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EBA consultation on draft guidelines on stress testing, supervisory stress testing

ESBG underlines good quality of several parts of draft guidelines

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​Published: 18 March 2016

​ESBG response to the EBA consultation on draft guidelines on stress testing 

and supervisory stress testing



​ESBG Transparency Register ID: 8765978796-80


Dear Sir/Madam,

​Thank you for the opportunity to comment on the EBA consultation on draft guidelines on stress testing and supervisory stress testing. We would like to share with you the following reflections:

First of all, ESBG would like to underline the good quality of several parts of the EBA's draft guidelines: (i) the draft puts forward a bold vision of what stress tests can achieve some time in the future, (ii) this vision is holistic and tears down all the silos which so often plague supervisory guidance and bank practices and (iii) the principle of proportionality is well reflected in several parts.

There is, however, one drawback which is related to the construction of this vision on the one hand, and which poses severe problems when the stress tests are evaluated as part of an institution's supervisory review and evaluation process (SREP) on the other hand. The vision of future stress tests builds on (at least) two levels of practice.

The first level is the level of current good practice in reasonably ambitious banks. This first level can be well evaluated in an institution's SREP, and insufficient compliance with the regulation at this level may justifiably lead to capital add-ons in the final SREP stage.

The second level is more aspirational and will require significant efforts in research and development even from the biggest and most ambitious banks. Examples include (but are not limited to) requirements to develop robust backtesting tools for stress tests, to compare reverse stress test scenarios to multivariate historic risk factor distributions, or to use external data to construct or validate economic downturn stress scenarios. Whilst these (and other) requirements may contribute to set up an agenda for future research, it would appear unfair towards all banks to penalise partial compliance or non-compliance with such requirements in an institution's SREP.

As a solution, ESBG suggests splitting the EBA's draft in two parts: the first part containing the level one requirements should be relevant for the SREP immediately. In contrast, a second part with more aspirational aspects could outline requirements which might be enacted at an appropriate time in the future when an adequate practice of implementation in banks has been established.

Apart from this, ESBG would like to emphasise the importance of defining a stable methodology for supervisory stress tests that would allow entities to adequately prepare in advance the resources needed for this kind of tests. Two examples in this respect would be the treatment of provisions and the methodology to calculate the interest margin.

As a consequence, the definition of a stable methodology would allow including supervisory stress testing as one of the recurrent tasks of the entity. Besides, it would simplify the systematic contrasting of the stress test results with the internal stress tests used for the internal capital adequacy assessment process (ICAAP) or recovery planning.

Despite the fact that we pleasantly noted that the principle of proportionality has been integrated in the draft guidelines on several occasions, we sometimes have the impression that there is a large scope of methods in these stress tests and the tasks are relatively extensive and complicated, with large potential of faults. Thus, small banks might have a hard time fulfilling these requirements. The principle of proportionality could be occasionally used to an even greater extent in the guidelines.

In ESBG's opinion, it could also be considered to establish longer and more reasonable timelines for the quality assurance process with the entities for supervisory stress tests. This process ought to entail a qualitative assessment where the inspection teams of the entities be involved, and where they could incorporate details on the assessment of the results given the particular idiosyncrasy of each case.

Moreover, authorities' stress tests and the methods that are used to determine the impact of a baseline and adverse scenarios on available own funds and whether these are sufficient to cover capital requirements ('overall capital requirements' – OCR and 'total SREP capital requirements' – TSCR) should ideally be harmonised in the EU/EEA.

Additionally, we would appreciate further clarification on what the regulator expects on the reverse stress testing – i.e. hurdle rates, etc.

In relation to the section which talks about using the quantitative outcomes of stress tests for capital adequacy assessment purposes, ESBG would like to propose an amended wording for para. 250. The rationale for the proposed change is that stress test results should be assessed in the context of the severity and occurrence probability of the scenario employed. The amended wording could read as follows:

"When, under the assessment referred to in paragraph 243 (b) and (c), it is anticipated that based on the quantitative outcomes of the stress tests, due to the current macro-economic conditions or other reasons, and under consideration of paragraph 245, the institution will not be able to meet its TSCR and/or target ratio in the next twelve months […]"

Finally, in our view, a two-month implementation period is too short for such a comprehensive stress testing programme.

About ESBG  – the European Savings and Retail Banking Group

ESBG brings together savings and retail banks of the European Union and European Economic Area that believe in a common identity for European policies. ESBG members support the development of a single market for Europe that adheres to the principle of subsidiarity, whereby the European Union only acts when individual Member States cannot sufficiently do so. They believe that pluralism and diversity in the European banking sector safeguard the market against shocks that arise from time to time, whether caused by internal or external forces. Members seek to defend the European social and economic model that combines economic growth with high living standards and good working conditions. To these ends, ESBG members come together to agree on and promote common positions on relevant matters of a regulatory or supervisory nature.

ESBG members represent one of the largest European retail banking networks, comprising of approximately one-third of the retail banking market in Europe, with total assets of €6,702 billion, non-bank deposits of €3,485 billion and non-bank loans of €3,719 billion (31 December 2014).

European Savings and Retail Banking Group – aisbl

Rue Marie-Thérèse, 11 ■ B-1000 Brussels ■ Tel: +32 2 211 11 11 ■ Fax: +32 2 211 11 99

Info@wsbi-esbg.org ■ www.esbg.eu



Published by ESBG. March 2016.


Regulation; Supervision; Stress testing; European Supervisory Authorities (EBA-ESMA); European Institutions