+Guidelines on stress testing (EBA/GL/2018/04)
---+1. Compliance and reporting obligations
------+Status of these guidelines
---------+1. This document contains guidelines issued pursuant to Article 16 of Regulation (EU) No 1093/2010 …
---------+2. Guidelines set out the EBA’s view of appropriate supervisory practices within the European …
------+Reporting requirements
---------+3. In accordance with Article 16(3) of Regulation (EU) No 1093/2010, competent authorities must …
---------+4. Notifications will be published on the EBA website, in line with Article 16(3).
---+2. Subject matter, scope and definitions
------+Subject matter and scope of application
---------+5. These guidelines aim to provide common organisational requirements, methodologies and processes …
---------+6. Within the context of groups, these guidelines also apply to institutions participating in a …
---------+7. The terms ‘institution’ and ‘institution-specific’ shall be deemed to refer to an institution on …
------+Addressees
---------+8. These guidelines are addressed to competent authorities and institutions as defined in point (i) …
------+Definitions/taxonomy
---------+9. Unless otherwise specified, terms used and defined in Regulation (EU) No 575/2013 and in …
---+3. Implementation
------+Date of application
---------+10. These guidelines apply from 01 January 2019.
------+Repeal
---------+11. The following guidelines are repealed with effect from the date of publication of these …
---+4. Institutions’ stress testing
------+4.1 Stress testing programme
---------+12. Institutions should have in place a stress testing programme that should cover at least the …
---------+13. Parent institutions in a Member State and EU parent institutions should also develop a group …
---------+14. The institutions within the scope of prudential consolidation should, when establishing their …
---------+15. Institutions should also include reverse stress testing and reverse stress testing scenarios in …
---------+16. Institutions should ensure that their stress testing programmes are workable and feasible and …
---------+17. Institutions should regularly assess their stress testing programmes to determine their …
---------+18. Institutions should ensure that their quantitative analysis in accordance with the previous …
---------+19. When assessing the stress testing programme, the institution shall consider at least the …
---------+20. The institution’s stress testing programme should be appropriately documented for all types of …
---------+21. The stress testing programme should be challenged across the organisation, for instance by the …
---------+22. Institutions should ensure, both for the initial design and for the assessment of the stress …
------+4.2 Governance aspects of stress testing
---------+23. The management body should approve the stress testing programme of the institution and oversee …
---------+24. Without prejudice to the requirement under Article 91(1) of Directive 2013/36/EU that members …
---------+25. The management body should understand the material aspects of the stress testing programme to …
---------+26. The stress testing programme should be executed in accordance with the relevant internal …
---------+27. Institutions should ensure that all elements of the stress testing programme, including its …
---------+28. Institutions should ensure that the stress testing programme is effectively communicated across …
---------+29. The stress testing programme should be an integral part of an institution’s risk management …
---------+30. The management body should take the outcomes of the stress tests into account, in particular …
---------+31. The outputs of stress tests (quantitative and qualitative) should be used as inputs to the …
---------+32. To be a meaningful part of the risk management system of an institution, stress tests should be …
------+4.3 Data infrastructure
---------+33. Institutions should ensure that the stress testing programme is supported by an adequate data …
---------+34. To ensure that a proper data infrastructure has been put in place, institutions, including …
---------+35. Institutions should ensure that their data infrastructure has the capacity to capture the …
---------+36. Institutions should ensure that the data infrastructure allows for both flexibility and …
---------+37. Institutions should ensure that their data infrastructure is proportionate to their size …
---------+38. Institutions should devote sufficient human, financial and material resources to guarantee the …
---------+39. Institutions should also consider stress testing data infrastructure as part of their overall …
---------+40. Institutions should maintain and keep up-to-date accurate and reliable risk data to conduct …
---------+41. Institutions should ensure that their aggregation of risk data is characterised by accuracy and …
---------+42. Institutions should ensure that data are aggregated on a largely automated basis so as to …
---------+43. Institutions should have the capacity to guarantee the completeness of risk data. For that …
---------+44. Institutions should be able to produce aggregated risk information on a timely basis to meet …
---------+45. Institutions should be able to generate aggregate data to meet a broad range of on-demand …
---------+46. Institutions should ensure that their risk reporting process: a) is completely supported by …
------+4.4 Stress testing scope and coverage
---------+47. Stress tests should take into account all types of material risk having regard to both the on- …
---------+48. Stress tests should capture risks at various levels in an institution. In this regard …
---------+49. Stress tests should take into account changes in correlations between risk types and risk …
