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Summary of CEBS Public Hearing on Draft Revised Guidelines on Stress Testing

Core Content

On 10 March 2010, the Committee of European Banking Supervisors (CEBS) held a public hearing to present its draft revised Guidelines on stress testing. The meeting was chaired by Piers Haben, the Chair of the CEBS Stress Testing Task Force. Approximately 50 attendees, including representatives from banks, industry associations, consultancy agencies, and journalists, participated in the discussion, which lasted for three hours and was marked by constructive debate.

The revised guidelines were an update to the Guidelines on Technical Aspects of Stress Testing under the Supervisory Review Process, originally published on 14 December 2006. They were developed based on the experience of supervisors in reviewing stress tests and the Basel Committee of Banking Supervision (BCBS)'s updated principles for sound stress testing practices and supervision, published in December 2009.

The main objective of the guidelines is to assist institutions and supervisors in creating robust, methodologically sound stress testing outputs that effectively identify risks and their potential mitigants under stressed conditions. They also aim to enhance the overall impact of stress testing on an institution's risk management and governance.

Main Points and Key Information

General Remarks

• The draft guidelines were generally welcomed for clarifying supervisory expectations and encouraging stronger stress testing frameworks.
• Industry representatives raised concerns about the level of detail and prescriptive nature of the guidelines, requesting that certain elements be framed as good practices rather than mandatory.
• There was a call for further clarification on the application of proportionality in the guidelines.
• Some attendees questioned the proposed implementation date (30 June 2010), noting that it would take time for institutions to implement the guidelines and enhance their infrastructure.
• CEBS confirmed a phased implementation approach, allowing institutions to gradually improve their stress testing frameworks.

Governance Aspects

• There was consensus on the importance of senior management and management bodies being actively involved in stress testing.
• Senior management may be involved in scenario selection and defining management actions, while management bodies are expected to review and challenge the scenarios and outputs.
• For large and complex institutions, it was suggested that management bodies take an oversight role rather than being deeply involved in technical modeling.
• Attendees emphasized the need for integration of stress testing with business operations, and for convergence between risk management models and other business models (e.g., performance management, pricing).
• Flexibility in designing stress testing programs was requested to align with specific institutional needs.

Stress Testing Methodologies

• Attendees supported the use of straightforward methodologies that lead to meaningful outcomes.
• There was a discussion on aligning conservative assumptions in stress testing with business operations.
• A constructive debate occurred regarding the use of "severe but plausible" scenarios, with some noting that the 2008-2009 financial crisis may have been seen as implausible before it occurred.

Reverse Stress Testing

• Broad support was expressed for the introduction of reverse stress testing as a risk management tool.
• Attendees requested clarification on:
  • The purpose of reverse stress testing.
  • Supervisory expectations regarding its use.
  • The balance between quantitative and qualitative approaches.

Multi-layered Approach

• There was support for a multi-layered approach that covers all business lines and all risk types.
• Reverse stress testing was seen as an essential component of a comprehensive stress testing program.
• Challenges were raised about conducting stress tests at the legal entity level for complex institutions, as some institutions operate on a business line basis.
• Attendees requested that supervisory colleges be recognized as important tools for coordinating stress testing activities and discussing results.

Stress Testing Outputs

• Attendees suggested that mitigating management actions should include reactive and proactive measures.
• They supported the idea that management actions should be approved by appropriate authorities, such as the management body, in cases like dividend decisions.

Supervisory Review and Assessment

• There was support for a section on supervisory review and assessment, which would help converge supervisory approaches.
• Industry representatives emphasized the need for coordination between supervisors for cross-border banking groups, especially regarding prescribed scenarios.
• Some encouraged CEBS to engage with third country supervisors to share experiences on stress testing and Pillar 2.
• Attendees highlighted the importance of adequate supervisory resources to properly assess institutions' stress testing frameworks.

Conclusion

The public hearing provided valuable feedback on the draft revised guidelines, with constructive suggestions for improving clarity, flexibility, and alignment with evolving regulatory frameworks. CEBS has committed to reviewing the guidelines as needed and is expected to finalize them by the end of Q2 2010. Written comments were to be submitted by 31 March 2010, and all will be published on the CEBS website unless otherwise requested.