The EBA has published a Discussion Paper On the future changes to the EU-wide stress test.
Since the global financial crisis, the stress test has become a widely used tool for supervisors to assess the resilience of banks and of the banking sector through its solvency. Most of the features of the EU-wide stress test have remained unchanged since its establishment and until now, there had never been a structured discussion on the post-crisis long-term strategy for the EU-wide stress test and on possible fundamental changes to the framework. The EBA has therefore decided to start assessing potential longer term changes to the EU-wide stress test approach.
In the Paper, the EBA discusses the shortcomings of the existing framework, namely the:
- lack of clarity and prioritisation of the EU-wide stress test objectives.
- usage of results and their link to the supervisory process. The EU-wide stress test is less integrated in the regular supervisory process, especially in comparison with other international frameworks
- ownership of results;
- resource-intensive nature of the exercise for all parties involved in conducting the EU-wide stress test, which is also related to the length of the process.
In light of this, the EBA is proposing to amend the rules to focus on the following four criteria instead:
- Relevance. This means that the stress test projections should be as close as possible to the actual impact on capital should an adverse scenario materialise. The stress test having relevance is also a prerequisite for enabling supervisors to identify vulnerabilities and for encouraging banks to enhance their own stress-testing capabilities to be used in their day-to-day management.
- Comparability. This means facilitating a level playing field across banks and jurisdictions in the EU, while still taking into account banks’ specificities and individual risk profiles. Comparability is fostered by methodological constraints, thorough supervisory QA and market discipline.
- Transparency. This allows markets and the wider public to gain information from the supervisory stress test. It also fosters market discipline by enabling market participants to review the stress test results of banks and the actions of supervisors.
- Cost-efficiency. This means fulfilling the stress test objectives with commensurate resources from both supervisors and banks.
Responses to the Discussion Paper should be submitted to the EBA by 30 April 2020.