Methodological Note - European Banking Authority

1 2021 EU-WIDE STRESS TEST Methodological NOTE 2021 EU-Wide Stress Test Methodological Note 29 January 2021 2021 EU-WIDE STRESS TEST Methodological NOTE 2 Contents List of tables 5 List of boxes 7 Abbreviations 9 1. Introduction 12 Background 12 Objectives of this note 12 Key aspects 13 Sample of banks 13 Scope of consolidation 13 Macroeconomic scenarios and risk type specific shocks 14 Time horizon and reference date 15 Regulatory regime and definition of capital 15 Hurdle rates 16 Accounting and tax regime 16 Static balance sheet assumption 16 Approach 17 Risk coverage 17 Process 18 Overview of the methodology by risk type 19 2.

2 Credit risk 25 Overview 25 Scope 27 High-level assumptions and definitions 27 Definitions 28 Static balance sheet assumption 36 Asset classes 38 Reporting requirements 40 Impact on P&L 44 Starting point-in-time risk parameters (a hierarchy of approaches ) 44 Projected point-in-time parameters (a hierarchy of approaches ) 45 Calculation of non-performing assets and provisions 49 a. Stock of provisions 49 b. Stock of provisions of S1 exposures 50 c. Stock of provisions of S2 exposures 52 d. Stock of provisions of S3 exposures 53 e. Provisions on sovereign exposures 54 FX lending 55 Impact on REA and IRB regulatory EL 56 REA for CCR 58 Securitisation exposures 58 2021 EU-WIDE STRESS TEST Methodological NOTE 3 3.

3 Market risk, CCR losses and CVA 64 Scope 65 High-level assumptions and definitions 66 Definitions 66 Static balance sheet assumption 71 Requirement for the trading exemption 71 Full revaluation of positions under partial or full fair value measurement 72 Reference date and time horizon 72 Market risk factors 72 Scope of application of the full revaluation 75 Features of the full revaluation 76 Trading exemption banks 79 Revaluation of market risk reserves 79 CVA impact on P&L and exclusion of the DVA impact 80 Reserves for liquidity and model uncertainty 81

4 Projection of client revenues for items held with a trading intent and NTI impact 85 Baseline NTI 85 Projection of client revenues under the adverse scenario 86 a. CA banks 86 b. Trading exemption banks 87 c. Adverse NTI 87 Counterparty credit risk losses 88 Impact on REA 92 4. NII 95 Overview 95 Scope 96 High-level assumptions and definitions 97 Definitions 97 Static balance sheet assumption 99 Treatment of maturing assets and liabilities 100 Treatment of non-performing exposures 101 Interest rate and currency shocks 103 Reporting requirements 104 a. General requirements 104 b.

5 Derivatives and embedded derivatives 105 c. Sight deposits 108 d. Other requirements 108 e. Template Breakdown 109 Impact on P&L 111 High-level constraints 111 Projection of the components of the EIR 112 a. Constraints on the margin component for liability positions 116 b. Constraints on the margin component for asset positions 119 5. Conduct risk and other operational risks 121 Overview 121 Scope 122 2021 EU-WIDE STRESS TEST Methodological NOTE 4 High-level assumptions and definitions 122 Definitions 122 Reporting requirements 124 Impact on P&L 128 Conduct risk treatment 128 a.

6 Qualitative approach to estimating future conduct risk losses 128 b. Quantitative approach to estimating future conduct risk losses 131 c. Floor for conduct risk loss projections 131 Treatment of other operational risks 133 Fall-back solution 134 Impact on capital requirements 134 AMA 134 Basic approach and standard approach 135 6. Non-interest income, expenses and capital 136 Overview 136 Scope 137 High-level assumptions and definitions 139 Definitions 139 Approach 139 Reporting requirements 140 Impact on P&L and capital 140 Dividend income and NFCI 140 Administrative expenses, other main cost items and one-off adjustments 143 Dividends paid and distribution restrictions under Article 141 of the CRD 146 Tax treatment 148 Other P&L impact 151 Impact on capital 153 Annex I: Sample of banks 157 Annex II: Template overview 161 Annex III.

7 Summary of information to be provided by banks 163 Annex IV: Summary of key constraints and other quantitative requirements 169 Annex V: Overview of the differences between CA banks and trading exemption banks 177 Annex VI: Requirements for banks applying nGAAP 179 Credit risk 179 Market risk 180 NII 180 NIEC 180 Annex VII: Exposure by LTV bucket for STA portfolios 181 Annex VIII: Consistent reporting of NII variables on portfolio level 182 2021 EU-WIDE STRESS TEST Methodological NOTE 5 List of tables Table 1: Overview of the methodology by risk type .. 19 Table 2: Overview of IRB asset classes.

8 38 Table 3: Overview of STA asset classes .. 39 Table 4: Historical information to be provided for 2019-2020 .. 41 Table 5: Starting point parameters to be provided for 2020 .. 43 Table 6: FX lending threshold (per country of counterparty) IRB asset classes .. 55 Table 7: FX lending threshold (per country of counterparty) STA asset classes .. 55 Table 8: Definition of sensitivities .. 77 Table 9: Informations about the CVA to be reported in the template CSV_MR_RESERVE .. 81 Table 10: VaR assumptions for the calculation of the REA .. 93 Table 11: Mapping of the IRB credit risk asset class to the NII asset type.

9 102 Table 12: Mapping of the STA credit risk asset class to the NII asset type .. 102 Table 13: Projection of conduct risk losses under the qualitative approach and in the adverse scenario Illustration .. 130 Table 14: Sample of banks .. 157 Table 15: Overview of CSV templates .. 161 Table 16: Overview of TRA templates .. 162 Table 17: Credit risk (excluding securitisations) information to be provided by banks .. 163 Table 18: Credit risk (securitisations) qualitative information to be provided by banks .. 165 Table 19: Market risk, CCR losses and CVA qualitative information to be provided by banks.

10 165 Table 20: NII qualitative information to be provided by banks .. 166 Table 21: Conduct risk and other operational risk qualitative information to be provided by banks .. 167 Table 22: Non-interest income, expenses and capital qualitative information to be provided by banks .. 167 Table 23: Credit risk (excluding securitisations) key constraints and quantitative requirements .. 169 Table 24: Credit risk (securitisations) key constraints and quantitative requirements .. 170 Table 25: Market risk, counterparty credit risk losses and CVA key constraints and quantitative requirements.