NBB_2019_07 - EBA Guidelines on Institution Stress Testing

NBB_2019_07 - 26 mars 2019 Circulaire – Page 1/3 boulevard de Berlaimont 14 – BE-1000 Bruxelles tél. +32 2 221 24 33 – fax + 32 2 221 31 04 numéro d’entreprise: 0203.201.340 RPM Bruxelles www.bnb.be Circulaire Bruxelles, le 26 mars 2019 Référence: NBB_2019_07 votre correspondant:
Patrick Van Roy tél. +32 2 221 53 33 – fax +32 2 221 31 04 patrick.vanroy@nbb.be EBA Guidelines on Institution Stress Testing Scope Credit institutions, stockbroking companies, branches established in Belgium of credit institutions and stockbroking companies subject to the law of States that are not members of the European Economic Area (EEA), and, finally, within the framework of consolidated supervision or supplementary supervision of conglomerates, financial companies and mixed financial companies. The recipients of this circular are hereinafter referred to as “the institutions”. Summary/Objectives This circular aims to provide institutions with a set of guidelines for the development of their stress testing programs. This circular replaces circular CBFA_2011_10 by incorporating the EBA Guidelines on Institution Stress Testing (EBA/GL/2018/04), which themselves replace the CEBS guidelines on the same subject (CEBS/GL/32). The EBA Guidelines on Institution Stress Testing are hereinafter referred to as “the Guidelines”.

Circulaire – Page 2/3 NBB_2019_07 - 26 mars 2019 Madame, Monsieur, The present circular follows the publication by the European Banking Authority (EBA) on 19 July 2018 of guidelines on the conduct of stress tests by institutions, in parallel with the publication by the Basel Committee in October 2018 of its own guidelines on the matter. It reproduces, in the annex and in its entirety, the guidelines developed by the EBA in French (EBA/GL/2018/04). The annex is available on the website of the National Bank of Belgium. Overview of the Guidelines and Motivation The EBA Guidelines aim to provide common requirements, methodologies and organizational processes for the conduct of stress tests by institutions, taking into account capital adequacy and risk management. Although stress tests are a risk management tool used for many years, the terminology used in this field needed to be clarified. This is why the EBA Guidelines also offer a list of definitions related to stress tests. Certain aspects that have become more important in recent years, such as reverse stress tests within the framework of institutions' recovery plans, have been integrated and defined in these Guidelines. In addition, new categories of risks are covered. The sections relating to business models, data aggregation, and the links between solvency and liquidity stress tests have also been developed or updated as the previous guidelines detailed in circular CBFA_2011_10 no longer corresponded to current best practices. The EBA Guidelines are broken down into different axes:
a) the governance arrangements for stress testing programs and their frequency; b) the data infrastructure, in particular data aggregation capabilities and reporting practices for stress testing purposes; c) the scope and field of application of stress tests, from stress tests conducted at the portfolio and individual risk level to full-scale stress tests at the institution level; d) the types of stress tests, from simple sensitivity analyses to more complex stress tests (including reverse stress tests) and the scenario analyses they must contain; e) a non-exhaustive range of individual risk domains to be taken into account to conduct stress tests in order to improve risk management, capital planning and liquidity management processes; f) the use of stress tests in the context of recovery and resolution planning, as well as in the assessment of the capital adequacy and liquidity of an institution in adverse circumstances for the ICAAP (Internal Capital Adequacy Assessment Process) and the ILAAP (Internal Liquidity Assessment Process), including the interaction between the results of stress tests and the management measures of institutions. Implementation of the Guidelines: Institutions directly supervised by the ECB Regarding institutions under the direct supervision of the ECB, the latter published in November 2018 two guides detailing its expectations regarding the ICAAP and the ILAAP1. In these guides, the ECB asks institutions to take into account the EBA Guidelines on stress testing. Paragraph 10 of the ECB guide on ICAAP states as follows:
“Besides this guide and the relevant provisions of Union law and national legislation, institutions are encouraged to consult other publications related to the ICAAP of the European Banking Authority (EBA). (…) In particular, the EBA Guidelines on internal governance (EBA/GL/2017/11) and on stress testing of institutions (EBA/GL/2018/04) as well as the 1 https://www.bankingsupervision.europa.eu/press/pr/date/2018/html/ssm.pr181109.fr.html

NBB_2019_07 - 26 mars 2019 Circulaire – Page 3/3 guidelines of the CEBS on concentration risk management within the framework of the prudential supervision process (GL31)”.
For liquidity stress tests, a similar formulation exists in the ECB guide on ILAAP.
Beyond these general references, the ECB's ICAAP and ILAAP guides define their own expectations regarding institutions' stress testing, notably via Principle 7 (“The regular conduct of stress tests aims to ensure capital and liquidity adequacy in adverse circumstances”). However, this does not mean that the ECB sets new standards in terms of stress testing. The ECB simply clarifies its expectations regarding the aspects described in the EBA Guidelines and refers to them when they are more detailed than its own guides. Beyond Principle 7 (entirely dedicated to stress testing), the other principles of the ECB's ICAAP and ILAAP guides integrate a number of aspects of the EBA Guidelines. Implementation of the Guidelines: Institutions supervised by the NBB Regarding less significant credit institutions, the NBB published in March 2018 a circular concerning its expectations regarding reporting on ICAAP and ILAAP (NBB_2018_11)2. In this circular, the NBB asks less significant credit institutions to ensure that they report a number of information on an annual basis, including a description of the general framework of stress testing, their results, the scenarios and assumptions implemented, the criteria used to select and calibrate the scenarios, the interaction or integration of stress testing into the ICAAP and ILAAP, as well as stress tests specifically conducted within the framework of the ICAAP and ILAAP. Generally speaking, the NBB's expectations regarding stress testing programs developed by less significant credit institutions in the context of the ICAAP and ILAAP, recovery plans or for other purposes are in line with the EBA Guidelines (EBA/GL/2018/04). It is important, however, to highlight the proportional nature of these expectations, the stress tests implemented by less significant credit institutions being consistent with their own risk profile and business model. The NBB's expectations regarding the stress testing programs of the other recipients of this circular are also in line with the EBA Guidelines while also obeying the necessary principle of proportionality. A copy of this is addressed to the commissioner(s), approved auditor(s) of your institution. Please accept, Madam, Sir, our distinguished salutations. Pierre Wunsch Governor
Annex (1) - only available on www.nbb.be
2 https://www.nbb.be/fr/articles/circulaire-nbb201811-attentes-en-matiere-de-reporting-relatif-linternal-capitaladequacy