Stress Testing

Keynote Address:
Financial Regulation and Stress
Testing in the EU and the Impact on
Global Banks
11:20am – 12:10pm
Presenter:
Piers Haben, Director, Oversight, European Banking
Authority (EBA)
Financial regulation and Stress Testing in
the EU and the Impact on Global Banks
GARP 15th Annual Risk Management Convention - March 4, 2014,
New York City
Piers Haben - Director, Oversight, European Banking Authority
(EBA)
EBA stress testing
Agenda 1. Supervisory stress testing and the
Objective: Multi
country/multi
institution
stress testing
as part of the
suite of stress
tests
suite of stress tests
2. Expectations of risk professionals
3. EBA stress testing- 2014 and beyond
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The European Banking Authority
Single rule
Book
• Standards
• Guidelines
Home host
• Cooperation
• Convergence
Risks &
reporting
P Haben EBA stress testing 2014
• Thematic risk reports
• Stress testing
• Supervisory reporting
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1 - The suite of stress tests
Type
Aim
Use
System-wide
micro- prudential
stress tests
Firms
Firms own stress
testing
Risk analysis
Supervisors
Micro prudential
stress tests under
pillars 1 and 2
bank-by-bank
information on risks
and vulnerabilities
Supervisory
analysis; early
warning tools
Macro
prudential
authorities
Macro economic
stress tests;
System-wide macro
prudential stress
tests
Aggregated
information on
systemic risks and
vulnerabilities
Systemic stability,
economic policy
implications
P Haben EBA stress testing 2014
Banks’ risk
management
•Hybrid in methods
and aims; multiple use
•Focused on sample
bottom up stress test
•Focused on sample
top down stress tests
•Focused on
comparability
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1 - Crisis / non crisis / company stress tests
2 - Expectations of risk professionals in banks
2. Expectations continued EBA Stress testing guidelines - review
Resources are key
Dedicated stress testing technical experts need to be involved. Board engagement
remains key. Small are also important.
Stress test requirements are multiple
And here to stay! But at the moment are spread over various supervisory manuals and
convergence is needed.
Challenge functions
Skilled resources and top-down stress testing is an increasing part of the landscape.
Reverse stress testing is essential
P Haben – EBA stress testing
Doing and
communicating the suite
of stress test
Capital and liquidity
Including reverse stress
tests and overcoming
disaster myopia
Using stress
tests
Skills
IT infrastructure
Board
Complementarity
Resources
But is still rare although it features as part of a recovery and resolution plan.
Transparency
Bank actions
Supervisory actions
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3 - Supervisory stress testing in the EU-where
are we?
3 - EBA stress testing – towards 2014
EBA Core Tier 1 capital ratio dispersion measures
(median, average, interquartile range, 5th and 95th percentiles)
3 – AQRs and EBA stress testing in 2014
A) Asset Quality Review-EBA recommendation to all supervisors
A)
Loan classification – common definitions of NPL and forbearance
B)
Collateral assessment
C)
Arrears management
D)
Provisioning
B) The EBA stress testing – A tool for supervisors
 The role of supervisors in challenging bottom-up results
 Consistency and Transparency
Capital ratio
S1
Net impact
S2
Base
M
S3
Net
Gross
Base case
Progression of a stress test
Stress impact on
Mitigating impact
different business lines
of actions
Final position
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3 - Multi Country / Multi Institution stress testing
# Cooperation amongst Supervisors
• 124 consolidated banks
• 28 jurisdictions
• 80% of total assets in the EU
P Haben -EBA Stress testing
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3 - Tools- Choices in multi country multi institutional stress
testing
Scenarios
Consistent
Comprehensive
Relevance
•Common triggers/drivers
•Narrative addresses risks du
jour
•Covers all countries
•Covers main variables
consistently
•Additional sensitivity for each
country / sector
•Avoid infinite iteration e.g.
switch off channels
Methodology
–A
constrained
Bottom up
approach
T
r
a
n
s
p
a
r
e
n
c
y
Static balance sheet
Caps, Floors & other
constraints
Complexity in focus areas
Credit
Simplicity in complex areas
Market and securitisation
P Haben – EBA stress testing
BenchMarks
Supervisory
reaction
function
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3 - Tools - Core building blocks of an EU wide stress test-stylised
overview
Common EU wide variables – GDP, inflation, Unemployment, interest rates + country variables
– Severity and Relevance are key.
