EBA/ECB Stress Tests Framing : Stress tests methodologies and governance framework

The client is a Public Investment and Financing group serving French companies which has two main characteristics.

• The Bank has a mission of general interest: in case of financial difficulties, the Bank would not be able to stop any new activity
• The shareholding of the Bank is public with a direct link with the French government

THE CHALLENGE

The Solvency Function wanted to work towards a robust stress testing framework, starting with framing the ECB/EBA 2020 supervisory stress test exercise by establishing the key components related to stress testing methodologies and the design of a target governance framework for internal stress tests.

It was in this context that Avantage Reply was requested to provide subject matter expert support to the following key aspects by:

• Sharing elements of practices related to internal stress tests framework
• Providing expert support on all methodological aspects of stress tests (methodologies of EBA ST 2020 and action plan) and capital planning
• Defining and implementing a framework and governance for internal stress tests
• Ensuring autonomy to conduct the various work and iterations with the various key contributors to the ST process
• Ensuring review and construction of methodological documentation.

APPROACH AND SOLUTION

To meet the client needs, Avantage Reply has deployed an efficient device composed of:

• Subject matter expert support whose task has been to frame and structure the various parts of the project
• Experienced manager and senior consultant who has already worked on stress test issues

In practice, the approach adopted by Avantage Reply has been based on three main phases:

Phase 1: Conduct an operational and methodological gap analysis of EBA ST 2020

The aim of this phase is to assess the possible specificities of the EBA ST exercise that may require significant workloads within the different teams by identifying:

• Risk modules and their referents
• Perimeters and objectives of all modules
• Methodologies and P&L, OCI, RWA impacts
• Data required

Phase 2: Define a EBA ST/ Internal ST governance

This phase consists of qualifying and structuring a governance mechanism based on the modules of the EBA ST exercise and adaptable for Internal ST. The objectives are mainly the management, the governance and the implementation of stress tests by defining:

• Stress tests comitology (project committee, steering committee, etc.)
• Validation comitology
• Methodologies and P&L, OCI, RWA impacts
• Data required

Phase 3: Define a target device of stress tests

The aim here is to define the principles of the device with its main components including:

• Perimeter and objectives
• Governance
• Business model and vulnerabilities
• Scenarios and methodologies
• Reporting and internal steering
• Data and systems

RESULTS AND BENEFITS

The client has received a complete and granular package regarding the key methodologies per module in line with supervisory requirements. Besides, the target governance framework has been defined and implemented allowing to be well prepared in this challenging exercises. In addition, the client will be able to capitalise on this structuring for the benefit of the next internal stress tests exercise.