EBA欧洲银行-ABI_CP12_6页_94kb

ITALIAN BANKING ASSOCIATION COMMENT ON CP 12: STRESS TESTING UNDER THE SUPERVISORY REVIEW PROCESS

Core Content

The Italian Banking Association (IBA) comments on the European Commission's Consultation Paper (CP 12) on stress testing under the Supervisory Review Process. The IBA acknowledges the importance of stress testing as a tool to supplement internal risk evaluation methodologies and reduce model risk. However, they emphasize the need for greater clarity and coordination in defining stress scenarios and their implications for capital and liquidity requirements.

Main Views and Key Information

1. Purpose and Scope of Stress Testing

• Stress testing is a useful exercise for developing strategies and responses to extreme but plausible events.
• It should not be used to determine capital resources, except at the level necessary to form a strategic response framework.
• Capital resources are primarily determined by regulatory rules and standards based on current operations, not by stress testing.

2. Systemic vs. Idiosyncratic Events

• Idiosyncratic events (e.g., individual bank liabilities) are mainly addressed by internal capital requirements.
• Systemic events, especially catastrophic ones, require coordinated external intervention involving supervisors, regulators, and the financial industry.
• No single bank can ensure business continuity in systemic crises, which must be managed through strategic dialogue and pre-agreed recovery actions.

3. Stress Testing as a Long-Term Process

• The implementation of CP 12 guidelines should be viewed as a long-term process.
• In the initial phase, sensitivity analyses with simple scenario tests may suffice, especially due to the complexity of full stress tests.
• The principle of proportionality must be respected, and the final version of CP 12 should reflect this.

4. Types of Stress Tests

• Concentration risk: Involves assessing the impact of loss of value of financial collateral and interdependence risks in economic downturns.
• Macroeconomic stress: Requires empirical models (e.g., CreditPortfolioView, Merton-style models) to simulate systemic risks.
• IRB stress test: Focuses on validating rating models under Pillar I, evaluating capital adequacy relative to credit risk.

5. Methodological Considerations

• Monte Carlo simulation models already contain sufficient scenario information for exploring the tails of credit risk distribution.
• The current approach to financial collateral stress testing may be overly restrictive; the existing Pillar I method is considered conservative and prudent.
• Stress testing for IRB institutions should be limited to more easily realized scenarios, as they are already required for internal rating system authorization.

6. Liquidity Risk and Regulatory Clarity

• Concrete examples of liquidity crisis scenarios are introduced, but the definition of "exceptional but plausible" events remains unclear.
• The IBA requests more guidance on the depth and intensity of macroeconomic factors and their drivers.
• A predetermined basic method for stress testing, along with the possibility of internal models, is suggested to reduce the burden on banks.

7. Time Horizon and Capital Calculation

• The time horizon for stress tests should be aligned with the maturity and liquidity of the positions under stress.
• For market risk, daily or ten-day monitoring is suggested, while credit risk can be tested on a longer horizon.
• There is ambiguity regarding how to reduce the results of stress tests to a single capital requirement. The IBA questions the methodology for aggregating results and the appropriate time horizon for interest rate risk testing.

Reference Framework

A diagram is provided to clarify the role and thresholds of stress testing, distinguishing between:

• First Dimension (Micro Level): Liquidity event severity at the company level.

  • Business as usual: P&L impact only.
  • Tension on pricing/funding: Threat to payment continuity, mis-payment or failure to pay circumstances.

• Second Dimension (Macro Level): Market/system event depth.

  • Normal market conditions: Fly to quality, market disturbances.
  • Liquidity crunch: Market turbulences.
  • Serious liquidity shortage: Market crisis.
  • Liquidity collapse: Market disruption.

The framework is intended to differentiate various scenarios and guide both internal management and regulatory approaches.

Conclusion

The IBA calls for greater clarity, international coordination, and a balanced approach in implementing stress testing. They stress that stress testing should complement, not replace, existing methodologies and should not be used to determine capital requirements beyond what is necessary for strategic planning.