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Stress Tests

Stress Tests

Updated October 2020​


PROPOSED SOLUTIONS AND ACTIONS


ESBG believes the stress test process should be more stable in terms of methodology and its interpretations, as well as the information templates required. Dedicated workshops should be organised by the EBA and the ECB with technical experts earlier in the process to improve the methodology and its alignment with the templates. The legacy of each national industry and the specificities of each business model should not be negated in the methodology or by Joint Supervisory Teams (JSTs) under unilateral adjustment requests, not to disconnect the exercise from reality. It is necessary to respect the foreseen calendars and to grant banks sufficiently comfortable deadlines to answer any requirements that appear during the process. Transparency could also be improved. 

Regarding the future of the EU-wide stress test, we welcome the EBA initiative to revise and re-centre the current framework and hope that any changes will result in increased transparency and simplicity of the overall process. Introducing a two-legs stress test, as described in the EBA recent discussion paper, may however not bring additional benefits and risks reducing some of the advantages of the existing process. The different results of the supervisory and bank legs would in all probability increase costs, complexity and quality assurance requirements. ESBG therefore encourages the EBA to continue future stress tests with only a single-leg. This would allow to focus on improving the existing and already-known processes of the established stress test governance, procedure and methodology.


IDENTIFIED CONCERNS​

The main worries are related to the lack of transparency and stability of the stress test process, in addition to the short time frame provided to banks to answer the numerous data requests. Moreover, specific explanations provided by banks to the EBA and the ECB have not always been taken into account, and the authorities have rather continued to apply a “one-size fits all” approach. As a result, the EU-wide stress test exercise would qualify as purely theoretical, as it does not take into account local particularities to a satisfactory extent. 


WHY POLICYMAKERS SHOULD ACT

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Authorities should continue in their good efforts in improving the European stress testing framework aiming to improve its efficiency, governance, process, stability and significance. A stress test that is stable, well-designed and open to business models’ specificities would, in fact, best contribute to the stability of the financial system in the EU. Any support that goes in this direction would be very welcome and useful.​


BACKGROUND​​

One of the responsibilities of the European Banking Authority (EBA) is to help ensure the orderly functioning and integrity of financial markets and the stability of the financial system in the EU. To this end, the EBA is mandated to monitor and assess market developments as well as to identify trends, potential risks and vulnerabilities stemming from the micro-prudential level.

One of the primary supervisory tools to conduct such an analysis is the EU-wide stress test exercise. The EBA Regulation gives the Authority powers to initiate and coordinate the EU-wide stress tests, in cooperation with the European Systemic Risk Board (ESRB). The aim of such tests is to assess the resilience of financial institutions to adverse market developments, as well as to contribute to the overall assessment of systemic risk in the EU financial system. 

The EBA's EU-wide stress tests are currently conducted in a bottom-up fashion, using consistent methodologies, scenarios and key assumptions developed in cooperation with the ESRB, the European Central Bank (ECB) and the European Commission (‘The Commission’).

 In the context of the COVID-19 crisis and its global spread since February 2020, the EBA has decided on 19 March 2020 to postpone the 2020 EU-wide stress test to 2021 as a measure to alleviate the immediate operational burden for banks at this challenging juncture. The final timeline for the EU-wide stress test will be communicated in due course.

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