Guideline 3: Core tests

3.1 In order to comprehensively assess their capacity to effectively deal with cases of institution failure, DGSs should conduct the core tests as prescribed in this guideline.

DGS functions to be covered by core tests

3.2 With a view to the peer review conducted by the EBA, DGSs should perform core tests of the functions legally entrusted to them (set out in Directives 2014/49/EU and 2014/59/EU as transposed in national law) during a DGS stress-testing cycle, and report the results to the EBA. For these purposes, the following DGS functions should be:

• • to compensate depositors in their Member State in the event of a credit institution ’ s insolvency pursuant to Article 11(1) of Directive 2014/49/EU ( ‘ repayment function ’ );
• • to compensate depositors at branches set up by credit institutions authorised in another Member State in the event of a credit institution ’ s insolvency pursuant to Articles 11(1) and 14 of Directive 2014/49/EU ( ‘ repayment with cross-border cooperation function ’ ). DGSs should perform such a core test only in cases where they could be involved in cross-border compensations (as home DGS, as host DGS, or in both roles) pursuant to the abovementioned Article 14 of the DGSD and the applicable national provisions;
• • to finance the resolution of credit institutions in order to preserve continuous access to deposits pursuant to Article 11(2) of Directive 2014/49/EU and Article 109 of Directive 2014/59/EU ( ‘ contribution to resolution function ’ );
• • to use their available financial means for alternative measures in order to prevent the failure of a credit institution, if allowed under the law of the Member State where the DGS is established, pursuant to Article 11(3) of Directive 2014/49/EU ( ‘ failure prevention function ’ ); and
• • to use their available financial means to finance measures to preserve the access of depositors to covered deposits in the context of national insolvency proceedings, if allowed under the law of the Member State where the DGS is established, pursuant to Article 11(6) of Directive 2014/49/EU ( ‘ contribution to insolvency proceedings function ’ ).

3.3 In addition, DGSs should perform and report results of their regular SCV-file tests, which are conducted by the DGS on a regular basis. The regular SCV-file tests are also core tests. The results of the regular SCV-file tests should not be confused or commingled with the SCV-file assessment performed when conducting a core test dedicated to repayment function. In the latter case, the SCV-file assessment should be reported as part of the results of this core test on depositor-compensation.

3.4 If DGSs implemented significant changes to the systems or processes during the stress-testing cycle, DGSs are required to retest certain core tests during the ongoing stress-testing cycle – if retesting within this timeframe is operationally feasible. For example, when a DGS changes its payout method from an agent bank model to electronic transfer, using the DGS’s dedicated IT platform, the payout processes change significantly, and so to ensure resilience, the DGS should retest its repayment function for the indicators described in Guideline 4 that are impacted by the change.

3.5 Depending on the core test, DGSs will use the indicators outlined in Guideline 4. DGSs should report results on the above core tests to the designated authorities and the EBA using the reporting template provided in Annex 1.

3.6 For each of the core tests, DGSs should report to the EBA using the reporting template, up to a maximum of three tests.

3.7 A core test should be performed as end-to-end tests at least once per stress-testing cycle. The other iterations of the core test within the same stress-testing cycle can be conducted by means of series of granular tests which together cover all indicators related to this certain core test.

Repayment function

3.8 DGSs should test their ability to repay depositors as provided for under Article 11(1) of Directive 2014/49/EU. No DGS should abstain from testing the repayment function on the grounds that it has tested the resolution or failure prevention functions described hereinafter or that all affiliated credit institutions would fall under the category described in paragraph 3.27.

3.9 In a repayment scenario, the DGS should simulate the failure of one or several credit institutions in order to assess whether the repayable amount as referred to in Article 7 of Directive 2014/49/EU would be available within the repayment periods prescribed in Article 8 of that Directive.

3.10 Additionally, when testing its resilience to compensate depositors, the DGS should assess the quality of its internal processes to collect and analyse the SCV files and liaise with the relevant credit institution for requesting further/corrective data if needed. These tests related to SCV files should not be confused or commingled with the regular routine SCV-file assessments.

3.11 Over the period of the programme as referred to in Guideline 2, DGSs should apply the indicators described in Guideline 4 that are applicable to the repayment function.

Repayment with cross-border cooperation

3.12 If DGSs fulfil a role as home DGS or host DGS under Article 14 of the DGSD, the DGS should simulate the failure of one or several credit institutions with one or more branches in another Member State.

3.13 DGSs should perform such tests in the roles that are applicable to them: as home DGS, as host DGS or in both roles if applicable. A DGS should test its role as a host DGS if it is in a Member State where there is at least one branch held by a credit institution from another Member State. A DGS should test its role as a home DGS if any of its member institutions holds a branch established in another Member State. A DGS should test both roles if both cases apply. If the national provisions provide that a single DGS is in charge of managing cross-border-compensation actions on behalf of the other DGSs in place in the same Member State, the requirement of conducting home-host-cooperation core tests only applies to the relevant DGS.

3.14 DGSs should consider using, when possible, a risk-based approach when selecting the partner DGS(s) for testing a repayment with cross-border-cooperation scenario. For example, if DGS X is home and host for DGS Y, and only host for DGS Z, DGS X can decide, based on a risk-based approach, to perform the test in the role of home for DGS Y, and in the role of host for DGS Z.

