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FBF Summary on Revised Guidelines for Stress Testing - CEBS Consultation Paper CP 32

Core Content

The French Banking Federation (FBF), representing over 450 banks in France, has provided detailed comments on the CEBS Consultation Paper CP 32, which outlines revised guidelines for stress testing in the banking sector. The FBF acknowledges the importance of these guidelines and supports the initiative to improve stress testing practices. However, it raises concerns regarding the ambitious nature of the proposed standards and their feasibility for implementation.

Main Principles and Views

• Agreement with Purpose and Principles: The FBF agrees with the purpose of the consultation paper and the principles outlined, which are considered a significant contribution to the enhancement of stress testing in the banking industry.
• Proportionality and Realism: The FBF emphasizes that stress testing must adhere to the principles of proportionality and realism, noting that the current level of ambition set by supervisors exceeds what is currently practiced by banks.
• Stress Testing as an Information Tool: The FBF views stress testing as an informational tool for management to aid in decision-making, not necessarily as a direct method to determine capital requirements or initiate corrective measures.

Concerns and Suggestions

• Complexity of Stress Scenarios: The FBF points out that combining all risk drivers (credit, market, interest rate, liquidity) and all perimeters in stress testing is very challenging due to coherence constraints between different risk factors.
• Reverse Stress Testing: While supporting the use of reverse stress testing as a risk management tool, the FBF highlights practical difficulties in its implementation, such as the challenge of developing a global scenario and maintaining consistency across various risk scenarios.
• Scope of Stress Testing: The FBF suggests clarification on the concept of "firm-wide basis," indicating that it should be understood in terms of legal entities. It also recommends that stress tests based on complex scenarios should be conducted at a consolidated level, with coordination by the college of supervisors.
• Implementation of Guidelines: The FBF believes that the proposed timetable for implementation, starting from 30 June 2010, is too ambitious. It suggests a more gradual approach, such as a minimum 18-month period or a progressive implementation plan.

Additional Comments

• Securitisations: The FBF agrees with the integration of securitisations into stress testing but raises concerns about the practicality of implementation. It suggests a possible extension of the implementation timeframe.
• Warehousing Operations: The inclusion of warehousing operations in stress tests is questioned, as these exposures are already covered under general stress IRB with capital add-ons, and their calculations are subject to numerous uncertainties before the securitisation structure is completed.
• Pipeline Risks: The FBF considers the inclusion of pipeline risks unnecessary, citing limited transaction volumes during periods of stress and the lack of consideration for the probability of transaction completion.

Conclusion

The FBF supports the CEBS initiative to revise stress testing guidelines but advocates for a more proportionate and realistic approach. It recommends a flexible implementation timeline and greater coordination among supervisors to ensure consistency and practicality in applying these guidelines. The FBF is available for further discussions on these matters.