29 July 2009

EBF – Newsletter 19

EBF considers that regulators should not adopt a one-size-fits-all approach regarding remuneration in the financial services as substantial differences in business have to be taken into account.

Banks admittedly bear some responsibility in the crisis and they are actively helping to minimise the consequences.

The European Banking Federation has launched its newest report on Financial Literacy which brings together initiatives taken by National Banking Associations to raise the level of financial literacy among consumers.

Concerning remuneration in financial services, EBF believes that regulators should not adopt a ‘one-size-fits-all’ approach, as substantial differences in business practices have to be taken into account (such as differences between investment banks and retail banks or large and small banks).

Being at the core of the discussion topics and stress tests, EBF presented three practical but fundamental concerns:

1.    Stress testing is an entity’s risk management tool. The objective of stress testing is to alert bank management to adverse unexpected outcomes related to a variety of risks and to provide an indication of how much capital might be needed to absorb losses should large shocks occur. All banks carry out regular stress tests but not all banks use stress testing efficiently and/or integrate the results in the bank’s governance in a way that allows the institution to plan capital needs adequately.

2.    The rationale for supervisory stress testing is unclear. The EBF believes that, in the context of the supervisory review process under Pillar II, supervisors should make regular and comprehensive assessments of a bank’s stress testing programme and, if necessary, challenge the scope and severity of firm-wide scenarios. However, as banks’ risk profiles and stress testing practices differ widely in the EU, it is uncertain to what extent aggregated industry-wide stress tests by supervisory authorities on the basis of common supervisory scenarios would help identify systemic vulnerabilities.

3.    There is no EU-wide stress test framework. Despite CEBS’ statement that stress tests are being carried out on the basis of common guidelines and scenarios, the truth is that, unfortunately, there is currently no pan-European agreement on a number of essential common parameters - starting with the definition of own funds and the valuation of illiquid assets - that would robustly underpin this type of exercise. In the absence of such basic understanding, European banks remain concerned that the aggregated information resulting from this exercise may be misleading and, consequently, could end up informing wrong policy choices.

Newsletter

 

© EBF