11 April 2013

EBF publishes recommendations on EBA Stress-Testing exercises

EBF sees stress-testing as a tool that should deliver additional information as to the resilience of the banking system, without raising unnecessary doubts on the continued progress shown by the industry on the way to stability.

The EBF is committed to restoring confidence in the EU banking sector as a necessary step towards financial stability. European banks have successively recapitalised themselves after the crisis showing significant increase in the level and quality of their capital ratios. This process is taking place against the background of the upcoming regulatory framework and further pressure from markets in anticipation of the new rules. In this context, the EBF sees stress-testing as a tool that should deliver additional information as to the resilience of the banking system without raising unnecessary doubts on the continued progress shown by the industry on the way to stability.

The EBA stress test is a central piece in restoring confidence in the EU banking sector. It has a significant impact on the outlook of analysts and the wider public on the EU banking sector. At the same time, this sophisticated tool requires precision in the definition of scenarios and assumptions as well as getting across clear and unambiguous messages in the communication of results. Assumptions taken should be explicitly cited so as to avoid misrepresentations of results.

This document contains a series of recommendations made by the members of the EBF Stress-Testing Working Group who are in charge of stress-testing in their banks and have participated in the completion of previous EBA stress-testing exercises. Responses have also been coordinated by the National Banking Associations to take account of the views of the wider national banking systems.

At the time this note is drafted, some banks have received draft templates from the EBA. Further methodological recommendations may be included in an updated version of this EBF paper taking into account the draft templates.

General remarks:

• It should be made clear that the EBA stress test exercise is not intended to serve as an asset quality review ahead of the ECB takeover of supervisory responsibility for Eurozone banks as envisaged in the proposal underway for a Single Supervisory Mechanism..
• The main purpose of the exercise should be clearly defined and communicated from the beginning: whether it is to test the banks’ resilience to specific scenarios that may seem plausible, e.g. related to the sovereign debt crisis or to oil prices; or it is to measure the capacity to withstand an equivalent stress scenario for each country.

The first approach would lead to varying degrees of severity in different countries however it would only portray the consequences of one single potential event. The second approach could be consistent across countries however it would represent the effects of a range of unpredictable events. For the sake of transparency it would be good that EBA’s choice be explained upfront.

Press release

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