Implementation of the supervisory stress test

SUMMARY

Avantage Reply supported a large European bank with the submission of the 2020 ECB Stress Test exercise. The bank was looking for the assistance in implementing the new stress test methodology, completing all stress test templates, developing the explanatory notes and performing all necessary corrections during the ECB submission period.

Avantage Reply supported the client through the 2020 ECB Stress Test as well as the 2021 post-COVID relaunch of the ECB Stress Test exercise. In addition, Avantage Reply carried out all project management activities during this project.

CUSTOMER GOALS

The supervisory Stress Test exercises require a lot of effort in terms of methodology and data. The customer invited us to support him with this exercise to ensure an on-time submission of all required documents and templates to the ECB.

CHALLENGES

The 2020 Stress Test exercise consisted of more than 20 templates covering various topics such as credit risk, market risk and others, the completion of which requires many data. Numerous validation rules check the validity of the submitted data across all templates. In addition, the information provided within the Stress Test templates is being validated against data submitted in FINREP and COREP reports.

Compared to the 2018 Stress Test, the credit risk and net interest income methodologies were significantly changed. Thus, a new methodology was required to satisfy all new requirement in these templates.

Due to the COVID-19 crisis, the ECB decided to postpone the final submission of the stress test templates until 2021. For the 2021 Stress Test exercise, the supervisor decided to include additional templates in order to collect information on the impact of the pandemic on significant institutions.

On top of all data and methodology challenges, the ECB Stress Test exercise is carried out over a very short time period putting additional pressure on the teams involved in this exercise.

SOLUTION

Avantage Reply started the assignment with a recap of the work that was performed by our team for the 2018 Stress Test in order to facilitate the identification of key stakeholders and data sources. Explanatory notes created during the 2018 Stress Test exercise were retrieved and compared to the new requirements for the 2020/2021 Stress Test.

Following a gap assessment for the 2020 Stress Test requirements, the following activities were performed by our team:

• Project management: The project was split into several workstreams. Regular meetings were organised to enhance the communication across different stakeholders and to monitor the status of the project.
• Data: Our team analysed the data needed to calculate the starting points for the workstreams to ensure the appropriateness, accuracy and completeness of each data point.
• Methodology: We developed an approach to calculate the projections for each template. Specifically for the NII templates, our team developed an excel-based tool to perform all necessary calculations.
• Documentation: Our team drafted the explanatory notes and supported the client in the production of the QA documents for submission to the ECB.
• Submission: During the submission period, our team supported the client in the correction of validation warnings in the Stress Test templates and re-submitting the results.



CUSTOMER DESCRIPTION

Our client is the European bank operating in the Retail, Private Banking and Corporate Banking sectors with presence established in multiple countries.

Due to its systemic importance in one of the European countries, the Bank is requested by the Single Resolution Board to develop its resolution plan on a year-to-year basis.