Guest blog by Amal Merzouk, Senior Business Solutions Manager Risk at SAS
Stress-testing is one of seven conditions required by the Basel Committee before banks can use an internal model. The Basel Committee has engaged with the industry to examine stress-testing practices. In Europe, however, the structure and power of regulators have been reformed, stress tests and other macro prudential tools have been introduced, and the largest Eurozone banks are now under the watchful eye of the European Central Bank via the Single Supervisory Mechanism.
In the meantime, the European Banking Authority (EBA) has agreed some key elements of an EU-wide stress test to take place in 2016. This is based on a constrained bottom-up approach, and includes a static balance sheet assumption and wide risk coverage to assess EU banks’ solvency. It does, however, build on the Authority’s less onerous transparency test last year. This involved 109 lenders publishing information on bank balance sheets, covering composition of capital, leverage ratio, sovereign exposure, risk-weighted assets and credit risk exposure.
The new stress test for 2016, which will feature many aspects of the 2014 EU-wide test, will build on lessons learned from previous exercises. This will ensure that results are incorporated as an input to the process.
A total of 100 senior banking officials from US and Europe assessed how the rise of stress-testing is affecting their organizations. Key findings revealed there is still unfinished work before risk managers are fully compliant with the regulatory requirements. The main challenge is the use of stress-testing, and its integration into risk governance, not least because the financial crisis also revealed weaknesses in organizational aspects of stress-testing programs.
Download a summary of SAS and Longitude Research's survey findings on banks and stress-testing.