ESBG welcomes EBA's greater emphasis on proportionality
ESBG welcomes that the EBA is placing greater emphasis on proportionality in regulation, and hopes that this will pave the way for more proportionality in future regulations. However, more can be done to improve the proposed classifications, increasing granularity and have a paper which better explains how the ideas could be implemented.
We welcome the EBA’s commitment to using, primarily and as far as possible, already existing data from its database of supervisory reporting. However, if more data is required from financial institutions, we urge the EBA to deliver on the promise that these collections are proportionate to the complexity of the underlying requirements itself and to the burden of institutions and supervisors to deliver such data.
We consider the step-by-step approach to be suitable in principle. However, the procedure in step 2 is not clear. In our view, the proposals for the metrics are not yet fully developed. It is not sufficiently clear how on this basis – without concrete benchmarks – the decisions of a political expert can be better supported.
ESBG very much appreciates the inclusion of a classification for co-operative and savings banks. These banks are by nature local, rather small banks with a low-risk profile and a focus on core banking business. We urge the EBA should ensure that the proportionality considerations are also applied to small and non-complex institutions that are part of a consolidated group, particularly credit institutions that are only locally/regionally active and therefore do not have a systemic impact.
We would like to point out that Classification III has clear disadvantages compared to Classifications I and II. Institutions that are to be subject to the strictest regulation are to be delimited by means of a size criterion (€ 30 billion balance sheet total; point 31 lit. d of the EBA discussion paper). A delimitation on the basis of the balance sheet total would contradict the basic idea of a sufficiently differentiated regulation on the basis of the pro-portionality principle.
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The EU Commission’s proposed ‘single-stack’ approach for Basel III finalisation would harm European banks
ESBG also calls for a proportionate implementation of the Basel III framework in the EU banking system to ensure that Europe’s diversified banking sector continues to foster economic growth.
BRUSSELS, 27 October 2021 – The European Savings and Retail Banking Group (ESBG) calls on the European Parliament and the Council of the EU to reconsider the output floor implementation on a ‘single-stack’ approach included in the European Commission’s proposal for the finalisation of the Basel III standards in the EU, announced today.
The ‘single-stack’ approach would mean applying the output floor to EU-specific capital requirements, on top of internationally agreed ones. ESBG calls for the use of the ‘backstop approach’, meaning applying the floor only to internationally agreed capital requirements. The ‘backstop approach’ would help preserve and strengthen the EU’s diverse banking system. Otherwise, the ability of Europe’s diversified banking sector to provide finance to the real economy and foster economic growth could be hampered.
“ESBG and its members believe that the Co-legislators should implement the Basel III framework adapting it to the specificities of the European banking market, where needed. This includes an application of the output floor that does not exceed what is explicitly laid down in the agreement on the finalisation of Basel III”, said Johanna Orth, Chair of ESBG’s Task Force on Basel.
The package of reforms to finalise the Basel III framework is designed for internationally active banks. Therefore, when implemented within the EU regulatory framework the EU special features should be considered, including those which are already enshrined in the banking regulation. In particular, the so-called SME supporting factor should be retained, as it provides the right incentive to stimulate real economic growth.
“The implementation of the Basel standards within the EU regulatory framework should reflect the proportionality principle, taking into consideration the risk nature, scale and complexity of the activities of European credit institutions”, said ESBG Managing Director, Peter Simon.
This would allow financial institutions to carry out their activities under a non-detrimental regulatory framework which strengthens the European banking sector – the backbone of the EU’s ‘real economy’. A disproportionate regulatory weight also would negatively impact banks, which would be overburdened with regulatory requirements that could even push resources away from customer service.
The EU banking sector’s diversity ensures that a full range of services is offered to customers at competitive prices, in particular by banks that focus on SMEs, households and local communities.
In this context, ESBG is looking forward to bringing the voice of its members to the upcoming legislative process. We believe that close cooperation among all stakeholders will be indispensable for the successful implementation of the finalised Basel III standards. We encourage the EU decision-makers to make full use of the discretions envisaged in the Basel III text, including those on operational risk, which will be crucial for continuous and solid credit provisions to the real economy after the implementation phase.
