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ESBG Summary of Comments on CEBS Consultation Paper on Draft Revised Guidelines on Stress Testing (CP 32)

Core Content

The European Savings Banks Group (ESBG) has provided feedback on the CEBS Consultation Paper on draft revised Guidelines on Stress Testing (CP 32), which aims to update the 2006 guidelines to incorporate lessons from the financial crisis and improve the effectiveness of stress testing procedures. ESBG generally supports the initiative and the objective of integrating stress testing into banks' risk governance and management frameworks. However, they have raised several concerns regarding the approach and implementation of the guidelines.

Main Views

• General Approach:

  • ESBG supports the CEBS initiative to update stress testing guidelines.
  • They caution against overemphasizing the financial crisis, as it may bias the final guidelines.
  • A principles-based approach is preferred over overly prescriptive rules to avoid unnecessary standardization.
  • Stress tests should not be seen as a guarantee of absolute safety; they are not capable of fully anticipating market discontinuities.

• Implementation:

  • ESBG questions the tight implementation deadline of 30 June 2010, especially for small retail banks.
  • They suggest that the deadline should be indicative rather than mandatory, and that the actual application should be considered by the end of 2010.
  • ESBG welcomes the flexibility provided to supervised institutions in the implementation of the guidelines.

• Proportionality Principle (§ 9):

  • ESBG supports the inclusion of the proportionality principle, which allows for tailored stress testing based on the institution's size and risk profile.
  • They emphasize that proportionality should also apply to different types of risks and the methodology, frequency, and detail of stress tests.
  • They recommend that smaller institutions can use simpler methods like sensitivity analysis to meet stress testing requirements.
  • ESBG suggests removing the requirement for small banks to consider interactions between individual risks, as it is not proportionate.

• No Capital Requirements Derived from Stress Testing (§ 11):

  • ESBG argues that stress testing results should not be used to mandatorily determine capital requirements.
  • They believe that this would create wrong incentives and undermine the independence of capital planning and risk management processes.

• Specific Remarks:

  • Section 2 (Governance aspects):
    • ESBG supports internal review of capital and liquidity requirements but opposes the mandatory link between stress tests and capital requirements.
    • They question the requirement for benchmarking with other stress tests, arguing that it is not useful for institutions with specific portfolios.
  • Section 3 (Stress Testing Methodologies):
    • ESBG doubts the added value of multiple stress tests with varying severity.
    • They suggest that sensitivity analysis is more practical and that scenario analysis should be treated as examples rather than mandatory.
    • They also oppose the inclusion of reverse stress tests due to their complexity and high cost, especially for smaller institutions.
  • Section 5 (Outputs and Management Intervention):
    • ESBG finds it difficult for supervisors to assess the feasibility of management actions in stressed conditions.
    • They argue that real-world corrective measures depend on a variety of factors that cannot be fully captured in stress tests.
  • Section 6 (Supervisory Review):
    • ESBG believes that general scenarios proposed by supervisors can serve as a useful basis for institution-specific stress tests.
    • They suggest that these scenarios should be comprehensive and tailored to individual risks, with further institution-specific scenarios being admissible.

Key Information

• ESBG's Position: Advocates for a principles-based, flexible, and proportionate approach to stress testing.
• Concerns: Overemphasis on the financial crisis, overly prescriptive rules, mandatory capital requirements from stress testing, and the complexity of reverse stress tests.
• Recommendations:
  • Delete the mandatory link between stress testing and capital requirements.
  • Remove the requirement for external benchmarking.
  • Consider reverse stress tests only as examples and not as mandatory.
  • Allow smaller institutions to use simpler methodologies like sensitivity analysis.
  • Set a realistic timeline for implementation, not a strict deadline.

About ESBG

• ESBG is an international banking association representing one of the largest European retail banking networks.
• It comprises about one third of the retail banking market in Europe with total assets of €6061 billion as of 1 January 2008.
• ESBG represents its members' interests in EU institutions and manages high-quality cross-border banking projects.
• Members are typically savings and retail banks or associations, organized in decentralized networks and offering services regionally.
• ESBG Member banks are known for responsible reinvestment and serve as a benchmark for corporate social responsibility activities.