We welcome the initiative to revise and recenter the EU-wide Stress Testing framework. We hope that any changes to the framework will result in increased transparency and simplicity of the overall process. The tremendous increase in granularity over the past cycles should be subject to a cost-benefit analysis.
Changing the current framework as described in the discussion paper may not bring additional benefits and risks reducing some of the advantages of the existing process. In particular, banks involvement throughout the process gives incentives to invest in and develop internal risk management frameworks and models. The banks involvement also allows supervisors to better understand the mechanics of banks’ internal models and projections in relation to their business models and risk profiles.

The different results of the two legs, as proposed in the discussion paper, would in all probability cause an increase in overall QA requirements. This would increase the complexity of communication of results and lead to higher resource allocation (both in the banks and with the supervisors). The focus of the exercise would likely shift towards investigation and explanation of differences between the two legs of the calculation. In addition, the increase in complexity may not lead to the desired increase in comparability (analysts and investors will be required to compare and contrast multiple bank legs from across the industry).
The costs for developing such two-leg stress test approach should be considered, especially in view of the current time of crisis. To mitigate costs and increase benefits from future EU-wide stress tests, the EBA should rather consider improvements to the existing and already-known processes of the established stress test governance, procedure and methodology. With a particular focus on improving process efficiency: examples include the starting points for each of the various calculation streams i.e. the pre-population of starting point data with data delivered to either EBA and/or competent authorities within regular reporting process (COREP reporting).
Please consider continuing future stress tests with only a single-leg. The current approach has the benefit that banks are tested against a common methodology and, as stated in the paper, the main benefit of undertaking stress tests in such a coordinated fashion is the production of transparent and comparable outcomes. Moreover cost-efficiency criterion in section 3.1.2 (page 13) of the paper would be achieved using only a single-leg, together with the right balance of the other criteria.

Maintaining a single-leg would be in line with the primary objective of EU macro prudential stress testing to assess capital adequacy and identify risks. This would also allow focus to remain on improving the existing methodology and removing or relaxing constraints that do not have sensible impacts (e.g. treatment of sight deposits methodology, RWA floors, stage 3 recoveries, administrative expense floors etc.).
The regulatory authorities should consider maintaining a single-leg stress test along with the implementation of simplified rules on banks’ communication of results and improvements to the existing methodology by removing or relaxing constraints that do not have sensible impacts. Allowing banks to communicate concerns regarding top-down methodologies and constraints along with supplementary information where the banks deem necessary. If this change were implemented in lieu of a second “bank leg” calculation the exercise would keep the existing advantages of the current regime, allow for cost efficiency and achieve increased transparency to market participants. These changes should lead to more sensible results which are better aligned with the real expectations and to broader acceptance by market participants and the public.

Where feasible a hybrid approach with the use of top-down models to replace some bottom-up elements could be an improvement over the current framework. This includes the implementation of top-down models (e.g. NII, NFCI and Credit Risk).
However, the use and especially the outcome of the models under the applied methodology would need to be discussed and reviewed with the participating banks. Certain aspects of the methodology have proven troublesome in that a one-size approach does not work for all types of participating institutions. It may be necessary to consider multiple versions of the top-down model, tailored in some respects to the different types of participating institutions.
Constraints with respect to P&L should be relaxed to allow for reasonable changes to costs. For example, in the development of the current COVID-19 crisis travel expenses will decline substantially. Another example is RWA floor in the credit risk area, where removal of the starting point floor should ensure that there is no double counting of capital held for defaulted exposures. As defaulted exposures are already accounted for through risk costs in the P&L.

ICAAP processes are relatively heterogeneous across EU banks. Using the internal stress testing processes as the basis for the bank leg will highlight the differences in banks internal practices.
The idea of prescribing a flexible methodology can bring advantages as the banks know the best their business and therefore, can decide when a constraint is beneficial or not to be applied.
The regulatory authorities should consider maintaining a single-leg stress test along with the implementation of simplified rules on banks’ communication of results. Allowing banks to communicate concerns regarding top-down methodologies and constraints along with supplementary information where the banks deem necessary. If this change were implemented in lieu of a second “bank leg” calculation the exercise would keep the existing advantages of the current regime, allow for cost efficiency and achieve increased transparency to market participants.

The regulatory authorities should consider maintaining a single-leg stress test along with the implementation of simplified rules on banks’ communication of results. Allowing banks to communicate concerns regarding top-down methodologies and constraints along with supplementary information where the banks deem necessary. If this change were implemented in lieu of a second “bank leg” calculation the exercise would keep the existing advantages of the current regime, allow for cost efficiency and achieve increased transparency to market participants.

