41. Competent authorities should assess the merits of a top-down versus bottom-up approach …

Competent authorities should assess the merits of a top-down versus bottom-up approach, selecting the most suitable method based on the specific objectives, the maturity of financial entities in ESG stress testing, and the nature of exposures covered by the assessment, taking into account the following considerations:

• ▪ A top-down approach, where competent authorities centrally calculate the impacts of the stress test scenarios, ensures a certain degree of comparability across financial entities and provides competent authorities with stronger control over the process and methodology, reducing the burden for the industry.
• ▪ A bottom-up approach, where financial entities calculate the impact of the stress test scenarios themselves, offers higher level of granularity, allowing to capture idiosyncratic elements specific to some portfolios, counterparties, and exposures. It also fosters greater 10 involvement in the stress testing process and helps enhance financial entities’ capacity building.

1. Overview

1.1 References

1.2 Identified Requirements

1.3 Related Standards

2. Identified Requirements

3. Related Standards

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