General
1. In order to assess the soundness of an institution’s stress test used in the assessment of its capital adequacy in accordance with Article 177 of Regulation (EU) No 575/2013, competent authorities shall verify all of the following:
(a)
the adequacy of methods used in designing the stress tests, in accordance with Article 64;
(b)
the robustness of the organisation of the stress testing process, in accordance with Article 65;
(c)
the integration of the stress tests in the risk and capital management processes, in accordance with Article 66.
2. For the purposes of the assessment under paragraph 1, competent authorities shall apply all of the following methods:
(a)
review the institution’s internal policies, methods and procedures on the design and execution of stress test;
(b)
review the institution’s outcomes of the stress test;
(c)
review the roles and responsibilities of the units and management bodies involved in the designing, approval and execution of the stress test;
(d)
review the relevant minutes of the institution’s internal bodies, including the management body, or committees;
(e)
review the relevant findings of the internal audit or of other control functions of the institution;
(f)
review the progress reports on the efforts made by the institution to correct shortcomings and mitigate risks detected during relevant audits;
(g)
obtain written statements from or interview the relevant staff and senior management of the institution.
3. For the purposes of the assessment under paragraph 1, competent authorities may also apply any of the following additional methods:
(a)
review the functional documentation of the IT systems used for the stress test;
(b)
request the institution to perform a computation of the stress test based on alternative assumptions;
(c)
perform their own stress test calculations based on the institution’s data for certain types of exposures;
(d)
review other relevant documents of the institution.
Adequacy of methods used in designing the stress tests
1. When assessing the adequacy of methods used in designing the stress tests used by the institution in the assessment of the capital adequacy in accordance with Article 177 of Regulation (EU) No 575/2013, competent authorities shall verify that:
(a)
the tests are meaningful, reasonably conservative and capable of identifying the effects on the institution’s total capital requirements for credit risk under severe, but plausible, recession scenarios;
(b)
the tests cover at least all material IRB portfolios;
(c)
the methods are consistent to the extent appropriate with methods used by the institution for the purpose of internal capital allocation stress tests;
(d)
the documentation of the methodology of stress tests including internal and external data as well as expert judgment input is detailed enough to allow third parties to understand the rational for the chosen scenarios and to replicate the stress test.
2. For the purpose of the assessment under paragraph 1(a), competent authorities shall verify that the stress tests include at least the following steps:
(a)
an identification of the scenarios including severe, but plausible, recession scenarios and, the adjustment in accordance with Article 153(3) of Regulation (EU) No 575/2013, of the scenario envisaging deterioration of credit quality of protection providers;
(b)
an assessment of the impact of identified scenarios on the institution’s risk parameters, rating migration, expected losses and calculation of own funds requirements for credit risk;
(c)
an assessment of the adequacy of own funds requirements.
3. When assessing the adequacy of scenarios referred to in paragraph 2(a), competent authorities shall verify the soundness of the following methodologies:
(a)
the methodology for identifying a group of economic drivers;
(b)
the methodology for building stress scenarios, including their severity, duration and likelihood of occurrence;
(c)
the methodology for projecting the impact of each scenario on the relevant risk parameters.
Organisation of the stress testing process
When assessing the robustness of the organisation of the stress testing process used by the institution in the assessment of the capital adequacy in accordance with Article 177 of Regulation (EU) No 575/2013, competent authorities shall verify that:
(a)
the stress test is performed regularly and at least on a yearly basis;
(b)
the roles and responsibilities of the unit or units in charge of the design and execution of the stress test are clearly defined;
(c)
the results of stress tests are approved at an adequate management level and that senior management is informed of the results in a timely manner;
(d)
the IT infrastructure effectively supports the performance of stress tests.
Integration of the stress tests in the risk and capital management processes
When assessing the integration of the stress tests in the risk and capital management processes of the institution for the purposes of Article 177 of Regulation (EU) No 575/2013, competent authorities shall verify that:
(a)
the institution takes into account the results of stress tests in its decision-making process, in particular with regard to risk and capital management;
(b)
the institution takes into account the results of stress tests within the capital management process and identifies possible events or future changes in economic conditions for the purposes of capital requirements.
Source: EUR-Lex (Publications Office of the EU), © European Union, reuse permitted under Commission Decision 2011/833/EU.
