2018 EU-wide stress test

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2018 EU - wide stress test

IFRS9 strikes again

The Board of Supervisors of the European Banking Authority (EBA) agreed in its meeting held on 24-25 October 2017 on the final timeline of the 2018 EU-wide stress test. The exercise is expected to be launched at the beginning of 2018 and the results to be published by 2 November 2018. The EBA, in co-operation with Competent Authorities, is now in the process of finalising the methodology and templates with the objective of sharing them with participating banks ahead of the launch. The following key milestones were agreed for the 2018 stress test:

  • Launch of the exercise in January;
  • First submission of results to the EBA in early June;
  • Second submission to the EBA in mid-July;
  • Final submission to the EBA in late October;
  • Publication of results by 2 November 2018.

Participant banks will face major challenges in terms of adapting their stress testing framework to take into account IFRS9 standard. Regarding credit risk the major issues to be handled are:

  • Increasing complexity in calculating impairment losses, provisions stocks due to the transition from two states (default and non-default) to three stages in IFRS9. Stressed PDs and LGDs are to be considered both on 12 months and on lifetime depending on the migration of exposures.
  • The soundness of macroeconomic modelling for IFRS9 will be challenged. If the bank’s macroeconomic overlay factor models used in IFRS9 can be properly adapted to compute stressed ECL and economic capital this will save a great deal of effort on the modelling side. On the other hand if the macroeconomic variables that need stressing are not incorporated in the IFRS9 forward looking component this could arise the need to adapt IFRS9 models.
  • The stress test comes on top of the efforts to implement IFRS9. The questions are: Are IFRS9 models implemented in a uniform manner? If so, are the idiosyncratic factors accounted for? Is the EU-wide exercise sufficiently general in assessing risk and at the same time sufficiently particular in pointing out problematic portfolios?
  • The sensitivity and stability of the IFRS9 models wasn’t validated yet, the stress test exercise might come with surprises in terms of comparability and validity of results.

Deloitte can help you:

  • Structure your data and adjust the stress testing framework to meet IFRS9 requirements.
  • Assess the limitations of your IFRS9 credit risk models for stress testing purposes.
  • Evaluate the sensitivity of your macroeconomic models to extreme stress scenarios.
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