22 January 2020
The European Banking Authority (EBA) launched today a public consultation on possible future changes to the EU-wide stress test. This discussion paper aims to present the EBA’s vision of the future of the EU-wide stress test and to collect comments and feedback from the different users. The proposal envisages two components owned by supervisors and banks respectively: the supervisory leg and the bank leg. The consultation runs until 30 June 2020.
"The framework we are proposing today aims at making the EU-wide stress test more informative, flexible, and cost-effective. It is the first time we embark on a comprehensive discussion on the future of EU stress testing and we are keen to receive feedback from a wide range of stakeholders."
José Manuel Campa, EBA Chairperson
Since 2011, the EU-wide stress test has contributed to improving banks’ resilience after the financial crisis, has enhanced transparency and has been instrumental in restoring trust in the EU banking sector. The proposed new framework tries to balance the need to preserve comparability and conservatism, while allowing for more flexibility in order to identify banks’ idiosyncratic risks.
The proposal envisages two components owned by supervisors and banks respectively: the supervisory leg and the bank leg. The supervisory leg serves as the starting point for supervisory decisions and would be directly linked to the setting of Pillar 2 Guidance (P2G). The bank leg, on the other hand, allows banks to communicate their own assessment of risks in an adverse scenario.
To ensure a certain level of comparability, both legs would use the same common scenarios and starting points for projecting the stress test results.
The supervisory leg would be based on a common EU methodology, in line with the current constrained bottom-up approach but with the possibility for competent authorities to adjust or replace banks’ estimates based on top-down models or other benchmarking tools.
The methodology for the bank leg would be less prescriptive than today and give banks more discretion in calculating their projections. In practice, banks would use the same common methodology as in the supervisory leg, but would be allowed to relax the methodological constraints to the extent they can explain and disclose the rationale and impact of such deviations.
The standards for the disclosure of the results should remain high. For the bank leg, the proposed disclosure is as granular as it is today, including the overall outcome in terms of capital depletion, main risk drivers, and detailed data on exposures. For the supervisory leg, granularity would be more limited in quantity, but very relevant in terms of supervisory decisions. In particular, the discussion paper seeks views on three possibilities: (i) disclosing P2G, (ii) disclosing ranges of P2G or (iii) disclosing not P2G but the CET1 capital depletion net of any supervisory adjustments so that the results are informative in terms of supervisory expectations regarding capital distribution.
As for the scenario design, the discussion paper is considering costs and benefits of multiple macroeconomic scenarios. In addition, feedback is requested on the feasibility of introducing exploratory scenarios, which would focus on potential risks with very short realisations (e.g. liquidity risk) or coming from longer-term changes in the business environment (environmental, social and political) or in technology.
Comments to this consultation can be sent to the EBA by clicking on the "send your comments" button on the consultation page. Please note that due to the current Covid-19 situation the deadline for the submission of comments is has been extended to 30 June 2020.
A public hearing will take place at the EBA premises on 21 February 2020 from 10:30 to 12:30 CET. All contributions received will be published following the end of the consultation, unless requested otherwise.
The 2020 EU-wide stress test will be conducted according to the current framework and its results will be published in July 2020.
Franca Rosa Congiu