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Banking sector calls for participation in development of EU e-ID Toolbox
BRUSSELS, 2 September 2021 – The European Credit Sector Associations (ECSAs), submitted joint feedback on 30 August to the European Commission’s initiative for an EU digital ID scheme for online transactions across the Member States.
The ECSAs include the European Banking Federation (EBF), the European Savings and Retail Banking Group (ESBG) and the European Association of Co-operative Banks (EACB).
The organisations welcome the Commission’s proposal, announced on 3 June, for a regulation establishing a framework for a European Digital Identity, as well as the high ambitions outlined in the initiative, which represent a positive development in the creation of a future-proof EU single digital market.
A European digital identity will make it possible to offer faster onboarding processes and improve customers’ user experience while ensuring the same level of security as face-to-face onboarding. The ECSAs believe that the proposal will ultimately contribute to facilitating the adoption of digital banking services.
The Commission proposal aims to provide an ecosystem of credentials leveraging a new wallet architecture of several ID solutions, which holds the potential to further increase innovation for the benefit of all European businesses and citizens. The proposed decentralised model fosters personal autonomy and increased personal data protection, giving users control over their identity attributes.
The ECSAs believe the proposal will incentivise the Member States to be more expedient in developing e-ID solutions with a wide scope of usage and potentially much higher adoption rates. It also provides grounds for some attributes to be validated against public sources. This is a welcome development, particularly in processes where a high level of assurance of these attributes is necessary, for example, the KYC process. When acting as relying parties, banks should be aware of the chain of trust in data sharing (including actors involved) and should be able to promptly check the validity of credentials.
Call for banking sector’s involvement in the Toolbox
The ECSAs appreciate the cooperation between the European Institutions, Member States and the private sector. Member States should cooperate in a coordinated manner towards a Common Toolbox. The European digital identity should build on existing (and upcoming) national notified e-ID solutions. The ECSAs believe that the banking sector should also be involved in the development of the Toolbox. Banks can be key partners in drafting a roadmap that ensures successful e-ID adoption given the wide scope of use cases and related implementation costs.
It will be key to establish a common technical architecture that enables the private sector to integrate any digital wallet developed within this regulatory framework without additional technical burden, regardless of where it is issued.
The ECSAs look forward to a Toolbox that is a common, openly available standard that enables the development of multiple, interoperable e-ID solutions and which incentivises private sector schemes to participate.
About the ECSAs e-ID Task Force
The ECSAs e-ID Task Force brings together experts from 36 financial institutions and national banking associations with the goal of expressing a common position for the whole sector on Digital Identity. The Task Force stands ready to further engage on the strategic issue of digital identity with the Commission, the EU co-legislators and a wide range of stakeholders both at European and national level.
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The European Credit Sector Associations’ joint response to the Commission’s digital identity consultation
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Call for proportionality in ECB’s revisions to options and discretions policies
BRUSSELS, 30 August 2021 – The European Savings and Retail Banking Group (ESBG) submitted on 23 August its response to the European Central Bank (ECB) public consultation on updates to its harmonised policies for exercising the options and discretions allowed under EU law when supervising banks.
The ECB is proposing revisions to its policies primarily to account for legislative changes adopted since they were first published in 2016. Most of the revisions pertain to options and discretions in the application of liquidity requirements. The consultation relates to many aspects of supervision, including permissions for banks seeking to reduce their capital, the treatment of certain exposures in the calculation of the leverage ratio as well as some exemptions from the large exposures limit.
Call for proportionality
In the area of consolidation, ESBG considers that the ECB’s requirement for the application to use a consolidation method other than the equity method is disproportionate. Institutions would have to regularly determine the equivalence method (which they would rather avoid) in order to provide the evidence as required by the ECB. Institutions that have already received exemption approval for the old portfolio as of the reporting date of 31 December 2020 will hardly be able to prove the disproportionate effort of applying the equivalence method in the application for newly acquired participations that are immaterial in terms of amount. Hence, the ECB requirement should be deleted or limited to cases where the sum of the relevant book values reaches a size that is relevant for the banking group.
