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Finance Denmark

Finance Denmark appreciates the efforts made by the EBA in reviewing and potentially renewing existing methods and practices related to EBA stress testing. However, we do have several concerns regarding the proposed framework and would strongly recommend maintaining the current framework only making minor adjustments.

We are not convinced about the merit of having two stress tests: a supervisory leg and a bank leg. Communication will be complicated by the fact that banks must be able to explain the differences between the outcome of the supervisory leg and the bank leg. In addition, it causes confusion and many questions from eg investors if two sets of results on capital are disclosed based on among other things different assumptions. Too many different approaches might lead to confusion and mistrust about the results. Finally, the experience of the US stress test CCAR suggests that the market only focuses on the outcome of the supervisory stress test. This will make the supervisory leg de facto the only important one which makes it even harder for banks to support a two-leg approach where influence on the supervisory leg is smaller than today. Furthermore, we expect this to be substantially more burdensome for banks than the current set-up. Banks might have to run 4 stress tests: the supervisory leg, the bank leg, the ICAAP and a national supervisory stress test.

We see the main objective of the EU stress test to provide means for identifying the risks and vulnerabilities of EU banks and the EU banking system. We support the objective stated in the methodological note for the 2020 EU-wide stress test:
The objective of the EU-wide stress test is to provide supervisors, banks and other market participants with a common analytical framework to consistently compare and assess the resilience of EU banks and the EU banking system to shocks, and to challenge the capital position of EU banks. The exercise is based on a common methodology, internally consistent and relevant scenarios, and a set of templates that capture starting point data and stress test results to allow a rigorous assessment of the banks in the sample.

This calls for keeping the current set-up despite its methodological constraints for some risks and the static balance sheet assumption. However, it is our impression that the EBA have gradually adjusted the most problematic restrictions. This is reflected in the last methodological note for the 2020 EU-wide stress test. We have also appreciated the transparent and stable methodology note which e.g. was very helpful regarding the implementation of IFRS 9 methods in the 2018 exercise. In order to make time consistent interference about results, it is in our view preferably to maintain a stable stress testing methodology over time. This point is supported by the fact that various other stress testing exercises are cur-rently in the making. Specifically, we take the coming EBA Pilot Exercise on climate stress testing in consideration. The discussion paper mentions so-called explorative (climate) scenarios as well. We strongly support the development of such stress tests.

However, to reduce burden for both supervisors and banks, a reduction of the number of templates would be appreciated. We would suggest that the geographical breakdown of credit risk is simplified or omitted for smaller banks by the discretion of the national supervisors. In addition, it is important to aim at comparability between banks and level playing field in the EU-wide stress test.

We think it is important to maintain a framework where the EU-wide stress test is a part of a larger toolkit used by the national supervisors in SREP process and for assessment of capital planning which also includes national stress tests and other risk assessment tools. Thus, a clear link should not be established between the result of the EU-wide stress test and P2G. P2G should be the result of national supervisors’ assessment based on many factors and including a dialogue with the individual banks.

We also find it important to maintain the current bottom-up approach which ensures engagement of the banks, incentives to develop own models and a dialogue between supervisors and banks. We do not see the issue of ownership as a big problem. The current set-up works well.
Finance Denmark