04 October 2019

European Parliament: Towards a fundamental re-design of banks’ Stress Tests in the EU?

This European Parliament briefing provides background information to existing stress tests, highlights some issues that may still require attention in future stress tests - in particular in terms of transparency and communication, - and summarises proposals Andrea Enria mentioned in his speech.

On 26 September 2019, Andrea Enria, Chair of the European Central Bank’s Supervisory Board, gave a speech on the future of stress testing (“The future of stress testing – realism, relevance and resources”) in which he outlined a proposal on how to achieve meaningful progress with a view to make the tests both more realistic and more relevant, with fewer resources required.

Andrea Enria’s proposals involve a decisive re-design of the stress test exercise. Stress tests are currently carried out using a “constrained bottom-up approach” whereby supervisory authorities ensure a quality check of models run by banks.

It is suggested to split stress tests into a supervisory view (“top-down” approach along the lines of stress tests under Dodd-Frank in the US) and a “banks’ view” (bottom-up approach).

This briefing:

• summarises the proposal,
• provide background information on some of the shortcomings of existing stress tests, including those identified in a recently published report of the European Court of Auditors, and
• highlights some issues that may still require attention in future stress tests, in particular in terms of transparency and communication.

The proposal leaves open the question as to whether those new stress tests would be Banking Union specific and how they would interfere, where applicable, with stress tests carried out by the European Banking Authority (EBA) or by the ECB for macro-prudential purposes.

Full briefing on EP

Full Andrea Enria speech on ECB

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