CEBS Guidelines on Stress Testing - European Banking Authority

82.When considering the impact of management actions, institutions should
explain the impact of the stress on both gross and net bases. Gross would
obviously include assumptions about strategy, growth and associated revenue
but exclude specific management actions in a stress such as winding down a
business line or raising capital.
83.Management intervention and mitigating actions may involve, for example:
a. the review of limits;
b. the revision of policies, such as those that relate to funding or capital
adequacy;
c. changes in the overall strategy and business plan including a reduction of
exposures to specific sectors, countries, regions, instruments or portfolios;
d. recourse to risk mitigation techniques; and
e. capital raising.
84.One of the measures available to management may be the raising of
additional capital. The presence of a capital buffer, of appropriate quality, can
be a significant mitigating factor as higher levels of capital increase the
degree of freedom management has when taking mitigating actions.
85.A contingency plan should contain emergency actions in case standard
measures turn out to be inadequate in the face of the most adverse
scenarios. When defining their contingency plans institutions should take into
consideration the reduction of the efficiency as a consequence of extremely
severe stressed situations.
Section 6 - Stress tests under ICAAP
Guideline 16. Institutions should evaluate the reliability of their
capital planning based on stress test results 20 .
86.Stress test results should be used to assess the viability of its capital plan in
adverse circumstances. To be effective for capital planning purposes, a range
of scenarios should be considered including at least an adverse economic
scenario that is severe but plausible, such as a severe economic downturn
and/or a system-wide shock to liquidity. The stress should be firm-wide
covering all relevant risk areas and material entities within the institution.
87.The stress tests should be forward-looking, cover the same period as the
institution’s ICAAP, be updated at least as regularly as the ICAAP and reflect
20 It should be noted that the assessment of stress tests is an important element of the
ICAAP-SREP dialogue between institutions and supervisors (Element 4 of the dialogue as
discussed in the <strong>CEBS</strong> <strong>Guidelines</strong> on the application of supervisory review process under
Pillar 2 (GL03)).
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