The revised guidelines replace the Guidelines on technical aspects of stress testing under the supervisory review process that were published on 14 December 2006 and complement the principles set out in CEBS’s Guidelines on the Application of the Supervisory Review Process under Pillar 2.

The revised guidelines draw on the experience that supervisors have obtained by reviewing institutions’ stress tests in recent years, and take account of the revised principles for sound stress testing practices and supervision published by the Basel Committee of Banking Supervision (BCBS)¹.

These guidelines will assist institutions in understanding supervisory expectations of appropriate stress testing governance and infrastructure, and also cover the use of stress testing as a risk management tool. 

The guidelines are designed to assist institutions and supervisors in achieving robust, methodologically sound outputs that are effective in identifying risks and their potential mitigants during stressed conditions and their overall impact on an institution.

The revised guidelines are designed to be as practical as possible and aim to identify the relevant “building blocks” in an effective stress testing programme. The topics covered are ranging from stress testing governance structures and their use, to possible methodologies, including choosing the appropriate severity of scenarios, multi-layered approach to stress testing programmes, from simple portfolio-level to comprehensive firm-wide scenario analyses to outputs of stress testing programmes, including the interaction between the outcomes of stress tests and management intervention/mitigating actions.

The revised guidelines are supplemented by a number of annexes that provide examples of stress testing specific risks (market risk, securitisation, credit risk, operational risk, interest rate risk from non-trading activities and concentration risk), which illustrate some practices in relation to stress testing these risk types, but are not exhaustive lists of such practices.

CEBS expects its members to apply the present guidelines by 31 December 2010, meaning that by this date the guidelines should be transposed into national supervisory guidelines and reflected in the national supervisory manuals/handbooks, where applicable, and implemented in supervisory practises.

CEBS also expects institutions to make progress in implementing the guidelines following the transposition and recommendations/requirements of national supervisory authorities, and to put in place implementation programmes aimed at ensuring timely/ compliance with the new guidelines (e.g. gap analysis, implementation plans, etc.).