Use of supervisory stress testing by competent authorities
Competent authorities should, also on the basis of Article 100 of Directive 2013/36/EU, use supervisory stress testing to facilitate the SREP and, in particular, supervisory assessment of its key elements, as described in Title 4 to Title 9. In particular, supervisory stress testing should help competent authorities, where appropriate, with the following:
The assessment of the reliability of institutions’ stress testing programmes, as well as the relevance, severity and plausibility of scenarios for institutions’ own stress tests used for ICAAP and ILAAP purposes. This may include challenging institutions’ main assumptions and risk drivers.
The assessment of institutions’ ability to meet TSCR and OCR in the context of the assessment of capital adequacy, as specified in Section 7.7. Depending on the coverage and type of the supervisory stress test, this assessment may be limited only to some elements of TSCR covered by the design features of the supervisory stress testing (e.g. additional own funds requirements for individual risk categories, if the stress test covers only such risk categories).
The determination of P2G for institutions.
The identification of possible vulnerabilities or weaknesses in institutions’ risk management and controls on individual risk areas.
The identification of possible deficiencies in overall governance arrangements or institution-wide controls: supervisory stress testing should be considered by competent authorities as an additional source of information for the purposes of the SREP assessment of internal governance and institution-wide controls referred to in Title 5. In particular, if a competent authority identifies by means of supervisory stress testing, deficiencies in the institution’s own stress testing programmes or supporting risk data infrastructure, these should be taken into account in the assessment of the overall governance and risk management framework of that institution.
The determination of specific quantitative liquidity requirements in the context of the assessment of liquidity adequacy, especially where a competent authority has not developed specific supervisory benchmarks for liquidity requirements. Certain elements of the liquidity supervisory stress tests should, where appropriate, be used as inputs when setting specific liquidity requirements for institutions (e.g. a comparative analysis, under adverse scenarios, of net cash outflows and eligible liquid assets over a set of time horizons, assessment of stressed maturity ladder), as specified in Section 9.4.
Furthermore, supervisory stress testing should help competent authorities to assess supervisory organisational procedures and to plan supervisory resources, considering also other relevant information, in particular for the more frequent and in-depth assessment of certain SREP elements in the case of non-Category 1 institutions, and for the purposes of determining the scope of the supervisory examination programme required by Article 99 of Directive 2013/36/EU.
Competent authorities should also, where appropriate, use the scenarios and outcomes of supervisory stress tests as additional sources of information in the assessment of institutions’ recovery plans, in particular when assessing the choice and severity of scenarios and assumptions used by the institution.
Competent authorities should also, where appropriate, use supervisory stress testing outcomes to support the analysis needed for the purposes of granting various permissions and authorisations required by Regulation (EU) No 575/2013 or Directive 2013/36/EU, for example in relation to qualifying holdings, mergers and acquisitions, and shares buy-backs.
Competent authorities should also use the outcomes of supervisory stress testing, where appropriate, to support a thematic analysis of the potential vulnerabilities of a group of institutions with similar risk profiles.
Competent authorities should also, where appropriate, use supervisory stress testing as a way to motivate institutions to enhance their internal stress testing and risk management capabilities: in particular, a supervisory stress test with a bottom-up component could motivate institutions to further develop and improve their data aggregation, risk modelling and IT tools for stress testing and risk management purposes.