Also in the area of consolidation, under commercial law (National Generally Accepted Accounting Principles – nGAAP), insignificant participations are generally exempted from the consolidation requirement. In the case of larger institutions, these exemptions soon exceed the EUR 10 million mark, up to which non-inclusion would be allowed even without a case-by-case decision. However, the ECB requirements makes it necessary to apply for individual case decisions for a large number of participations with very low book values in each case. In this respect, we believe that the ECB should not generally classify the case-by-case decision under Article 19(2) CRR as an exceptional case, but should consider it as a regular process.
Regarding liquidity waivers, ESBG believes that when one is granted the respective liquidity reporting requirements should also be waived. The systematic denial of waiving individual liquidity reporting requirements would contradict the objective of the waiver itself and would continue to be a reporting burden for European banks.
In addition, we ask the SSM to allow the utilisation of the effective maturity for internal rating-based foundation (IRB-F). Considering the coming changes regarding the use of internal models, we in fact expect the IRB-F portfolio to expand, particularly for short-term intra-bank exposure. Finally, a narrow definition of cash clearing operations via the ECB Guidelines should be rejected
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DORA should not increase operational and financial burden for ESBG members and their clients
BRUSSELS, 9 April 2021 – Banks have been among the first companies to install computers and create large data centres. This has contributed to the efficiency of their role of financing the economic activity and intermediating between savers and borrowers.
As IT architecture has become essential for economic activity, the risk of disruption of this architecture and its consequences for the banks and their clients are of paramount importance. Consider for example the damage done by data breaches, ransomware or service outage of cloud service providers.
The European Savings and Retail Banking Group (ESBG) is aligned with the goal pursued by the Digital Operational Resilience Act (DORA) to create a comprehensive framework for the digital operational resilience of the financial sector in the EU. We welcome the initiative to bring together ICT risks in finance in this legislative proposal that advocates for a level playing field approach. Since the implementation of this framework implies a lot of policy work for the European Supervisory Authorities, we suggest however that the entry into force would be 30 months after the publication of the act.
As for the content of the act, ESBG thinks rules should be adjustable to the different business models in our membership. Smaller financial institutions should be excluded from the framework. We believe that the direct supervision of critical ICT service providers by the ESAs should cover only large, internationally active service providers. Predominantly nationally active critical ICT service providers should be supervised at the national level to avoid incompatibilities with national security laws. We advocate for the creation of a reporting hub at the national level and that the reporting at the EU level is done by the National Competent Authorities. We do not oppose to the creation of an EU hub receiving all reporting but if it is finally set up, it must replace all pre-existing reporting and risks should be properly assessed to ensure the highest levels of cybersecurity.
Finally, the cost of supervising the ICT-providers should not be on the banks or even less on the bank customers’ shoulders. Just as banks rightfully support the cost of financial supervision, ICT providers should bear the cost of their supervision.
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Prudential treatment of software investments
In today’s digital era, the current approach of the EU-Legislator to the capital treatment of software assets is a disadvantage in comparison with non-EU banks and FinTech Companies and must be tackled in order to achieve a level playing field, preserve fair competition and advance technological innovations and digitalisation in the financial (banking) sector. Furthermore, banks can be encouraged to foster investment in digital solutions and/or IT systems only if software is not treated differently than other (e.g. tangible) assets and can be non-deductible.
Additionally, we advocate that the exemption rule for avoiding capital deduction should be optional (opt-out) for certain institutions. For institutions that have hardly any software assets capitalised, the cost of implementing the prudential amortisation approach would be disproportionate to the capital savings. The institutions in question should therefore have the option of continuing to deduct the software assets in full from CET 1.
The EBA provides some relief when it comes to the capital treatment of software, but it is still far too restrictive and inefficient in comparison to the US/Swiss Model. The prudential treatment of software assets in Europe should not penalize innovation. At the same time, banks need flexibility in cases where the benefits do not compensate the cost, Therefore, an option to not apply the RTS would be welcomed by certain institutions. This may lead to situations where implementation of the new approach will not be completely supported and continuation of complete deduction of the software from CET 1 would be preferred instead. If the RTS is too burdensome a possibility to opt out and not apply, it may become important for some financial institutions. Another possibly not very well accepted point is the proposed time period for the prudential amortization which is deemed extremely short.
