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EBA Guidelines on the Minimum List of Qualitative and Quantitative Recovery Plan Indicators

Core Content

The European Banking Authority (EBA) published a Consultation Paper (EBA/CP/2014/28) on 26 September 2014, outlining draft guidelines on the minimum list of qualitative and quantitative recovery plan indicators for credit institutions and investment firms. These guidelines are developed in accordance with Article 9(2) of Directive 2014/59/EU, which requires the EBA to specify the minimum list of indicators for recovery planning.

The guidelines aim to help institutions identify critical points in their financial status where recovery actions should be triggered. These indicators are agreed upon by competent authorities during the assessment of recovery plans and must be regularly monitored by the institutions.

The guidelines are structured into nine titles and include two annexes:

• Annex I outlines the minimum list of categories of recovery plan indicators and specific indicators within each category.
• Annex II provides an additional list of indicators for illustration purposes.

The framework of recovery plan indicators is aligned with the Financial Stability Board (FSB) guidance and includes both qualitative and quantitative indicators, with the latter being calibrated to reflect the institution's specific risks and conditions.

Main Views and Key Information

1. Scope and Applicability

• The guidelines are addressed to competent authorities and institutions that are required to develop recovery plans under Directive 2014/59/EU.
• Institutions and competent authorities should apply the guidelines consistently, except for paragraph 11 of Title II, which can be waived for certain investment firms if the indicators are deemed irrelevant to their legal structure, risk profile, size, or complexity.

2. Framework of Recovery Plan Indicators

• The framework should be tailored to the institution’s business model, strategy, and risk profile.
• It should identify key vulnerabilities that could lead to the need for recovery actions.
• The framework must be adequate to the size and complexity of the institution, with a sufficient number of indicators to monitor various areas effectively.
• It should support timely decision-making and be integrated into the institution’s governance structure and escalation procedures.
• The framework should also include forward-looking indicators to anticipate potential financial deterioration.

3. Types of Indicators

Qualitative and Quantitative Indicators

• Institutions must include both qualitative and quantitative indicators in their recovery plans.
• The inclusion of both types is subject to the questions posed in the consultation.

Minimum List of Categories

• Capital indicators: Measure the institution’s capital adequacy and leverage.

  • Specific indicators: Common Equity Tier 1 ratio, Total Capital ratio, Leverage ratio.

• Liquidity indicators: Monitor the institution’s ability to meet short and long-term funding needs.

  • Specific indicators: Liquidity Coverage Ratio, Short-term wholesale funding ratio, Net outflow of retail and corporate funding, Cost of wholesale funding.

• Profitability indicators: Reflect the institution’s financial performance and potential for losses.

  • Specific indicators: Return on Assets, Return on Equity, Significant losses due to administrative/regulatory fine or adverse court ruling.

• Asset quality indicators: Track the quality and performance of the institution’s assets.

  • Specific indicators: Impaired and past due loans / Total loans, Coverage ratio (loans and debt instruments), Non-performing loans by counterparty sector.

Additional Categories (Subject to Rebuttable Presumption)

• Market-based indicators: Reflect market expectations about the institution’s financial condition.

  • Specific indicators: Rating under review or downgrade, CDS spread, Stock price variations.

• Macroeconomic indicators: Capture signals of economic deterioration in the institution's operating environment.

  • Specific indicators: Geographical macroeconomic indicators, Sectoral macroeconomic indicators.

4. Calibration and Monitoring

• Recovery plan indicators should be calibrated based on institution-specific risks and the time needed to activate recovery measures.
• Institutions should recalibrate indicators at least annually and provide explanations for how thresholds are determined.
• The magnitude and speed of threshold breaches should be considered to ensure the effectiveness of the recovery plan.
• Management information systems should support easy and frequent monitoring of indicators and timely submission to competent authorities when requested.
• Continuous monitoring is required to ensure timely recovery actions in case of significant financial deterioration.

5. Implementation and Compliance

• Competent authorities should transpose these guidelines into their supervisory practices within 6 months of adoption.
• The EBA expects compliance with the guidelines by both competent authorities and financial institutions.
• Institutions should not limit themselves to the minimum list and may include additional indicators if appropriate.

Consultation Process

• The EBA invites comments on the proposals, especially the specific questions listed in Section 5.2.
• Comments should respond directly to the questions, include a rationale, and support views with evidence.
• Comments may be disclosed or treated as confidential, depending on the submission.
• Responses must be submitted by 02.01.2015 via the consultation page, using the form provided and referencing 'EBA/GL/2014/xx'.

Conclusion

These guidelines establish a comprehensive framework for recovery planning, ensuring that institutions are prepared to respond to financial stress. They emphasize the importance of monitoring, calibration, and flexibility in the selection of indicators. Institutions are required to include both qualitative and quantitative indicators, with additional indicators provided for illustration. The EBA encourages consultation and feedback to refine the guidelines further.