Guidelines on stress testing (revised) | European Banking Authority

Guidelines on stress testing (revised) (GL 32)

Repealed

These guidelines will assist institutions in understanding supervisory expectations of appropriate stress testing governance and infrastructure, and also cover the use of stress testing as a risk management tool. They provide high level guidance on how Stress Test could be conducted by institutions and assessed by supervisors, namely concerning desirable features relating to the scope, calibration, frequency, documentation or risks covered.

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EBA publishes peer review on the implementation of the stress testing guidelines

12 November 2013

The European Banking Authority (EBA) published today the peer review on the implementation of the EBA guidelines on stress testing . The aim of the peer review was to assess and compare the effectiveness of the supervisory activities related to the review of credit institutions' own stress testing frameworks across the EU, as well as the implementation of related provisions by competent authorities. The report shows that National Competent Authorities (NCAs) largely comply with the three assessed guidelines (18, 19 and 20).

Key features of the peer review work and main findings

In line with its mandate to assess the degree of convergence to the EBA guidelines, the EBA selected the guidelines on stress testing to perform a peer review analysis given the special emphasis placed on this topic by NCAs over the last couple of years.

The peer review work focused on methods and examples of best practice, and covered (i) stress testing governance structures and their use, (ii) possible methodologies including the appropriate severity of scenarios and potential mitigating measures during stressed conditions, and (iii) the overall impact of risk on institutions.

The following conclusions emerged from the peer review and in particular from on-site visits performed by the EBA:

All NCAs' resource models have benefits. However, irrespective of the model, dedicated stress testing technical experts should be involved.
Stress test instructions at national level are currently spread over various supervisory manuals, hence the need for centralised documents.
NCAs often focus on the (few) largest banks in their respective jurisdictions, and devote far less attention to other banks.
The incorporation of stress testing into the Supervisory Review and Evaluation Process (SREP) and the joint decision process is handled differently across NCAs.
Many of the assessed NCAs carry out substantial work on top-down stress testing, from both a micro- and macro-prudential perspective.
Very few NCAs require reverse stress testing, and when so it is often as part of a recovery and resolution plan.

Best practices

In terms of best practices, the implementation of the EBA Guidelines has resulted in more effective supervisory activities, especially in terms of standard procedures to assess stress testing.
Another example of good practice identified is the comparison between banks with similar characteristics and historical information, which could constitute a central input to the SREP/JRAD (Joint Risk Assessment and Decision) for cross border banking groups.
Finally, the results of the report encourage discussions about the stress test in supervisory colleges. All relevant information should be used in the joint decision process, together with documented processes, principles and methodologies.

Legal basis

Peer reviews are conducted in accordance with the provisions of Article 30 of Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 (‘the EBA Regulation') and the EBA decision establishing the Review Panel.

Press Release

CEBS today publishes its revised Guidelines on stress testing

26 August 2010

The Committee of European Banking Supervisors (CEBS) today publishes the final text of its revised Guidelines on stress testing which takes into the account the results of the earlier public consultation which run from December 2009 to March 2010.

The revised guidelines replace the Guidelines on technical aspects of stress testing under the supervisory review process that were published on 14 December 2006 and complement the principles set out in CEBS's Guidelines on the Application of the Supervisory Review Process under Pillar 2.

The revised guidelines draw on the experience that supervisors have obtained by reviewing institutions' stress tests in recent years, and take account of the revised principles for sound stress testing practices and supervision published by the Basel Committee of Banking Supervision (BCBS)¹.

The guidelines are designed to assist institutions and supervisors in achieving robust, methodologically sound outputs that are effective in identifying risks and their potential mitigants during stressed conditions and their overall impact on an institution.

The revised guidelines are designed to be as practical as possible and aim to identify the relevant "building blocks" in an effective stress testing programme. The topics covered are ranging from stress testing governance structures and their use, to possible methodologies, including choosing the appropriate severity of scenarios, multi-layered approach to stress testing programmes, from simple portfolio-level to comprehensive firm-wide scenario analyses to outputs of stress testing programmes, including the interaction between the outcomes of stress tests and management intervention/mitigating actions.

The revised guidelines are supplemented by a number of annexes that provide examples of stress testing specific risks (market risk, securitisation, credit risk, operational risk, interest rate risk from non-trading activities and concentration risk), which illustrate some practices in relation to stress testing these risk types, but are not exhaustive lists of such practices.

CEBS expects its members to apply the present guidelines by 31 December 2010, meaning that by this date the guidelines should be transposed into national supervisory guidelines and reflected in the national supervisory manuals/handbooks, where applicable, and implemented in supervisory practises.

CEBS also expects institutions to make progress in implementing the guidelines following the transposition and recommendations/requirements of national supervisory authorities, and to put in place implementation programmes aimed at ensuring timely/ compliance with the new guidelines (e.g. gap analysis, implementation plans, etc.).

¹ See http://www.bis.org/publ/bcbs155.htm