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CEBS Paper - CP 12: Stress Testing under SRP - Summary

Core Content

The Austrian Federal Economic Chamber (BSBV), representing all Austrian credit institutions, has provided comments on the CEBS consultation paper (CP 12) titled "Stress testing under the Supervisory Review Process." The comments focus on the operational risk perspective and aim to improve the clarity and practicality of the proposed stress testing framework.

Main Views and Key Points

General Comments on Stress Testing

• Clarity and Risk Assignment: Sections I–III of CP 12 discuss stress testing in general but do not clearly assign it to a specific risk category. Concepts such as economic cycles are suggested to be relevant to certain risks, but not others. The BSBV recommends that these aspects be better explained to ensure clear interpretation.
• Proportionality Principle: The BSBV supports the inclusion of the principle of proportionality, which considers the size, sophistication, and diversification of credit institutions when determining the scope and depth of stress testing.

Section II.3: Uses of Stress Testing

• Earnings and Capital Planning: The BSBV believes the recommendation that earnings should be part of an institution's capital planning is too general. They suggest that the new capital framework should address how earnings are specifically affected by stress situations, such as interest rate risk in the bank book.
• ICAAP for Smaller Institutions: The BSBV supports the idea that smaller institutions should be allowed to use very simple stress tests as part of their Internal Capital Adequacy Assessment Process (ICAAP), as outlined in P 18.

Section III.3: Stress Testing Calibration

• Material Risk Factors: CP 12 recommends that institutions identify material risks and derive corresponding risk factors for stress testing. The BSBV agrees with this approach.
• Historical Scenarios: The BSBV suggests that historical scenarios, while mentioned in CP 12, are already implicitly included in the time series used for risk modeling. They argue that repeating these scenarios may overemphasize past losses rather than providing new insights. Instead, they propose incorporating the results of qualitative risk analysis to develop more realistic and plausible scenarios.
• Severity and Likelihood: The BSBV supports the recommendation that stress tests should be based on exceptional but plausible events. They suggest that institutions should run stress tests of varying severity and likelihood, including different economic cycles, to better reflect potential future risks.

Section ST7-34: Frequency of Stress Testing

• Institutional Discretion: The BSBV believes that the frequency of stress testing should be determined by the institutions themselves rather than being strictly regulated. This allows for greater flexibility and alignment with each institution's specific risk profile and operational needs.

Conclusion

The BSBV emphasizes the importance of clarity, proportionality, and practicality in the implementation of stress testing under the Supervisory Review Process (SRP). They advocate for a more tailored and realistic approach to scenario development, which should be based on both quantitative data and qualitative risk assessments. Additionally, they support the use of simplified stress testing methods for smaller institutions to ensure a balanced and effective regulatory framework.