EBA Guidelines on Overall Recovery Capacity (ORC)
On 19 July 2023, the EBA published its guidelines on the overall recovery capacity (ORC) in recovery planning. Of particular importance to credit institutions is the first part of the guidelines, which provides guidance on the setting up of the framework for the determination of the ORC. Amongst others, these guidelines provide a non-exhaustive set of general qualitative elements that institutions should consider in their assessment of the credibility and feasibility of their recovery options. Of equal importance are the scenarios under which the ORC is determined to be sufficiently severe.
The guidelines further specify the steps that institutions are expected to follow during the determination of the ORC, starting from the selection of the recovery options to the adjustment of these recovery options and the calculation of the ‘scenario-specific recovery capacity’, and finally the determination the ORC range. Credit institutions are encouraged to thoroughly assess these guidelines and have adequate processes in place that are conducive for establishing the appropriate ORC.
EBA Review on Sound Remuneration Policies
In 2021, the EBA issued the Guidelines on sound remuneration policies for institutions, and Article 74(3) of Capital Requirements Directive (the ‘CRD’) mandates the EBA to issue a report within two years of the date of publication of these guidelines, based on the information collected by the competent authorities on the application of gender-neutral remuneration policies by credit institutions. The requirement applies on an individual and consolidated level.
The review aims at identifying the state of play regarding the implementation and application of gender-neutral remuneration policies and current best practices within institutions, as well as supervisory activities performed or planned in this context. Data is currently being collected by the competent authorities from a sample of credit institutions. Notwithstanding, all credit institutions are reminded to take into account the requirements of these EBA guidelines, which locally have been transposed within Banking Rule BR/21.
ECB & EBA Stress Tests
The European Central Bank (ECB) and the EBA both published the results of their 2023 stress test exercises. In the case of the ECB, the exercise covered ninety-eight euro-area banks under its direct supervision and assessed the resilience of EU banks over a three-year horizon under both a baseline and an adverse scenario which was characterised by severe negative shocks to economic growth and higher unemployment combined with higher interest rates and credit spreads.
Results showed that three years of severe economic stress would cause the CET1 ratio of ECB supervised banks to drop by 4.8 percentage points to 10.4%. However, capital depletion was lower than in previous stress tests, mainly due to banks being overall in a better shape going into the exercise, with higher-quality assets and stronger profitability.
Regarding the EBA’s exercise, this involved 70 banks from 16 EU countries, covering 75% of the EU banking sector’s assets. As in the case of the ECB, the stress test considered the resilience of EU banks over a three-year horizon. The results showed that EU banks remain resilient under an adverse scenario which combined a severe EU and global recession, and partly reflects a solid capital position at the start of the exercise, with an average fully-loaded CET1 ratio of 15%. Despite combined losses of EUR 496bn, EU banks remain sufficiently capitalised to continue to support the economy also in times of severe stress.
Notwithstanding these results, the current level of macroeconomic uncertainty highlights the importance of remaining vigilant and that both supervisors and credit institutions should be prepared for a possible worsening of economic conditions.
