4.2 Governance aspects of stress testing

The management body should approve⁵ the stress testing programme of the institution and oversee its implementation and performance.

⁵ See also Title II, section 1, of the EBA Guidelines on Internal Governance.

Without prejudice to the requirement under Article 91(1) of Directive 2013/36/EU⁶ that members of the management body must have at all times sufficient knowledge, skills and experience to perform their duties, the institution should ensure that their management body is able to fully understand the impact of stress events on the overall risk profile of the institution.

⁶ See also Title III, section 8, of the Joint ESMA and EBA Guidelines on the assessment of the suitability of members of the management body and key function holders under Directive 2013/36/EU and Directive 2014/65/EU.

The management body should understand the material aspects of the stress testing programme to be able to:

• (a) actively engage in discussions with stress testing committees of the institutions, where applicable, or with senior management or external consultants involved in stress testing;
• (b) challenge key modelling assumptions, the scenario selection and the assumptions underlying the stress tests in general; and
• (c) decide on the necessary management actions and discuss them with the competent authorities.

The stress testing programme should be executed in accordance with the relevant internal policies and procedures of the institution. The management body of the institution should ensure that clear responsibilities and sufficient resources (e.g. skilled human resources and information technology systems) are assigned and allocated for the execution of the programme.

Institutions should ensure that all elements of the stress testing programme, including its assessment, are appropriately documented and regularly updated, where relevant, in the internal policies and procedures.

Institutions should ensure that the stress testing programme is effectively communicated across business lines and managements levels, with a view to raising awareness, improving risk culture and instigating discussions on existing and potential risks as well as on possible management actions.

The stress testing programme should be an integral part of an institution’s risk management framework (including in the context of the internal capacity adequacy assessment process (ICAAP) and internal liquidity adequacy assessment process (ILAAP)). Stress tests should support different business decisions and processes as well as strategic planning, including capital and liquidity planning. The decisions should take into account the shortcomings, limitations and vulnerabilities during stress testing.

The management body should take the outcomes of the stress tests into account, in particular with regard to identified limitations, vulnerabilities and shortcomings detected, when setting the institutions strategy and when making all relevant decisions affecting capital, liquidity, recovery and resolution planning.

The outputs of stress tests (quantitative and qualitative) should be used as inputs to the process of establishing an institution’s risk appetite and limits. Furthermore, they should act as a planning tool to determine the effectiveness of new and existing business strategies and their impact on the use of capital. To enable that, the essential outputs from a stress testing exercise should be implied losses, capital and liquidity requirements, as well as available capital and liquidity.

To be a meaningful part of the risk management system of an institution, stress tests should be undertaken with appropriate frequency. This frequency should be determined having regard to the scope and type of the stress test, the nature, scale, size and complexity of the institution (proportionality principle), portfolio characteristics as well as changes in the macroeconomic environment or the institution’s business activities.