It is important that the bank’s own calculations are taken into account when generating the final supervisory outcome. However, duplicating the entire calculation seems overly resource intensive.
The regulatory authorities should consider maintaining a single-leg stress test along with the implementation of simplified rules on banks’ communication of results. Allowing banks to communicate concerns regarding top-down methodologies and constraints along with supplementary information where the banks deem necessary. If this change were implemented in lieu of a second “bank leg” calculation the exercise would keep the existing advantages of the current regime, allow for cost efficiency and achieve increased transparency to market participants.

Running a full parallel calculation (with relaxed constraints or mixed methodologies) would greatly increase overall workload. Consider instead simplified rules on banks’ communication of results and allow banks to communicate concerns regarding top-down methodologies and constraints along with supplementary information where the banks deem necessary.
If the efforts for submitting/calculating data and for the Q&A sessions will be reduced then a cost reduction could be obtained. On the other hand, as there will be multiple results to consolidate (and update, re-update, duplicate versions) this is likely to counterbalance any effort reduction.
In our view the top-down adjustments by supervisors within the supervisory leg without banks’ consent is a step backwards as banks’ challenging possibilities for the supervisors top-down changes will be limited in the future.
Additional efforts on all sides will be required in order to effectively communicate two legs of results, especially to market participants. These efforts should not be under estimated and need to be considered in any cost-benefit analysis of the change.
In summary we see increasing costs and less benefits from having to perform a 2-leg stress test.

The most unrealistic constraint in previous stress test was the pricing below the -0- floor on retail deposits. In the experience of our institution negative rates for retail depositors have not been feasible. Forcing our intuition to reprice from a non-existent negative deposit rate resulted in excessive degradation of our overall NII. Compared to the ECB calculation, using internal assumptions (for example not full but 50% pass through of the benchmark rate in NII) results in a major lower impact.
Floor on other administrative expenses: banks should be allowed to decrease this position in adverse scenario. Given the static balance sheet approach and the usual GDP decrease in adverse scenario, there can be substantial evidence for lower costs.
Other constraints that should be reconsidered:
• Coverage ratio STAGE1 must be non-decreasing. This is not necessarily true on aggregated (portfolio) level, if there is enough movement between STAGE1 and STAGE2.
• Staging criterion - Increase of 300% in PD must trigger S2 (this causes additional S2 migrations for minor changes in upper rating grades).
• IFRS9 PD/LGD curves – mean reversion application does not reflect accurately behavior of curves across ratings. Alternative could be: 1) Drop mean reversion 2) include it in starting point
• No recoveries from S3 – generates overly pessimistic outcomes
• Total REA values floored at level of starting point. For IRB approach migration to default effect leads to decrease of REA. The effect of deterioration of through the cycle parameters does not offset the migration to default effect, thus REA might be decreasing also under adverse scenarios.
• Constraint from the template: According to ECB guidance for SSM banks following should hold:
o If PDpit(t) > PDreg(t) then PDreg(t+1) > PDreg(t)
o LGDpitNew(t) > LGDreg(t) then LGDreg(t+1) > LGDreg(t)
o In case of improvement of PiT parameters (bottom of economic cycle) this does not necessarily hold.
• Cap on net fee and commission income: banks should be allowed to use their own model without a minimum haircut, if the model has been validated and outcome can be confirmed by back testing.
• Rationale for usage of benchmarks for sovereign portfolio unclear, more transparency here would be appreciated.

For the bank leg the discretion of relaxing or not the methodology should be with the banks if it leads to more plausible results.
The regulatory authorities should consider maintaining a single-leg stress test along with the implementation of simplified rules on banks’ communication of results. Allowing banks to communicate concerns regarding top-down methodologies and constraints along with supplementary information where the banks deem necessary. If this change were implemented in lieu of a second “bank leg” calculation the exercise would keep the existing advantages of the current regime, allow for cost efficiency and achieve increased transparency to market participants.

Significantly different, driven in large part by the use of growth assumptions, absence of supervisory flooring and pass-through constraints, leading to results more aligned with real world developments. Relaxing of other constraints has more limited impact on results but can in certain areas materially effect the effort in calculation.
Growth assumptions in particular require different methodology for calculating projections.
Outcomes also depend to a large extent on the chosen scenario. While the EU-wide stress test considers a macro-economic systemic shock suitable for a wide range of stakeholders; the internal stress test focuses on scenarios tailored to the specificities of the individual bank (e.g. crisis in a certain portfolios, industries or geographies).

Comparability between banks is best assured via the supervisory leg with top-down constraints on methodology and balance sheet development. General guidance is welcome insofar as it assists the banks in determining best practice.

