31 August 2010

CEBS publishes revised guidelines on stress testing

The Committee of European Banking Supervisors (CEBS) publishes the final text of its revised Guidelines on stress testing which takes into the account the results of the earlier public consultation which ran from December 2009 to March 2010. The revised guidelines replace the Guidelines on technical aspects of stress testing under the supervisory review process that were published on 14 December 2006

The revised guidelines draw on the experience that supervisors have obtained by reviewing institutions’ stress tests in recent years, and take account of the revised principles for sound stress testing practices and supervision published by the Basel Committee of Banking Supervision (BCBS).

The new guidelines will assist institutions in understanding supervisory expectations of appropriate stress testing governance and infrastructure, and also cover the use of stress testing as a risk management tool. 

The guidelines are also designed to assist institutions and supervisors in achieving robust, methodologically sound outputs that are effective in identifying risks and their potential mitigants during stressed conditions and their overall impact on an institution.

The revised guidelines are designed to be as practical as possible and aim to identify the relevant “building blocks” in an effective stress testing programme. The topics covered are ranging from stress testing governance structures and their use to possible methodologies, including choosing the appropriate severity of scenarios, multi-layered approach to stress testing programmes; from simple portfolio-level to comprehensive firm-wide scenario analyses to outputs of stress testing programmes, including the interaction between the outcomes of stress tests and management intervention/mitigating actions.

The revised guidelines are supplemented by a number of annexes that provide examples of stress testing specific risks (market risk, securitisation, credit risk, operational risk, interest rate risk from non-trading activities and concentration risk), which illustrate some practices in relation to stress testing these risk types, but are not exhaustive lists of such practices.

CEBS expects its members to apply the present guidelines by 31 December 2010, meaning that by this date the guidelines should be transposed into national supervisory guidelines and reflected in the national supervisory manuals or handbooks, where applicable, and implemented in supervisory practises.

CEBS also expects institutions to make progress in implementing the guidelines following the transposition and recommendations/requirements of national supervisory authorities, and to put in place implementation programmes aimed at ensuring timely compliance with the new guidelines (e.g. gap analysis, implementation plans, etc.).

© CEBS - Committee of European Banking Supervisors