Identified Concerns
Article 36 (1) (b) CRR 2 states that the decisive criterion for the exception is that the value of software assets is not negatively affected by resolution, insolvency or liquidation. This provision could be interpreted that the exception applies to software assets, where the value does not materially suffer in a crisis. In addition, the Art. 36 (4) CRR 2 mandates EBA to define a threshold below which the software is affected to an extent that it cannot be deducted from the CET 1 Capital. Banks should focus on the turning point from which the software assets would be negatively affected by the resolution, insolvency or liquidation to a degree that the exemption in Art. 36 (1) (b) CRR2 would not be applicable.
We do not see a simplification but rather a complication having another amortization for prudential purposes. In our view, a pragmatic approach is, as stated above, to trust in the work of external auditors and apply the accounting amortization rules for prudential purposes as well.
If regulators want to include a certain margin of conservatism or prudence in the valuation of software assets, an easy-to-implement haircut on top of the accounting amortization would be the most efficient way for implementation.
Why Policymakers Should Act
Therefore, it needs to be ensured that EBA develops clear criteria to specify the materiality of negative effects on the values, which do not cause prudential concerns, and provides comprehensive guidance on how to perform this assessment in a way that is not unnecessarily burdensome and complex.
Furthermore, we would prefer the RTS to enter into force already on the day following its publication in the OJ (instead of twenty days thereafter; see Article 2 of the Draft RTS on p. 28). This would ensure that banks can apply these provisions as early as possible (as intended by the CRR Quick Fix). Alternatively, we propose a (possibly also retroactive) application of the provisions as of 30 September 2020 and therefore we request such a provision to be added to Article 2.
Finally, in light of the short consultation period as well as the CRR Quick Fix, we would like to express the need to prioritize the work on this RTS and faster finalization of the RTS. Otherwise, the process would counter the efforts of EU legislators and wouldn’t allow for fast relief for banks.
Background
As part of the Risk Reduction Measures (RRM) package adopted by the European legislators, the Capital Requirements Regulation (CRR) has been amended and introduced, among other things, an exemption from the deduction of intangible assets from Common Equity Tier 1 (CET1) items for prudently valued software assets, the value of which is not negatively affected by resolution, insolvency or liquidation of the institution. In addition, the EBA was mandated to develop draft RTS to specify how this provision shall be applied.
These EBA draft RTS specify the methodology to be adopted by institutions for the purpose of the prudential treatment of software assets. In particular, these draft RTS introduce a prudential treatment based on their amortisation, which is deemed to strike an appropriate balance between the need to maintain a certain margin of conservatism in the treatment of software assets as intangibles, and their relevance from a business and an economic perspective.
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Banking resolution: SRF
Due to the COVID-19 related context, ESBG calls for a reduction of contributions made to the Single Resolution Fund (SRF) for 2021. The sharing of information regarding the calculation of the contributions should also be urgently revised for the sake of transparency. Banks have swings in their contribution between 10% and 50% and these amounts are not immaterial for them. They need this information in order to do their budgeting in a better way.
More proactive planning of the SRB cycle and realistic timeframes would also lift a huge burden from the shoulders of the financial institutions. Covered deposits’ information and coefficients could be disclosed at an earlier date in order to help banks modelise their SRF contributions in due time. The calculation of target level could also be shared by the SRB in a timelier manner which would help savings and retail banks for preparing their audit trail. Another aspect of the calculation methodology that would deserve more transparency are linked to the parameters associated to the calibration of the bins for individual risk indicators.
