Title II – Requirements regarding scenarios

The range of scenarios should include at least three scenarios to ensure coverage of a system-wide event, an idiosyncratic event and a combination of system-wide and idiosyncratic events.

Each scenario should be designed to meet each of the following requirements:

• a. the scenario should be based on events that are most relevant to the institution or group concerned, taking into account, among other relevant factors, its business and funding model, its activities and structure, its size or its interconnectedness to other institutions or to the financial system in general, and, in particular, any identified vulnerabilities or weaknesses of the institution or group;
• b. the events foreseen in the scenario would threaten to cause the failure of the institution or group, unless recovery measures were implemented in a timely manner; and
• c. the scenario should be based on events that are exceptional but plausible.

Each scenario should include, where relevant, an assessment of the impact of the events on at least each of the following aspects of the institution or group:

• a. available capital;
• b. available liquidity;
• c. risk profile;
• d. profitability;
• e. operations, including payment and settlement operations;
• f. reputation.

Reverse stress testing should be considered as a starting point for developing scenarios that should be only ‘near-default’; i.e. they would lead to an institution’s or a group’s business model becoming non-viable unless the recovery actions were successfully implemented.

Range of scenarios of financial distress

Taking into account the principle of proportionality, the number of scenarios should be commensurate, in particular, with the nature of the business of the institution or group, its size, its interconnectedness to other institutions and to the financial system in general and its funding models.

At least one scenario should be included for each of the following types of events:

• a. a ‘system-wide event’, which means an event that risks having serious negative consequences for the financial system or the real economy;
• b. an ‘idiosyncratic event’, which means an event that risks having serious negative consequences for a single institution, a single group or an institution within a group; and
• c. a combination of system-wide and idiosyncratic events which occur simultaneously and interactively.

Global systemically important institutions (G-SIIs) and other systemically important institutions (O-SIIs) identified pursuant to Article 131 of the CRD⁴ should include at least more than three scenarios.

⁴ Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p.338).

The range of scenarios should include both slow-moving and fast-moving adverse events.

Both the system-wide and idiosyncratic events should relate to events that are the most relevant to the institution or group as described in paragraph 9(a). The scenarios should therefore be based on different events to those specified in paragraphs 17 and 18 where the latter are less relevant for the institution or group as indicated in paragraph 9(a).

System-wide events

In designing scenarios based on system-wide events the relevance of at least the following system-wide events should be taken into account:

• a. the failure of significant counterparties affecting financial stability;
• b. a decrease in liquidity available in the interbank lending market;
• c. increased country risk and generalised capital outflow from a significant country of operation of the institution or the group;
• d. adverse movements in the price of assets in one or several markets;
• e. a macroeconomic downturn.

Idiosyncratic events

In designing scenarios based on idiosyncratic events the relevance of at least the following idiosyncratic events should be taken into account:

• a. the failure of significant counterparties;
• b. damage to the institution’s or group’s reputation;
• c. a severe outflow of liquidity;
• d. adverse movements in the prices of assets to which the institution or group is predominantly exposed;
• e. severe credit losses;
• f. a severe operational risk loss.