EBA publishes additional information on the 2016 EU-wide stress test

How do stress testing results feed into SREP decisions?

Banking alert | 4 July 2016 | How stress test guidelines affect your SREP transformation


As stated in the EBA Guidelines on common procedures and methodologies for the SREP, Regulators are expected to factor the results of the EU-wide stress-test, together with other stress tests and capital planning assessments, into their assessment of banks’ ability to meet applicable own funds requirements over the economic cycle.

In this respect, the EBA has published additional information on how the results of the EU-wide stress test will feed into supervisory decisions under SREP.

How stress testing is assessed under SREP

The incorporation of the quantitative results of the EU-wide stress test into SREP assessments will generally involve the following:

  • Regulators will discuss the quantitative impact of the stress test with the bank and understand the extent to which credible management actions may offset some of the impact of the adverse scenario;
  • Regulators may consider the natural dynamics in the balance sheet, given the EU-wide stress test is conducted on the assumption of a static balance sheet;
  • Regulators will assess the net impact of the stress test on the bank’s own funds requirements, in particular Total SREP Capital Requirements (TSCR) under the conditions assumed in the adverse scenario;
  • Regulators may consider imposing capital measures if the analysis of quantitative results demonstrates that there may be potential breaches of TSCR over the stress test time horizon but no imminent risk. Such measures may include requiring the bank to use net profits to strengthen own funds and restricting or prohibiting distributions or interest payments to holders of Additional Tier 1 instruments;
  • Regulators may consider requesting changes to the bank’s capital plan;
  • Additional measures may include setting additional supervisory monitoring metrics in the form of capital guidance, above the combined buffer requirement, taking into account all available capital;
  • The qualitative outcomes of the stress test, including deficiencies in risk management and controls, hidden concentrations, previously unaccounted weaknesses in specific portfolios, or data management and reporting issues that have not been previously factored into the SREP assessment, might lead to the revisions of the conclusions on the four main SREP elements;
  • If the quantitative outcomes of the EU-wide stress tests suggest that there is imminent risk of the bank not being able to meet its TSCR, the Regulators may consider updating the SREP assessments and reviewing the TSCR.

How can we help?

  • Assistance with internal stress testing. We can help you tailor scenarios to your business model, perform stress tests on both a static and dynamic assumption, interpret results and take remedial action ahead of SREP assessments.
  • Active risk management techniques. We can assist you with developing a list of credible management actions, linked to the bank’s framework of indicators, to ensure that appropriate actions are taken to restore the bank’s financial position prior to activating the recovery plan.
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