Circular Letter No. CC/2020/00000002 - EBA Guidelines on Stress Testing

Circular Letter No. CC/2020/00000002 Mod. 40000375/T – 01/14 Subject: Guidelines from the European Banking Authority regarding stress testing of institutions (EBA/GL/2018/04)

The European Banking Authority (EBA) issued the “Guidelines on stress testing of institutions” (EBA Guidelines EBA/GL/2018/04) on July 19, 2018, which entered into force on January 1, 2019, and are published on its website1.

The aforementioned document establishes common requirements, methodologies, and organizational processes for the conduct of stress tests by institutions, taking into account the adequacy of capital and liquidity and the risk management of institutions.

In accordance with Article 16(3) of Regulation (EU) No 1093/2010 of the European Parliament and of the Council of November 24, 2010, supervised institutions and the Bank of Portugal are required to make every effort to comply with the Guidelines.

In this context, the Bank of Portugal notified the EBA of its intention to incorporate the EBA Guidelines EBA/GL/2018/04 into its supervisory practices and revoked Instruction No. 4/2011 as outdated in light of the content of the EBA Guidelines EBA/GL/2018/04.

Accordingly, the Bank of Portugal emphasizes the importance for less significant credit institutions2 and investment companies classified as financial companies to observe the provisions of the EBA Guidelines EBA/GL/2018/04, which must be followed and applied within the context of the legal and regulatory provisions governing this matter. In particular, the relevance of the EBA Guidelines EBA/GL/2018/04 is highlighted for the purpose of defining management actions to be adopted following the results of stress tests and Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP) self-assessments, in accordance with Articles 115-J and 115-U of the General Regime of Credit Institutions and Financial Companies.

In view of the aforementioned, and in observance of the principle of proportionality, the Bank of Portugal considers it equally relevant to convey that its supervisory practices in this area will take into account the

1 https://eba.europa.eu/regulation-and-policy/supervisory-review-and-evaluation-srep-and-pillar-2/guidelines-on-stress-testing 2 In accordance with Article 6(4) of Council Regulation (EU) No 1024/2013 of October 15, 2013. The European Central Bank, in the context of the Single Supervisory Mechanism, notified the EBA of the adoption of these Guidelines for significant credit institutions.

Mod. 40000375/T – 01/14 “SREP Categories”3 as defined in the EBA Final Report on the Public Consultation on the EBA Guidelines EBA/GL/2018/04.

Thus, it is the expectation of the Bank of Portugal that the application by entities of the principle of proportionality takes into account, in addition to what is established in section 4.5 of the EBA Guidelines EBA/GL/2018/04, the following criteria: a. Entities falling under “Category 1”, i.e., the entities referred to in points (a) and (b) of Article 2(3) of the General Regime of Credit Institutions and Financial Companies [i.e., Global Systemically Important Institutions (G-SIIs) and Other Systemically Important Institutions (O-SIIs)] and, where applicable, other entities identified by the Bank of Portugal, based on the assessment of their size and internal organization, as well as the nature, scope, and complexity of their activities – full application of the EBA Guidelines EBA/GL/2018/04; b. “Category 2” entities – application of the EBA Guidelines EBA/GL/2018/04 in accordance with the nature, scale, size, characteristics, and complexity of their activities. In particular, the domestic or cross-border distribution of their activities and the simple or multiple nature of their business lines are relevant; and c. “Category 3” and “Category 4” entities – application of the EBA Guidelines EBA/GL/2018/04 in a proportional manner and in accordance with the relevance to their activities, resources, and systemic risk.

3 As defined in the “EBA Guidelines on common procedures and methodologies for the supervisor review and evaluation process (SREP) and stress tests conducted by the supervisor (EBA/GL/2014/13)”