3.15 Over the period of the programme as referred to in Guideline 2, DGSs should apply the indicators specific to the repayment scenario with home-host cooperation, as described in Guideline 4.

3.16 If a DGS is not able to conduct such a core test because no other DGS opted for participating as partner DGS in the context of cross-border-cooperation exercises, this should be specified in the reporting template as ‘ area not tested ’ as provided for in paragraph 5.7.

Contribution to resolution

3.17 Resolution scenarios should assume intervention in relation to an affiliated credit institution that has been placed under resolution in accordance with Directive 2014/59/EU and for which a DGS contribution is required under Article 109 of that Directive.

3.18 DGS stress tests under resolution scenarios can be performed on a stand-alone basis or can be part of a broader resolution test performed under the leadership of resolution authorities, provided that the dedicated set of indicators described in Guideline 4 are tested and applied, respectively.

3.19 Where a DGS stress test under a resolution scenario is performed on a stand-alone basis, the DGS should consult the resolution authority in designing the scenario and running the test, and should request it to participate in the test. Resolution authorities should cooperate with the DGSs and provide them with the necessary information, either directly or through the designated authorities, to design and run stress tests.

3.20 The assumed level of the DGS contribution to resolution financing should be calibrated in consideration of the rules laid down in Articles 108 and 109 of Directive 2014/59/EU and the profile of credit institutions selected for the test involving a resolution scenario.

3.21 In exceptional cases, after consulting the resolution authority, a DGS can abstain from testing resolution scenarios where it conversely determines that no affiliated credit institution falls within the category described in paragraph 3.27. Failure prevention

3.22 Where, pursuant to Article 11(3) of Directive 2014/49/EU, a DGS is allowed to use funds for the prevention of failure of a credit institution, it should perform at least two types of tests:

• • a test simulating a significant deterioration of the financial situation of one or several affiliated credit institutions, including their capital position, asset quality and liquidity position. In this context, the test should assess whether the DGS would be able to prevent failure under the conditions set out in Article 11(3) of Directive 2014/49/EU, including by considering the type of alternative measures that could be implemented and whether the DGS would have the available financial means to provide the necessary support; and
• • a test of the risk-monitoring systems of the DGS. Where distress situations have been recorded in the past, DGSs should determine whether the monitoring systems have been able to detect the imminence of the risk.

3.23 DGS stress tests related to failure prevention should be performed by means of a dedicated set of indicators described in Guideline 4.

Contribution to insolvency proceedings

3.24 Core tests related to the DGS contribution to insolvency proceedings should assume intervention to preserve the access of depositors to covered deposits in the context of national insolvency proceedings pursuant to Article 11(6) of Directive 2014/49/EU.

3.25 DGS stress tests related to contribution to insolvency proceedings should be performed by means of a dedicated set of indicators described in Guideline 4.

Selection of affiliated credit institutions to be included in core tests

3.26 With a view to conducting core tests, a DGS should select one or more of its affiliated credit institutions whose profile is adequate in relation to the planned focus of the test, including the type of functions, the severity and complexity of the scenario, and its geographical reach.

3.27 A DGS should select one or more affiliated credit institutions deemed as relevant with a view to testing contribution to resolution. DGSs should consider selecting one or more affiliated credit institutions in consultation with the resolution authorities.

Severity and complexity of core tests

3.28 DGSs should conduct core tests assuming different levels of severity and complexity. However, the EBA recognises that there is a limit to increasing complexity and severity of tests, and that the stress-test scenarios should remain realistically applicable to the DGSs. Thus, over time DGSs should apply increasingly sophisticated and severe scenarios, while maintaining assessments of the ability to manage baseline scenarios that can be realistically expected. For example, a DGS could initially perform a cross-border cooperation test in the role of home DGS with one other DGS as host DGS. Subsequently, the DGS could increase the complexity of the test by performing another cross-border cooperation test with two or three host DGSs at the same time. DGSs can also increase the level of severity and complexity of the design of the stress-test exercises, for example by choosing a different type of exercise (i.e. a DGS might initially perform a desktop exercise to assess a certain aspect and subsequently, a simulation for assessing that aspect).

3.29 DGSs should consider adding another layer of complexity and stress to one or more of the core tests, by adding to the chosen core test a ‘ special ’ scenario with severe business continuity challenges or external circumstances that would bring extra stress for a DGS to perform its functions, outlined in Guideline 4.

3.30 DGSs should report if and how they have increased the severity and complexity over time of the stress tests performed by the DGS (compared to the previous stress-testing cycle or, where applicable, within the reported stress-testing cycle). A DGS should consider increasing the severity and complexity of a stress test from one stress-testing cycle to another. A DGS should also consider increasing the severity and complexity of two similar stress tests (dedicated to the same legal function) conducted within the same stress-testing cycle.

3.31 In order to ensure historical relevance, DGSs should, over its programme as referred to in Guideline 2, test scenarios assessing the capacity of their systems to deal with intervention cases of a type and intensity experienced in the past, and in particular during the 2008-2012 period.

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1.1 Tagairtí

1.2 Ceanglais aitheanta

1.3 Caighdeáin ghaolmhara

2. Ceanglais aitheanta

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