Overarching stress testing policy
Developing an overarching stress testing policy
Stress tests are an important instrument in both regulatory and internal risk management for financial institutions. Regulatory requirements result from Pillar I (CRD) and Pillar 2 (SREP) as well as the EBA stress testing guidelines. Furthermore, the regular EBA and ECB stress tests have established themselves as regulatory review points for resilience.
Stress tests are an appropriate method for internal risk management to analyze the effects of various crisis situations on the capital resources and risk-bearing capacity of a bank.
The overarching stress testing policy which zeb developed based on the existing stress test concepts of Raiffeisen Holding forms the framework for all stress testing activities at the Raiffeisen Holding credit institution group.
The Raiffeisen Holding credit institution group (R-Holding KI-Gruppe) consists of the individual institutions Raiffeisen- Holding NÖ-Wien reg. Gen. m. b. H. and Raiffeisenlandesbank NÖ-Wien AG alongside further subsidiaries.
In terms of stress tests, for R-Holding KI Gruppe, aside from the dedicated guidelines from the European Banking Authority (e.g. EBA/CP/2015/28 for stress tests; EBA/GL/2014/13 for SREP), there are also relevant requirements from the Austrian Raiffeisen deposit protection scheme (ÖRE). The latter are also especially applied to stress tests that are conducted for the purposes of the institutional protection schemes (national and federal state IPS) and as part of the recovery plans of the institutions associated with the ÖRE.
To establish an overall framework for the stress test program at R-Holding KI-Gruppe and to consolidate and harmonize the stress test concepts already existing for the individual scopes and risk types, zeb created an overarching stress testing policy in close coordination with employees from Raiffeisen Holding and the Raiffeisenlandesbank. zeb used its comprehensive regulatory expertise in combination with in-depth specialist knowledge of bank management in order to meet the wide-ranging requirements.
The stress testing policy forms a framework for specifying the type and scope of stress tests, the scenarios to be monitored, the methodology and the processes as well as the reporting of stress tests (see figure).
Governance defines the overarching aspects of dealing with stress tests which have to be considered groupwide and specifically per institution through the stress testing program of R Holding KI-Gruppe. This especially includes the overall responsibility of the management.
The framework catalogs the relevant stress tests while specifying the objective, affected risk types, observed time frame, risk parameters to be adjusted, calculation logic and the result values aimed at, among others.
The stress testing policy treats scenarios separately from the stress tests shown in the framework as each scenario can in principle be used for various types of stress test and also beyond. The description of a scenario includes a plausible and understandable story line as well as possible triggers. It specifies drivers that influence the business model or the financial situation of the institution as well as threats to the affected portfolios and customer segments.
The methods describe the processes both for conventional stress tests, in the sense of adjusting input parameters for risk models to the conditions of the observed stress scenario, and also for reverse stress tests. Reverse stress tests determine the combination of risk parameters that lead to a certain target value in a stress scenario, e.g. a depletion of the available risk coverage fund.
Contents of the stress testing policy
outlook and conclusion
The stress testing policy puts the main focus of attention on the ICAAP stress tests envisaged as part of the regulatory review process of Pillar II. The flexible framework established in the stress testing policy, however, also allows EBA stress tests that differ from an institution’s internal stress tests in terms of their objectives and methodology to be integrated into the same overall process. Therefore, R-Holding KI-Gruppe now holds comprehensive, overarching guidelines for both current and future stress testing activities.
The underlying motivation is not solely based on regulatory requirements, but rather an explicit and vested interest of the group of companies rooted in a sense of responsibility to owners and creditors. The holistic stress testing program presented in the stress testing policy allows a more effective capital allocation, improves the risk-return profile and furthermore offers approaches for improvements to risk pricing, early risk detection and risk management.