Key elements of supervisory stress testing
When deciding on the key elements of supervisory stress testing, competent authorities should consider, inter alia, the following:
coverage, in terms of covering certain risk factors or multiple risk factors, certain individual portfolios or activities or sectors/geographies, all or several portfolios;
design, in terms of the following: single-factor or simple multi-factor sensitivity analysis, solvency or liquidity stress testing, reverse stress testing or medium to long-term scenario analysis. Competent authorities should choose the design that is most appropriate for the objective pursued by the stress test;
scope, in terms of covering the perimeter of cross-border groups, ensuring that all relevant group entities are taken into account;
sample of institutions covered by stress tests: when planning supervisory stress testing, competent authorities should consider the appropriate sample for the purposes of the exercise, in particular when using supervisory stress testing for thematic assessments of certain business lines/models or impact studies/assessments;
approach, namely top-down stress test, bottom-up stress test, combination of both, prescribing specific anchor scenarios for institutions.
When designing and conducting supervisory stress tests for SREP purposes, competent authorities should consider the outcomes of asset quality reviews (AQR), where available, appropriate and not already incorporated into institutions’ financial statements. Combining supervisory stress testing with AQRs can be considered useful in ensuring that the balance-sheet positions of the institutions covered by the supervisory stress tests are reported accurately with improved and comparable starting points across participating institutions.