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    EBA Consults on the Future of Stress Test Framework for Banks in EU

    January 22, 2020

    EBA launched a public consultation on the possible future changes to the EU-wide stress test. Among other factors, feedback is requested on the feasibility of introducing exploratory scenarios, which would focus on potential risks with very short realizations (for example, liquidity risk) or coming from longer-term changes in the business environment (environmental, social, and political) or in technology. The consultation runs until April 30, 2020. The new proposed framework would be introduced in the 2022 EU-wide stress test at the earliest. However, the 2020 EU-wide stress test will be conducted according to the current framework and its results will be published in July 2020.

    The proposal envisages two components owned by supervisors and banks: the supervisory leg and the bank leg. The supervisory leg serves as the starting point for supervisory decisions and would be directly linked to the setting of Pillar 2 Guidance. To ensure a certain level of comparability, both legs would use the same common scenarios and starting points for projecting the stress test results. The supervisory leg would be based on a common EU methodology, in line with the current constrained bottom-up approach but with the possibility for competent authorities to adjust or replace the estimates of banks based on top-down models or other benchmarking tools.

    The bank leg, on the other hand, allows banks to communicate their own assessment of risks in an adverse scenario. The methodology for the bank leg would be less prescriptive than today and give banks more discretion in calculating their projections. Banks would use the same common methodology as in the supervisory leg, but would be allowed to relax the methodological constraints to the extent they can explain and disclose the rationale and impact of such deviations. The standards for the disclosure of the results should remain high. For the bank leg, the proposed disclosure is as granular as it is today, including the overall outcome in terms of capital depletion, main risk drivers, and detailed data on exposures. For the supervisory leg, granularity would be more limited in quantity, but very relevant in terms of supervisory decisions. The discussion paper seeks views on three possibilities:

    • Disclosing Pillar 2 Guidance
    • Disclosing ranges of Pillar 2 Guidance, or
    • Disclosing not Pillar 2 Guidance but the common equity tier 1 capital depletion net of any supervisory adjustments so that the results are informative in terms of supervisory expectations regarding capital distribution

    The discussion paper also presents a roadmap for the implementation of changes to the current framework, including a high-level timeline and the process for the public discussion on the possible changes. Under a scenario in which the new framework is rolled out in the 2022 EU-wide stress test, the methodology for this exercise would have to be approved during the last quarter of 2021. For meeting this deadline and leaving enough time for designing the methodology and consulting the public on it, the decision on the changes to the framework would have to be approved by the end of the third quarter of 2020. The final decision is expected to be communicated by October 2020, which would be followed by ordinary preparatory work, following the same timelines as for the 2020 exercise.

     

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    Comment Due Date: April 30, 2020

    Keywords: Europe, EU, Banking, Stress Testing, EU-wide Stress Test, 2022 Stress Test, Pillar 2 Guidance, Bottom-up Stress Test, Top-down Stress Test, EBA

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