Allowing banks to communicate openly about their results with the publication of additional data and/or calculations would be the most optimal approach in our view. Balancing costs and benefits for the banks.
The regulatory authorities should consider maintaining a single-leg stress test along with the implementation of simplified rules on banks’ communication of results. Allowing banks to communicate concerns regarding top-down methodologies and constraints along with supplementary information where the banks deem necessary. If this change were implemented in lieu of a second “bank leg” calculation the exercise would keep the existing advantages of the current regime, allow for cost efficiency and achieve increased transparency to market participants.
We do not think increase cost-efficiency in point 74 of the discussion paper will result from the proposed changes. There might be a benefit of less communication and QA with the authority however the communication and QA efforts might increase towards other external stakeholders such as rating agencies and analysts. This statement is also confirmed within Box 5 with expected communication challenges to arise from the publication of two different set of results and the high probability of intense discussion between banks and authorities for the supervisory leg results as a major input to setting the P2G level. Furthermore, the last bullet point in Box 5 questions the overall need for calculation of a bank leg with no connection to setting of regulatory requirements such as P2G.

Supervisory QA would seem to have limited benefits in our view; especially as publication of the bank leg and subsequent analyst interest should enforce market discipline.
QA process can be very long and time consuming therefore, reducing the QA sessions for one of the legs would be beneficial.

Though dynamic effects are considered in our internal stress testing program it is not clear to us how any of these could be sensibly implemented in the context of an EU Wide Stress Test without compromising comparability and efficiency.

Granularity of disclosures is too high. Please consider decreasing the granularity; reduction of granularity should be possible.
The current disclosures for EBA stress test deem to sufficient and also acknowledged by all relevant stakeholders next to competent authorities and banks such as analysts, investment banks and rating agencies.

The banks legs will not be directly comparable across the sample. Banks should be allowed maximum flexibility in the communication of the bank leg in a way that is appropriate to their own circumstances. The supervisory leg is best suited for cross-industry transparency and therefore should have a ‘required’ granularity.
As outlined in our answers to other questions we do not support EBA’s suggestion of incorporation of a second bank leg calculation. In case a second leg will be implemented, this introduces the risk that relevant stakeholders might misinterpret the results publication and much more Q&A and explanation work will be needed from both banks and regulators. This will in all probability generate significant efforts in order to get proper reconciliation between the different legs. All involved and interested stakeholders are used to the current and established disclosure procedures. Benefits to an additional leg must be clearly material in order to change an accepted and acknowledged process.
Instead of a second “Bank Leg”, consider simplified rules on banks’ communication of results and allow banks to communicate concerns regarding top-down methodologies and constraints along with supplementary information where the banks deem necessary.

Compressing the banks results to only focus on capital depletion; though market friendly does not do justice to the depth of information used to generate the outcome. However, we do not see any challenges to maintaining the overall comparability given lower granularity of disclosure.

Please refrain from increasing complexity or granularity of the transparency templates. Granularity of disclosures is too high. Please consider decreasing the granularity; reduction of granularity should be possible. In particular with regards to Credit Risk IRB and STD approach (26 of 34 pages).
Capital and P&L publication is ok and similar enough to existing reporting structure. As described in questions 23 and 24, the impact from how P2G is derived from the EBA ST results should be a future part of the disclosure (at least it should be obligatory to provide this information to the banks).

Please refrain from increasing complexity or granularity of the transparency templates. Granularity of disclosures is too high. Please consider decreasing the granularity; reduction of granularity should be possible. The added-value of the current granularity is questionable; a lot of resources both in system and personal needed to populate such data with uncertain benefit.

The banks legs will not be directly comparable across the sample. Banks should be allowed maximum flexibility in the communication of the bank leg in a way that is appropriate to their own circumstances. The supervisory leg best suited for cross-industry transparency and therefore should have a ‘required’ granularity regarding CET1 capital depletion.
See answer to question 15; will probably result in more question marks than in added-value for any involved stakeholders.
Consider simplified rules on banks’ communication of results and allow banks to communicate concerns regarding top-down methodologies and constraints along with supplementary information where the banks deem necessary. This supplementary information could include revised CET1.

Supervisory involvement in the “bank leg” would lead to duplication of efforts. Any deviation of starting points will be enforced via market discipline in the publication (explanations will be required by analysts).
Consider simplified rules on banks’ communication of results and allow banks to communicate concerns regarding top-down methodologies and constraints along with supplementary information where the banks deem necessary.
See answer to question 15.