Scenario
Credit risk: ensure RWAs translated by scenario . Also EU benchmarks
Methodology
- Static
balance
sheet
Market risk: Reduce net trading income by x standard deviations + 1 common shock
Securitisation: Simple downward migration of rating
Funding: Asymmetric pass through of interest rates with caps and floors on P&L -
Threshold
1 common definition of CT1 with one minimum identifiable threshold
Common menu of supervisory reaction functions
Transparency
Capital / RWA + EAD by asset class and geography / Sovereign / P&L – provisioning / Loss rates /
Risk parameter aggregate benchmarks
Scenario specificities
Methodology specificities
Threshold specificities
• Country sensitivities
asset prices (including
real estate); sector
shocks (e.g. shipping)
• Credit risk: risk factor
modelling
• Market risk: Idiosyncratic
risk profiling linked to
macro scenario
• securitisation: As above
• Funding: Detailed ALM
assessment and stress
• Additional thresholds of
level and movements
• Different target
thresholds (leverage,
liquidity)
• More prescriptive
supervisory reaction
function including
management actions
Idiosyncratic transparency
• Explanation of additional
sensitivities
Core +
3 – Tools Towards a common framework for
supervisory stress tests
General
Principles
Scenarios
Templates
Supervisory
Cooperation
Based on macroeconomic
and local risk factors
Input
Disclosure
Public/Private
Templates
Time
Horizon
Output
Portfolios/Granularity
Definitions
Assumptions
Risk Coverage
Transparency
+ Tools
Use of
results
Benchmarks
Reporting
Structure
Treatment of
management actions
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3- The role of supervisors in challenging bottom-up
results
Three components for assuring quality and reliability
Statistical
validation
• Benchmarks / outliers for
the risk parameters
• Back-testing of regulatory
risk parameters
• Floors vs benchmarks
• Completeness and
accuracy
• Correctness of
assumptions
• Application of
methodology
Top down
stress test
• Re-computation of results
• Independent (‘blind’)
assessment
• Closely aligned with the
bottom-up design
• Bank specific consistency
Supervisory
expertise
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3 - Transparency –Shining a light on
sovereign holdings
Transparency
key in 2011.
3400 data
points per bank
First consistent
sovereign data
In 2013 700
data points per
bank.
•
•
•
•
•
•
Source: EBA Transparency exercise 2013
Capital
RWA + EAD
by asset
class and
geography
Sovereign
P&L
provisioning
Loss rates
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3 - Cooperation in the European stress testing
universe
European
Commission
European Banking Authority
European Systemic Risk Board
National
Ministries
of
Finance
28 Nations, 28 National Supervisory Authorities + ECB
National Supervisory
Authorities
National Central
Banks
20 Non-SSM banks
European Central Bank
Single Supervisory Mechanism
Euro Zone Supervisory
Authorities
104 SSM banks
124 banks in 2014 EU-wide stress test
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Challenges posed for global banks by
stress-testing
Control
Governance – effective oversight and
communication
Integration
Results – form an input into decisionmaking
Consistency
Approach – globally consistent for
better comparability of results
Transparency
Full clarity – driving clear
interpretation and quality of dialogue
Capacity
Riskappetite
Resources – prepared to meet
increased demand
Active risk management – key
drivers and pre-emptive mitigating
actions
FirmSpecific
Microprudential
Macro
prudential
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Multi country multi institutional stress testing
2014 &
beyond
Scenario + methodology + templates
Tools
Input to Supervisors
Transparency
Input to Markets
Core elements
Transnational
cooperation
Institution
Suite of stress
tests
• Banks own
• Pillar 2
P Haben EBA stress testing 2014
Home host interaction
Banking groups
Systemic issues
Country
• Macro and
Micro
• Idiosyncratic
questions
International
• Banking
groups
• Systemic
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EUROPEAN BANKING AUTHORITY
Tower 42, 25 Old Broad Street
London EC2N 1HQ
Tel: +44 2073821770
Fax: +44 207382177-1/2
E-mail: [email protected]
http://www.eba.europa.eu
Annex -Transparency - Credit risk portfolio
structure by home country of banks
Source: EBA Transparency exercise 2013
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Annex - Tools - RWA outcomes and variance
Source: EBA THIRD INTERIM REPORT ON THE CONSISTENCY OF RISK-WEIGHTED ASSETS
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Annex - Stress testing in Pillar 2
Categorisation of institutions for the purposes of proportionality (based on systemic risk/relevance and top-down BMA)
Business Model Analysis
Internal Governance Assessment
Assessment of individual risks and
controls
ICAAP review
Liquidity and funding risk
Liquidity and funding risk assessment , including
institution’s internal liquidity assessment
Stress test
Stress test
Capital adequacy assessment
Liquidity adequacy assessment
Overall assessment (SREP summary)
Outcome of SREP process
Required capital
Quantitative/Qualitati
ve liquidity measures
Other supervisory
measures
Other supervisory
actions
Input to determining Supervisory examination programme
SREP
Early
intervention
Failing
/likely to fail
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