EBA欧洲银行-Annex-4-Trading-book-stress-and-sovereign-haircuts_9页_192kb

Summary of Annex 4: Guidance for Calculation of Losses Due to Application of Market Risk Parameters and Sovereign Haircuts

Core Content

This document outlines the methodology for calculating losses due to market risk parameters and sovereign haircuts as part of the stress testing exercise. It provides a structured approach for banks to apply predefined risk parameters and haircuts to their trading book positions under baseline and adverse macroeconomic scenarios.

Main Points

• Purpose: The guidance is to help banks project gains and losses on trading book positions resulting from a broad-based financial market downturn.
• Scope: Applies to market risk parameters and sovereign haircuts, excluding certain elements like dividends, ABS/RMBS/CMBS credit spreads, and market liquidity.
• Stress Testing Framework: The stress test is based on an instantaneous shock, not a gradual evolution of macroeconomic variables.

Market Risk Parameters

• Macro-Financial Variables: The parameters are based on the evolution of short- and long-term interest rates, exchange rates, equity and commodity prices.
• Baseline and Adverse Scenarios:
  • European stock prices are assumed to be 15% lower.
  • US dollar is 11% weaker against all major (non-pegged) currencies.
  • Short-term interest rates increase by 125 basis points.
  • Long-term euro area sovereign bond yields increase by 75 basis points.
• Commodity Prices: Remain unchanged, but a small and transitory 5% shock is applied to all commodities, which subsides immediately after the holding period.
• Modeling Approach:
  • A satellite multi-equation market risk model is used to derive stressed parameters.
  • The model is calibrated to align with the adverse macroeconomic scenario.
  • Parameters are based on the 25th/75th percentile of the density forecast for the two-year horizon.
• Calibration:
  • For non-European stock prices, credit spreads, swap rates, and volatility, ECB uses standard information criteria and sign restrictions.
  • Dividends, ABS/RMBS/CMBS credit spreads, market liquidity, and counterparty credit risk adjustments are calibrated separately by EBA.
• Application:
  • Banks must apply the market risk parameters from Tables 1 and 2 to their trading book positions.
  • Gains from specific asset classes can be recorded if they are directional in nature.

Valuation Haircuts for Sovereign Exposures

• Adverse Scenario:
  • Sovereign credit spreads are widened by country-specific shocks.
  • Haircuts are applied to sovereign exposures with maturities between 3 months and 15 years.
  • Haircuts are derived from changes in benchmark sovereign bond prices due to the increase in nominal bond yields.
• Shocks by Maturity:
  • Shocks are calibrated based on the slope of the CDS curve for the euro area.
  • The shock for "other developed countries" is the average of shocks for the euro area, US, UK, and Japan.
• Haircut Calculation:
  • For each maturity, a sample of representative sovereign bonds is used.
  • The haircuts are weighted by the outstanding amount of individual bonds.
  • If no debt instrument is available, haircuts are interpolated.
  • No haircuts are provided for Estonia, as it has no marketable sovereign debt.
• Haircut Application:
  • Haircuts are applied to the gross exposure to sovereign debt.
  • Losses are split into two components: one due to general interest rate risk and one due to widening of sovereign credit spreads.
  • Haircuts are not extrapolated for long and ultra-long maturities if no appropriate bonds are available.
• Exclusion of Swap Curve Shock:
  • Banks are instructed not to apply the swap curve shock to sovereign bond positions.
  • However, they may exclude short interest rate swap positions that hedge long sovereign debt exposures, provided there is no maturity mismatch.

Special Cases

• Indirect Sovereign Exposures:
  • Banks must internally compute the stressed value of indirect sovereign exposures.
  • This applies to CDS positions and written sovereign CDS.
• Example 1:
  • A €100 long position in 10-year Spanish government debt with a fair value of €95.
  • Under the baseline scenario, the loss is €3.14 due to interest rate risk.
  • Under the adverse scenario, the loss is €13.88, split into €3.14 (interest rate risk) and €10.74 (sovereign credit spread widening).
• Example 2:
  • A fully hedged 10-year Spanish government debt position with a CDS.
  • The loss from the bond is offset by a gain from the CDS, but both are reported separately.

Tables Overview

• Table 1: Calibrated market risk parameters for non-emerging and emerging markets, including interest rates, exchange rates, and volatility.
• Table 2: Additional calibrated market risk parameters, including equity, commodities, and credit spreads.
• Table 3: Valuation haircuts for sovereign bonds in the adverse scenario, by country and maturity.
• Table 4: Shocks to sovereign credit spreads, by maturity, for each country.
• Table 5: Guidelines for applying haircuts by maturity to exposures.

Key Information

• Stressed Parameters: Derived from the 25th/75th percentile of the density forecast under the adverse scenario.
• Haircut Basis: Based on changes in sovereign bond prices due to increased yields and credit spreads.
• No Extrapolation: Haircuts are not extrapolated for long and ultra-long maturities without appropriate bonds.
• Interpolation: Used when no debt instrument is available to derive a haircut.
• Estonia Exception: No haircuts are provided for Estonia due to lack of marketable sovereign debt.
• EU-Wide Stress Testing: Does not assume changes in sovereign credit ratings.

This guidance ensures consistency and transparency in the stress testing process, allowing banks to accurately project potential losses under adverse conditions.