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EBA publishes final version of guidelines to strengthen Pillar 2 framework

Posted on Aug 10, 2018

The EBA finalised guidelines on the supervisory review and evaluation process (SREP), on stress testing as well as on interest rate risk in the banking book (IRRBB). Read more about how new regulation affects your institution.

Guidelines on the Supervisory Review and Evaluation Process

The final version of the guidelines on common procedures and methodologies for SREP and supervisory stress testing (EBA/GL/2018/03) published 19 July 2018 completes the consultation process outlined in the EBA’s 2017 Pillar 2 Roadmap and updates the draft guideline published end of October 2017 with a three-month consultation period.

There are few changes compared to the last draft – none of them has material character. This, of course, reflects that substantial changes were introduced before, amending the 2014 guidelines, e.g. Pillar 2-Guidance (P2G) and assessment of institution’s own stress testing for ICAAP and ILAAP purposes.

The new guidelines will apply from 1 January 2019. A second revision is planned in 2018/19 after finalization and adoption of the CRD V/ CRR II.

For a detailed analysis of how your institution is affected and about possible adjustments to your Pillar 2 framework, please contact Mr Marc Daferner, email: marc.daferner@fintegral.com, telephone: +49 160 58 34 253.

Guidelines on institutions’ stress testing

The final version of the guidelines (EBA/GL/2018/04) on institutions’ stress testing was published as part of the “Pillar 2 package” on 19 July 2018, which also included guidelines on the SREP and IRRBB. During the three-month consultation period 13 institutions commented the draft guidelines issued end of October 2017. The changes implemented by the EBA provide clarification in definitions and wording.

As in the SREP guidelines major changes to the stress testing framework were already introduced with the 2017 draft guidelines, e.g. on stress testing governance, scope of stress testing with regards to risk types and stress testing methods, data management and reporting and documentation.

The challenges banks now face depend on how requirements of the draft guideline have already been implemented. To benefit from our extensive experience both in the development of an efficient stress testing framework and the setup of risk type specific stress tests, please get in touch with Mr Marc Daferner, email: marc.daferner@fintegral.com, telephone: +49 160 58 34 253.

Guidelines on interest rate risk arising from non-trading book activities

The final version of the guidelines (EBA/GL/2018/02) on the management of interest rate risk arising from non-trading book activities was published as part of the “Pillar 2 package” on 19 July 2018, which also included guidelines on SREP and institutions’ stress testing. During the three-month consultation period, 23 institutions commented the draft guidelines issued end of October 2017.

Major changes to the draft guidelines comprise the following points:

  • Strengthening of the general proportionality principle throughout the document;
  • Institutions are required to include expected cash flows of NPEs (net of provisions) for the purpose of the outlier tests only if their NPE ratio is above a newly introduced materiality threshold of 2%;
  • Adjustment of the proposed minimum level of negative interest rates for the linear lower bound (post-shock interest rate floor) from -150 bps to -100 bps as well as clarification that institutions should apply the observed rates if they are lower than the floor;
  • Currency aggregation: When calculating the aggregate EVE change for the outlier tests, institutions are now allowed to include positive changes to EVE but weighting this positive changes by a factor of 50%; and
  • Narrowing the definition of CSRBB by using a positive definition and leaving out unintended items as well as exclusion of liabilities from the scope of the CSRBB. The high-level provisions on CSRBB within the guidelines will be detailed in the guidelines expected to be issued by the EBA under the mandate of the CRD V.

Furthermore, the implementation date was postponed to 30 June 2019 with an additional 6 months of transitional provisions for SREP category 3 and 4 institutions to implement the requirements on CSRBB and the additional outlier test.

For a detailed analysis of the requirements and implementation issues, please contact Mr Andreas Peter, email: andreas.peter@fintegral.com, telephone: +49 160 58 34 066.

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