---------+50. Institutions should perform stress tests on an individual portfolio basis, covering all risk …
---------+51. Institutions should ensure that they stress test portfolios and business lines or units to …
---------+52. In particular, when considering inter-risk concentrations, institutions should aggregate across …
---------+53. In order to deliver a complete and holistic picture of the institution’s risks, in addition to …
---------+54. It should be taken into account that: a) risks at the institution-wide level may not be well …
---------+55. A group or an institution that is internationally active should also perform stress tests at …
------+4.5 Proportionality
---------+56. In accordance with the principle of proportionality, an institution’s stress testing programme …
---------+57. Institutions should take into account their size and internal organisation, and the nature …
---------+58. For the purpose of the application of the principle of proportionality and in order to ensure …
------+4.6 Stress testing types
---------+59. The specific design, complexity and level of detail of the stress test methodologies should be …
---------+60. Institutions should take into account the stage within the economic cycle when designing stress …
---------+61. Institutions should identify appropriate, meaningful and robust mechanisms for translating risk …
---------+62. The link between stressed risk factors and the risk parameters not only should be based on …
---------+63. Because of the complexity involved in modelling hypothetical and macroeconomic-based risk …
---------+64. Shortcomings of models and mechanisms that link risk factors with losses or increased risk …
---------+65. Institutions should assess possible non-linear interactions between risk factors and stressed …
---------+66. Institutions should conduct sensitivity analyses at the level of individual exposures …
---------+67. Institutions should identify relevant risk factors at various levels of application of …
---------+68. Institutions should define the risk factors identified using different degrees of severity as …
---------+69. Where there are uncertainties about the robustness of the estimated dependency between …
---------+70. Single risk factor analyses should be supplemented by simple multi-risk factor analyses, where …
---------+71. Institutions should maintain a list of the risk factors identified. 4.6.3 Scenario analysis
---------+72. Institutions should ensure that scenario analyses are a core part of their stress testing …
---------+73. The design of the stress test scenarios should not only be based on historical events, but …
---------+74. A range of scenarios should be considered to encompass different events and degrees of severity …
---------+75. Institutions should ensure that their stress test scenarios meet at least the following …
---------+76. Institutions should determine the time horizon of stress testing in accordance with the aim of …
---------+77. Institutions should ensure that: a) stress tests explicitly take into account dynamic …
---------+78. Institutions should make qualitative assessments of second-round or feedback effects of stress …
---------+79. Institutions should ensure that stress testing is based on severe but plausible scenarios and …
---------+80. Institutions should ensure that various degrees of severity are considered for both sensitivity …
---------+81. Institutions should ensure that severity is set taking into account the specific …
---------+82. Institutions should ensure that their scenarios assess absolute and relative changes of risk …
---------+83. For assessing the appropriate degree of severity of scenarios, institutions should also compare …
---------+84. Institutions should perform adequate reverse stress tests as part of the stress testing …
---------+85. Institutions should include scenarios identified through the reverse stress testing to …
---------+86. In carrying out their reverse stress tests, institutions should also consider whether failure …
---------+87. Institutions should use reverse stress testing as a regular risk management tool in order to …
---------+88. As part of their business planning and risk management, institutions should use reverse stress …
---------+89. Institutions should use reverse stress testing in planning and decision-making and to challenge …
---------+90. Where reverse stress testing reveals that an institution’s risk of business model failure is …
---------+91. Institutions with particular business models, e.g. investment firms, should use reverse stress …
---------+92. Institutions using internal models for credit risk, counterparty credit risk and market risk …
---------+93. Institutions should perform qualitative analyses in developing a well-defined narrative of the …
---------+94. Institutions should perform quantitative and more sophisticated analyses, taking into account …
---------+95. Institutions should, where appropriate, use sensitivity analyses as a starting point for …
---------+96. Institutions should use reverse stress testing as a tool to gather insights into scenarios that …
---------+97. Institutions should develop scenarios of severe macroeconomic and financial distress, varying …
---------+98. Because of the different objectives of the two sets of reverse stress tests, the stress tests …
---------+99. Institutions should use reverse stress testing to assist with the development, assessment and …
---------+100. Institutions should use reverse stress testing to identify the risk factors and further …
---------+101. Reverse stress testing should contribute to the recovery plan scenarios by using a dynamic and …
------+4.7 Individual risk areas