Identified Concerns
The raise of total covered deposits in recent years leading to an increase of the SRF contribution amounts is concerning as it diverts parts of banks’ resources from the real economy channel. This trend is expected to continue in 2020 as covered deposit amounts are predicted to go up in the context of COVID-19. The volatility of the covered deposit amounts is therefore concerning for ESBG members as it creates uncertainty to the annual amount to be contributed by banks to the Fund. Current market conditions are additionally putting pressure on savings and retail banks who are facing liquidity constraints thus weighting on their capacity of transforming deposits into loans to the real economy. More than ever, savings and retail banks need to be considered as key players in helping mitigate the impact of the COVID-19 crisis. With many business sectors severely challenged, the demand for business loans and financing is immense, particularly for small and medium enterprises (SMEs). The specificities of the current COVID-19 crisis must push authorities and regulators to respond adequately to the significant pressure put on the financial sector. As much as possible, authorities should re-assess current priorities in the SRF regulatory framework and develop policies that allow financial institutions to direct available resources to the real economy in order to support growth and jobs. Regulatory requirements governing recovery and resolution of banks in distress should be given the necessary flexibility in order to further provide liquidity to the banking sector and contribute to the recovery of the European economy as a whole.
Why Policymakers Should Act
More than ever, savings and retail banks need to be considered as key players in helping mitigate the impact of the COVID-19 crisis. With many business sectors severely challenged, the demand for business loans and financing is immense, particularly for small and medium enterprises (SMEs). The specificities of the current COVID-19 crisis must push authorities and regulators to respond adequately to the significant pressure put on the financial sector. As much as possible, authorities should re-assess current priorities in the SRF regulatory framework and develop policies that allow financial institutions to direct available resources to the real economy in order to support growth and jobs. Regulatory requirements governing recovery and resolution of banks in distress should be given the necessary flexibility in order to further provide liquidity to the banking sector and contribute to the recovery of the European economy as a whole.
Background
The Single Resolution Fund (SRF) was established in 2016 in the context of the Single Resolution Mechanism (SRM) and enacted through an intergovernmental agreement (IGA) on the transfer and mutualisation of contributions to the SRF. The SRF pools contributions which are raised on an annual basis at national level from credit institutions within the 19 participating Member States. The objective of the SRF is to finance the restructuring of failing credit institutions at a minimum cost for taxpayers. In this logic, a precondition for accessing the Fund is the application of a minimum amount of creditors’ bail-in (8% of total liabilities) as laid down in the BRRD and in the SRM. The total amount in the SRF currently stands at €42 billion. The target level of the SRF to be reached by the end of 2023 amounts to 1% of the covered deposits of all banks in participating Member States and is expected to exceed €60 billion.
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Banking resolution: MREL
The principle of proportionality plays a crucial role in prudential regulation for all banks, regardless of their size and complexity.
For banks falling within the resolution regime, MREL requirements should be proportionate to the goal of the BRRD which is to ensure that taxpayers should no longer be liable to bail out troubled institutions. When calibrating MREL, resolution authorities should therefore appropriately take into account a bank’s size, business model, funding model, risk profile, SREP and stress tests results, degree of systemic relevance, the relevant resolution scenario and the preferred resolution strategy.
Correspondingly, small, less-complex institutions should be excluded from the scope of application entirely when liquidation is planned through normal insolvency proceedings (“insolvency institutions”). If the proposed resolution strategy is liquidation, there is no plan to use a bail-in tool, and hence no MREL requirement is needed. This fact should be reflected more clearly in the BRRD. The current approach of restricting the MREL requirements to the loss absorption amount and the exemption from reporting and disclosure obligations causes a high administrative burden, especially for the resolution authorities, and leads to high complexity. Excluding insolvency institutions from the scope of MREL from the outset would be much more proportionate and adequate while at the same time enabling the resolution authority to dedicate more of its time to the resolution plans of institutions failing within the resolution regime. The SRB should also be flexible with the timing of the MREL decisions, letting banks use the period envisaged in the BRRD2 until 2024, thus avoiding the pressure to issue or renew issuances during the current market instability.
