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CEBS published additional technical guidance on the Supervisory Review Process issued in January 2006 in the area of stress testing. The guidelines reflect a common understanding among European supervisory authorities on the stress testing processes to be used by institutions under the CRD with respect to Pillar 2 provisions.
The guidelines describe objectives and desired outcomes. CEBS proposes common high level guidance on how stress tests could be conducted by institutions and assessed by supervisors, namely concerning desirable features relating to the scope, calibration, frequency, documentation or risks covered.
The paper explains what is meant by stress testing and outlines the range of its different uses under Pillar 2. It also provides some general guidelines for both institutions and supervisors on the methodology of sound stress testing. Finally, it provides an overview of stress testing by risk categories.