Main features of a test or review

The main features of a test or a review should be a timeline , a scope , a time horizon and reference date , a quality review process , a common methodology and, where relevant, a macro-economic scenario and hurdle rates, as well as a timeframe to address the shortfall .

A test or review should have a precise timeline , including a launch date and a deadline for the institutions subject to the test or review to provide their results to the relevant competent authorities. It should also include a deadline for the communication (publication) of the results of the test or review by the relevant competent authority or the coordinator of the exercise. For exercises, the coordinator should be clearly identified and the coordination process with all the competent authorities and the institutions involved should be clearly defined and understood ahead of the performance of the test or review.

A test or review should have a predefined scope . The sample of institutions subject to the test or review should be clearly defined. It should cover a material sample of institutions in terms of risks and assets. An explanation of the macroeconomic and/or prudential reasons for determining the sample should also be provided. This explanation can be based on absolute or relative qualitative figures and support the materiality of the sample defined.

A test or review should have a time horizon and/or reference date . A test or review should be carried out on the basis of financial statements and supervisory figures with reference to a predefined date. The purpose of the time horizon is to establish the length of time over which the scenarios will be applied, i.e. over a specified number of years. The time horizon and the reference date for the test or review should be clearly identified in the test or review’s common methodology and should influence the timeframe required to implement measures. The time horizon and the timeframe required to implement measures may depend on the risk characteristics of the analysed exposures and on whether a test (dynamic and long-term perspective) or review (point in time and short-term approach) is conducted.

A test or review should have a deadline for the competent authorities to conduct their quality review process and assessment and to provide the results of the institutions concerned to the coordinator in an exercise. Banks’ figures, approaches and projections should be subject to thorough plausibility checks in the quality assurance analysis, including a comparison against relevant benchmarks. This may lead to requests for revisions to banks’ figures and projections in the context of the quality assurance process.

A test or review should be supported by a clear and detailed common methodology. Tests should also be supported by one or more macro-economic scenarios . The methodology, without necessarily being a pass/fail test approach, should also include a range of hurdle rates or indicators that represent the quantitative references used to help assess the appropriate supervisory reaction function, including additional capital needs. When the test or review is concluded, institutions should be positioned according to the hurdle(s) rate(s) defined in the test or review methodology. This assessment may identify the need for institutions to fill a capital shortfall depending on different hurdle rates. When a capital shortfall is identified, competent authorities should request institutions to address this shortfall by private means. Institutions should address this shortfall through private capital increases or other measures to be taken by the institution within a specific timeframe , which should be defined in the exercise or pursuant to the criteria indicated in the exercise .