Comments on SREP, IRRB and stress testing
>> See the full ESBG response
BRUSSELS, 2 February 2018 – ESBG responded last Friday to the EBA consultation on the review of its Pillar 2 framework for SREP, IRRBB and Stress Test Guidelines.
Highlights from the response
ESBG responded to the section on consultation on common procedures and methodologies for SREP by saying the amendments proposed by the EBA are going in the right direction, although further alignments and clarifications will be necessary. ESBG also noted that it would appreciate a more explicit explanation on the interaction between supervisory and early intervention taking into account the consistency requirements between the ICAAP/SREP, the Pillar 2 guidance (P2G), the recovery requirements and the early intervention. In ESBG's opinion, the revised guideline, similarly to other existing EBA guidelines, imposes a too wide range of operative tasks to the management body.
It noted that the following provisions of the newly introduced Pillar 2 Capital Guidance need to be further clarified:
Regarding required capital composition of P2G, ESBG believes the EBA does not have a mandate to specify a tightening of the expected Level 1 requirements by means of guidelines.
On disclosure of P2G: ESBG argues it should up to the institution to decide if it publishes it or not given that some institutions may consider this information relevant for their investors. On re-designation of systemic risk add-ons to the systemic risk buffer would impact the maximum distributable amount (MDA) calculation, ESBG would prefer that it be left to the judgement of the supervisory authority to decide whether further MDA restrictions are necessary.
Regarding consultation on the management of IRRBB, ESBG proposes monitoring credit spread risk from non-trading book activities (CSRBB) as a balance sheet risk measure apart from IRRBB, and only related to tradable instruments. Also, the EBA could be more specific when defining interest rate sensitive loan commitments that should be included in the IRRBB analysis. It argues that the EBA should provide a specific technical guidance on how non performing exposures (NPEs) should be treated within the supervisory outlier test in order to obtain comparable results across the industry and that the EBA should clarify the guidelines regarding capital identification, calculation, and allocation as well as governance.
Speaking of proportionality, ESBG believes less complex institutions should be allowed to use simple and standardised stress tests with less frequent calculations and reporting.
ESBG appreciates the focus on proportionality and finds it important for this concept to be included in all aspects of the Guidelines. With regard to stress test scenarios, ESBG is of the opinion that the text could benefit from a clear recommendation to the competent authorities to design and publish such scenarios. It also notes the link between stressed risk factors and the risk parameters: Institutions could benefit from the statistics on risk parameters for a financial industry as whole broken down to individual portfolios. In ESBG's opinion, when assessing the appropriate degree of severity of scenarios, institutions should also compare them with the scenarios outlined in their reverse stress testing, considering specific implications of the reverse stress test design on the scenario plausibility. ESBG also stressed that assessing planned capital requirements based on scenarios with extremely low probability of occurrence should be avoided.
>> See the full ESBG response