EBA organized, on November 27 and 28, a research workshop on approaches, governance, and methodologies with respect to the future of stress tests in the banking sector. The EBA Chair José Manuel Campa opened the workshop by highlighting the importance of approaching long-term discussion on the future of stress tests and explaining the commitment to widely consult different stress test users before making any final decisions. The EBA Chair also summarized the identified shortcomings in EU stress tests in comparison to other jurisdictions and briefly discussed the potential top-down and bottom-up approaches. Additionally, Andrea Enria, Chair of the Supervisory Board of ECB, suggested a way to redesign the stress test by splitting it into three elements—a supervisory view, a bank view, and a macro view.
According to him, redesigning would ensure that the results can still be compared across banks and that the exercise does not consume too many resources. The supervisory view would, by and large, be a more efficient version of the current stress test. That is, it would still be based on a constrained bottom-up approach. The main difference is that because of a shift in focus when publishing the results, the supervisory view requires fewer resources than the current approach. The focus for publication would be on the capital depletion per bank. Compared with the current approach, this would require far less granular quality assurance by supervisors.
The bank view would not only help to make the results more realistic and relevant but it would also help to maintain transparency, which would be more limited in the supervisory view. The bank view would be the new element of the exercise. It would be run in parallel to the supervisory view and would give banks more freedom. They would have to apply the EBA methodology, but would be allowed to relax some of the constraints. Banks could thus better account for their individual risk profile and vulnerabilities. Overall, this would allow them to predict more accurately how the stress scenario would affect their balance sheet.
Finally, the macro view would make it possible to simulate events that are relevant at the macro level. However, the macro view should not provide a third set of stress test results but should rather supplement the supervisory view with a top-down sensitivity analysis. It would help illustrate how the results might change if the central scenario were modified or different methodological assumptions were used. This would support the high-level narrative of the supervisory view. Mr. Enria concluded that the guiding principles for any future changes to the European stress test should be "realism, relevance, cost-efficiency (for both supervisors and the industry), and transparency."
Keywords: Europe, EU, Banking, Stress Testing, Supervisory View, Bank View, Macro View, Bottom-Up Stress Test, Top-Down Stress Test, ECB, EBA
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