---------+102. Institutions should ensure that the stress testing of individual risk is proportional to the …
---------+103. Institutions should take into account, at the individual level, the impact of second-round …
---------+104. Institutions should analyse at least: a) a borrower’s ability to repay their obligations, e.g. …
---------+105. Institutions should ensure that their institution-wide credit risk stress tests cover all …
---------+106. Institutions should endeavour to determine specific risk factors and set out, on a preliminary …
---------+107. Institutions should ensure that credit risk is assessed at various levels of shock scenarios …
---------+108. Institutions should subject risk factors to sensitivity analyses, which in turn should provide …
---------+109. Institutions should apply different time horizons when applying their stress scenarios. The …
---------+110. When stress testing financial collateral values, institutions should identify conditions that …
---------+111. In the design of scenarios, institutions should consider the impact of stress events on other …
---------+112. Institutions should quantify the impact of the scenario in terms of credit losses (i.e. …
---------+113. Institutions should consider, wherever possible, the following relevant parameters: PD, LGD …
---------+114. For the estimation of future losses in stress tests, institutions should, where appropriate …
---------+115. For the computation of EAD, an institution should also consider a credit conversion factor …
---------+116. Institutions should apply, to the extent appropriate, credit risk internal model approaches …
---------+117. When assessing their risk to leveraged counterparties or shadow banking entities, institutions …
---------+118. Institutions should take into account securitisation risks that arise from structured credit …
---------+119. Institutions should ensure that the stress testing of securitised assets addresses the credit …
---------+120. The sensitivity to systemic market effects, affecting, for example, liquidity dry-outs or …
---------+121. Stress tests should address all relevant contractual arrangements, the potential impact of …
---------+122. Scenarios should also consider the default of one or more of the contractual counterparties …
---------+123. If the institution relies on external ratings to assess the risk of securitised products, the …
---------+124. When designing the stress testing approach, institutions should consider the following: a) the …
---------+125. Institutions should take into account market risk, notably risks derived from losses resulting …
---------+126. Institutions should conduct stress tests for their positions in financial instruments in …
---------+127. Institutions should apply a range of severe but plausible scenarios for all positions referred …
---------+128. When calibrating these stress tests, institutions should take into account at least the nature …
---------+129. As instruments and trading strategies change over time, institutions should ensure that their …
---------+130. Institutions should develop an appropriate approach to capturing the underestimation of tail …
---------+131. Institutions should in particular: a) assess the consequences of major market disturbances and …
---------+132. Institutions should be aware that relevant risk parameters related to operational risk may …
---------+133. In order to stress relevant risk parameters, institutions should use the profit and loss (P&L) …
---------+134. As operational losses may induce second-round effects (i.e. reputational risk), in order to …
---------+135. Idiosyncratic risk factors should also be explored and used as inputs for scenario design. …
---------+136. Institutions should consider the interactions of, and individual exposures to, such …
---------+137. Institutions should analyse carefully the possible interaction of operational risk losses with …
---------+138. The analysis of the stress test events should involve expert judgement, to include at least …
---------+139. Institutions should design severe but plausible stress events. Assumptions may differ from …
---------+140. Institutions should build their stress testing programme based on both internal and external …
---------+141. Institutions should take into account that conduct-related risk, as part of legal risk under …
---------+142. In their stress testing, institutions should assess the relevance and significance of the …
---------+143. When measuring conduct-related risk, institutions should consider (a) the uncertainty around …
---------+144. In order to capture the risk that the provisions are insufficient or timely inconsistent …
---------+145. Institutions should collect and analyse quantitative and qualitative information about the …
---------+146. In rare cases where an institution is unable to provide an estimate for an individual material …
---------+147. Stress testing should also, where appropriate, be used to assess extreme losses associated …
---------+148. Institutions should form a view on the unexpected losses that may originate from …
---------+149. Institutions should take into account that liquidity or funding risks arise when an …
---------+150. Institutions should take into account that liquidity or funding risks encompass: a) short- to …
---------+151. Institutions should analyse and measure themselves against risk factors relating to both …
---------+152. Institutions’ analysis of risk factors should take into account, but should not be limited to …
---------+153. Institutions should subject these risk factors to sensitivity analyses which in turn should …
---------+154. Institutions should apply the following three types of stress scenarios: an idiosyncratic …
