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ESBG Response to CEBS Consultation Paper 12 (CP12) on Stress Testing

Core Content

The European Savings Banks Group (ESBG) is an international banking association representing one of the largest retail banking networks in Europe. With total assets of €4,716 billion as of 1 January 2005, ESBG members are typically savings and retail banks, often organized in decentralized networks, and are known for their responsible reinvestment and strong commitment to corporate social responsibility.

The ESBG acknowledges the CEBS' interest in stress testing and the importance of engaging in dialogue with the industry to develop effective guidelines. However, they express concerns regarding the practicality and scope of the proposed guidelines, emphasizing the need for a balanced and realistic approach.

Main Views and Key Points

General Concerns

• Complexity and Resource Intensity: Stress testing is a complex and resource-intensive exercise. ESBG argues that supervisors should be realistic about the number and magnitude of stress tests they expect banks to conduct.
• Systemic Risk Considerations: Stress testing could increase systemic risk if it leads to overly rigid or uniform requirements across all institutions. Diverse methodologies among banks are seen as a positive factor in managing systemic risk.
• Applicability to Smaller Institutions: Most European banks, especially smaller ones, lack the resources and experience to fully comply with the current guidelines. ESBG suggests that the CEBS should recognize this and adjust expectations accordingly.

Structural and Conceptual Issues

• Scope of Application: The general sections of the consultation paper (I, II, III) cover stress testing broadly, but some concepts are specific to certain risk categories. ESBG recommends clarifying the relevance of these concepts to different risks.
• Excessive Detail in Credit Risk Guidelines: Sections IV.3.a and IV.3.b are seen as overly detailed and not applicable to most European credit institutions. ESBG suggests that these sections should be revised to be more proportionate.
• Redundancy and Clarity: Several paragraphs contain redundant or unclear content, including the requirement to stress "all material sensitivities" and the need to assess severity and likelihood of scenarios. ESBG recommends simplifying these sections and moving examples to annexes for clarity.

Specific Comments on Paragraphs

• Paragraph 20: ESBG supports the freedom for banks to choose their stress test scenarios and methodologies but warns that this could lead to a non-level playing field if additional capital requirements are imposed. They suggest a common understanding of acceptable stress tests.
• Paragraph 21: They appreciate the principles of materiality and proportionality, which should allow banks to balance additional risk management information against costs.
• Paragraph 25: ESBG believes the current wording limits banks' flexibility. They suggest that institutions should stress risk factors that "may affect their earning/profitability, solvency or other limits."
• Paragraph 26: They argue that repeating historical scenarios for operational risk is not useful and recommend incorporating qualitative risk assessments instead.
• Paragraph 27: The wording "all material sensitivities" is unclear and potentially costly. ESBG suggests replacing it with "all identified material sensitivities."
• Paragraph 30: The requirement to assess severity and likelihood is ambiguous. ESBG believes it should be interpreted qualitatively rather than quantitatively.
• Paragraph 33: ESBG recommends clarifying that smaller entities within large banking groups do not need additional stress testing if the group-level testing is sufficient.
• Paragraph 36: They advocate for an ongoing dialogue between supervisors and banks instead of requiring ad hoc stress tests in routine circumstances.
• Paragraph 41: ESBG supports the idea that management should understand stress test results, but not necessarily the technical details.
• Paragraph 46 and 47: ESBG suggests moving the content of paragraph 46 into paragraph 47 and revising it to include a general documentation clause similar to market risk guidelines.
• Paragraph 52: The content is redundant with previous CEBS guidelines (CP03 Revised, ICAAP 8) and should be removed.
• Paragraph 56: They agree that tail events above regulatory confidence levels can be useful for risk management but should not lead to additional capital requirements unless in exceptional circumstances.
• Paragraph 60: The second and third sentences are redundant and should be removed.
• Paragraph 66: ESBG recommends removing section IV.3.b as it does not add new information and suggests that macro-economic stress testing is particularly burdensome for smaller institutions.

Annexes

ESBG welcomes the examples in Annex I and recommends that they be used in the areas of market risk and credit risk to improve the clarity and readability of the document.