities define an ‘adjusted ORC’ and assign an ORC score, leading to supervisory action depending on the score.

Next Steps

At Grant Thornton, our team of regulatory specialists are well positioned to assist banks with their ORC calculation and benchmarking against these new EBA guidelines and the wider supervisory expectations for Recovery Planning.