Explaining deviations from the proscribed methodology will require clear and concise communication by the banks when publishing the “bank leg”. The banks will need to have clear and compelling reasons for deviating from the supervisory methodology. This will also mean that banks are required to comment on the results of the “supervisory leg”.
Overall increase of efforts will depend on the level of granularity in the final publication of the two legs.
The regulatory authorities should consider maintaining a single-leg stress test along with the implementation of simplified rules on banks’ communication of results. Allowing banks to communicate concerns regarding top-down methodologies and constraints along with supplementary information where the banks deem necessary. If this change were implemented in lieu of a second “bank leg” calculation the exercise would keep the existing advantages of the current regime, allow for cost efficiency and achieve increased transparency to market participants.

Explaining deviations from the proscribed methodology will require clear and concise communication by the banks when publishing the “bank leg”. The banks will need to have clear and compelling reasons for deviating from the supervisory methodology. This will also mean that banks are required to comment on the results of the “supervisory leg”.
A primary challenge in this respect is finding the proper balance of transparency and granularity for the disclosures. The level must be appropriate for external stakeholders to interpret the results and enable a comparison between the banks for both legs. Predicting the appropriate level of detail in advance of the exercise is difficult. In any case, the supervisory leg should be the absolute limit on the level of granularity. It does not make sense then to provide more granular information for the bank leg, if this information cannot be compared to the supervisory leg.
Consider simplified rules on banks’ communication of results and allow banks to communicate concerns regarding top-down methodologies and constraints along with supplementary information where the banks deem necessary at a level of detail left to the banks’ discretion.

We support disclosing the final P2G as outlined in option (i), increased transparency of the final P2G will help foster market discipline (see also question 24). Applying of option (ii) and (iii) could lead to potential misinterpretation by market participants and investors.
We fully support the increasing relevance of information by providing a link between stress test results and outcomes from supervisory actions such as setting the P2G.

We are not aware of any drawbacks and support publishing of banks’ final P2G in order to further support market discipline. It will further improve the analysis process for the minimum requirements of individual banks.
Considering that, according to CRR2, significant institutions will be required to disclose P2R in the future the P2G disclosure would support the transition to greater transparency.

Communication of management actions on the capital position are rather critical as they might be perceived as credit-negative by analysts and rating agencies. Especially if such actions do not fully reflect external stakeholders’ expectations. Public communication of such actions should be done on a voluntary, case-by-case basis.
Consider simplified rules on banks’ communication of results and allow banks to communicate potential management actions and future dividend capacity. This information should be structured along with supplementary information at the bank’s discretion.

The proposed framework resolves some of the issues with the old framework while creating some new challenges. In particular, the ‘bank leg’ as described will impose undue burdens on existing resources across the banking industry, without commensurate benefits for the participants.
As outlined in our answers to other questions, we do not see benefits for certain criteria with the proposed framework (e.g. cost-efficiency).
For the ‘bank leg’, rather consider simplified rules on banks’ communication of results and allow banks to communicate concerns regarding top-down methodologies and constraints along with supplementary information where the banks deem necessary.

We see limited benefits and many costs when implementing two adverse scenarios. Performing two adverse stress test calculations would lead to material increase in efforts both for the banks and for supervisors during the QA process. Changing to two scenarios would also increase the complexity of communication to explain the results towards external stakeholders.
In addition, having two adverse scenarios will still not be sufficient to fully cover the risk profiles of all the EU banks due their heterogeneity of business models, clients and geographies. If one looks at the current Covid-19 crisis it is visible that different countries and banks residing in these countries are being impacted quite differently, meaning there will be never one or two perfect scenarios which will be equally severe for the whole sample of EU banks.
Single well calibrated scenarios can fulfill the purposes of two separated scenarios, therefore we would prefer to keep one scenario only.

Two asymmetric adverse scenarios, will almost certainly, lead to a significant increase in the complexity of the exercise. Because of this, in our view, this option yields less benefit than one well calibrated single scenario.
See in addition also answers to question 28.

We think there is a higher value here compared to introduction of additional scenario.
Nevertheless, the benefits of a sensitivity analysis for the EU-wide stress test would seem to be limited benefit and will engender higher costs both for calculation and communication/explanation to market participants. Sensitivity analysis are already a regular part of the overall ICAAP and the budgeting and planning process of a bank and such sensitivity analysis are then reviewed within the regular SREP process.

Exploratory scenarios will increase costs and complexity of the overall stress test exercise. We rather suggest to stick to the established processes and focus on separate single stress test exercises.
Exploratory scenarios introduce useful insights in the banks risk management practice, and therefore might be used as a valuable tool for the internal stress test exercises. Nevertheless, considering specific individual features of participating banks, appropriate calibration of such a scenario for a wide sample of banks is likely to not be technically feasible. Unfortunately, exploratory scenarios are likely to increase costs and complexity of the overall stress test exercise without clear benefits should they be calibrated based on “one suits for all” principle.