A 29-page study from the EBA found that despite national competent authorities knowing what the standards are against which banks and other credit institutions should be measured, the tests themselves do not fully implement the EBA’s guidelines.
According to the peer review, roughly 48 per cent of stress tests “fully applied” the EBA’s guidelines on how to carry out the exams, with 35 per cent “largely applying” the standards, and 12 per cent applying them only partially.
The aim of the review was to assess and compare the effectiveness of the supervisory activities related to the review of banks’ own stress-testing frameworks across the EU, as well as the implementation of related provisions by supervising authorities.
The report concluded: “EBA members and observers largely applied the existing guidelines. Some NCAs have demonstrated examples of particularly good practice in a number of areas, while others are still making progress on stress testing in their jurisdiction.”
The report reiterated that, to prevent a similar crisis to the one in 2007/2008, financial institutions are required to take a forward-looking view in their risk management, strategic planning and capital planning, with stress testing being a key risk management tool.
The Committee of European Banking Supervisors, the EBA’s predecessor, introduced its guidelines on stress testing in 2010.
The guidelines mean supervising authorities have to challenge “the scope, severity, assumptions and mitigating actions” of firm-wide stress tests.
Tony Catt, compliance officer at East Sussex-based Anthony Catt, said: “It’s one of these well-meaning things that Europe foists on us from time to time. A lot are needlessly complicated and it’s a question of whether people think banks are going to be financially stronger.
“The problem is that the information for review is published by banks on a largely unaudited basis, so they can say what they like. I would question how accurate and how relevant these tests are, and whether banks are financially stronger as a result.
“The main benefit is banks have had to review closely what they do, which they wouldn’t have done otherwise. I do wonder how useful these stress tests are, unless they’ve been given strict and understandable guidelines.”