---------+155. Institutions should design different time horizons in their stress testing: the time horizons …
---------+156. Institutions should combine the stress of the short- to medium-term liquidity risk with a …
---------+157. Institutions should design a set of adverse behavioural assumptions for customers including …
---------+158. In the design of scenarios, institutions should consider the impact of stress events for other …
---------+159. The main methodology used for calculating the magnitude of the impact should be the net cash …
---------+160. Institutions should extend the analysis, if appropriate, to other metrics, such as: a) …
---------+161. When applying the different stress scenarios, institutions should assess and highlight …
---------+162. Liquidity stress test metrics should include, if appropriate and in particular for at least …
---------+163. Institutions should, where appropriate, integrate liquidity stress test in their …
---------+164. This section is without prejudice to the EBA Guidelines on interest rate risk arising from …
---------+165. Stress tests should support and be an integral part of the interest rate risk in the banking …
---------+166. The interest rate scenarios used for stress testing purposes, including for the purposes of …
---------+167. Institutions should ensure that the tests referred to in the previous paragraph are not only …
---------+168. Institutions should consider the following elements: a) the spread risk, which arises from …
---------+169. Institutions should be aware of potential indirect interest rate effects triggering losses …
---------+170. Where less complex financial instruments are employed, institutions should calculate the …
---------+171. Stress testing should be a key tool in the identification of concentration risk, as it allows …
---------+172. In assessing this risk in their stress testing programmes, institutions should take into …
---------+173. In stress testing, especially institution-wide and including group stress testing …
---------+174. Stress tests should take into account changes in the business environment that may occur and …
---------+175. The way in which concentrated exposures perform in response to the same risk factors should be …
---------+176. Institutions should consider the impact on trading books from exposures to a single risk …
---------+177. In order to assess the ex ante level of concentration risk and/or impact of the scenario on …
---------+178. Institutions should consider the potential existence of overlaps between different …
---------+179. Institutions should take into account that foreign exchange lending risk: a) may arise from …
---------+180. In their stress testing programmes, institutions should take into account foreign exchange …
---------+181. Institutions should consider, when designing or implementing their stress test scenarios, that …
---------+182. Institutions should develop stress scenarios by changing different parameters to allow them to …
---------+183. In order to assess potential vulnerability, institutions should be able to demonstrate …
---------+184. When stress testing the foreign exchange lending risk, institutions should take into account …
---------+185. Institutions should take into account possible significant weaknesses that may be built into …
---------+186. While assessing the potential impact of foreign exchange lending on profitability in a certain …
------+4.8 Application of stress testing programmes
---------+187. As part of ICAAP and ILAAP, institutions should ensure that they have enough capital and …
---------+188. Furthermore, by means of stress testing, institutions should evaluate the reliability of their …
---------+189. In addition to the general requirements related to institutions’ stress testing programmes …
---------+190. ICAAP and ILAAP stress tests should be consistent with the risk appetite and overall strategy …
---------+191. Furthermore, in their ICAAP stress test, institutions should assess their ability to stay …
---------+192. When doing solvency stress tests for the purposes of ICAAP, institutions should also consider …
---------+193. Supervisory stress testing conducted pursuant to Article 100 of Directive 2013/36/EU or the …
---------+194. Institutions should identify credible management actions addressing the outputs of stress …
---------+195. Institutions should consider a broad range of management actions (including within the …
---------+196. To assess possible responses to a stressed situation, institutions should identify the …
---------+197. Institutions should explain the qualitative and quantitative impacts of the stress before and …
---------+198. Acceptable management actions will be subject to the guidance and judgement of competent …
---------+199. Anticipated management actions differentiated by scenario and adjusted to the severity of the …
 English - European Union - Financial Industry -

Guidelines on stress testing (EBA/GL/2018/04)

Guidelines on stress testing (EBA/GL/2018/04)

https://www.eba.europa.eu/activities/single-rulebook/regulatory-activities/supervisory-review-and-evaluation-process-srep-and-pillar-2/guidelines-stress-testing – PDF

1. Overview

,
1. Compliance and reporting obligations

1. Compliance and reporting obligations
2. Subject matter, scope and definitions

2. Subject matter, scope and definitions
3. Implementation

3. Implementation
4. Institutions’ stress testing

4. Institutions’ stress testing

1.1 References

1.2 Identified Requirements

1.3 Related Standards

2. Identified Requirements

Requirements

3. Related Standards

Standards
  • EBA - Published by the European Banking Authority at https://www.eba.europa.eu/