Identified concerns
ESBG welcomes the efforts undertaken to make financial institutions resolvable in order to create a more resilient financial system and avoid taxpayer bail-outs. While this obviously demands for strong efforts by both small and larger financial institutions, a certain fine-tuning of requirements would allow to eliminate unnecessary burdens. Currently the calibration of the minimum requirement for own funds and eligible liabilities (MREL) does not sufficiently take into account the specificities of ESBG members as well as current market conditions and certain reporting and disclosure requirements have proven to be challenging and burdensome. Increased expectations on resolvability have also led to additional compliance efforts which must be carefully evaluated and considered.
Why policymakers should act
In the current Covid-19 pandemic context, banks should be considered as an integral part of the solution on the road to improving EU economic conditions. To this end, flexibility in the current recovery and resolution framework should be granted to allow banks to focus their efforts on delivering financial services to the real economy. Recovery rules established in the aftermath of the financial crisis of 2008 need to be fine-tuned to adequately face the specifics of the Covid-19 crisis.
Background
The minimum requirement for own funds and eligible liabilities (MREL) is a key regulatory requirement intended to build a solvency buffer capable of absorbing the losses of a financial institution in case of resolution. It falls within the broader framework of the Single Resolution Mechanism (SRM) which defines the unified resolution procedure for financial institutions within the euro area and the Bank Recovery and Resolution Directive (BRRD) which sets the framework for all banks in the EU. First adopted in spring 2014, the BRRD/SRM has been updated in June 2019 as part of the Risk Reduction Measure (RRM) package. Since it started operating in January 2015 as the resolution authority for participating Member States within the Banking Union (BU), the Single Resolution Board (SRB) has been issuing MREL decisions for all banks falling under its remit based on annual policies on yearly resolution planning cycles.
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Non Performing Loans
ESBG believes that the new measures should not force banks to get rid of their NPLs through “fire-sales”. In particular, we advocate for: (i) Measures to attract a wider investor base to a secondary market for NPLs, (ii) A common legal framework to ensure the right balance between debtor protection, data secrecy and privacy, (iii) The promotion of third-party loan servicers to increase secondary loan market efficiency and (iv) The introduction of an instrument along the lines of the ‘accelerated loan security’ facility with clearly defined processes and rules. Moreover, ESBG believes that the new Accelerated Extrajudicial Collateral Enforcement mechanism (AECE) should not negatively impact the functioning of national systems for collateral enforcement.
Identified Concerns
The introduction of measures to develop secondary markets for NPLs might have the unintended effect to push banks too hard to get rid of their NPLs stock. These deteriorated loans might end up being sold for a price lower than their real economic value (the so-called “fire-sale”), and this would also deprive banks of the opportunity to try to make these loans performing again. Moreover, the Co-legislators would also need to make sure that the introduction of the AECE mechanism doesn’t necessarily affect well-functioning national collateral enforcement systems.
Why Policymakers Should Act
MEPs and the Commission should continue their good work in making the financial sector more stable and safer, but they should also keep in mind economic growth and easing the conditions for lending to the real economy when designing additional legislation on NPLs. Policymakers should also take into account the uncertainty and challenges that have emerged after the COVID-19 outbreak in any debates on NPLs.
Background
In March 2018, the Commission proposed an ambitious and comprehensive package of measures to tackle Non-Performing Loans (NPLs) in Europe, which included:
- A proposal for a Directive on credit servicers, credit purchasers and recovery of collateral (also known as the Directive on NPLs secondary markets);
- A proposal for a Regulation amending Capital Requirements Regulation (CRR) as regards minimum loss coverage for non-performing exposures (also known as the NPLs prudential backstop); and
- A blueprint on the set-up of national asset management companies (AMCs).
The Regulation on the prudential backstop has been published in the Official Journal of the EU on 25 April 2019. On the other hand, also due to the pandemic outbreak in the EU, the European Parliament hasn’t reached an agreement on the Directive on secondary markets as well as on the Accelerated Extrajudicial Collateral Enforcement (AECE) mechanism, which was originally part of the Directive and was at a later stage separated by it. Trialogue negotiations with the Council of the European Union, which has already reached a General Approach both on the Directive on secondary markets and on the AECE mechanism, will start as soon as the European Parliament finalises its position.
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Stress Tests
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
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.
