How Relevant Are the New Elements in the 2016 Stress Test Design?

08-06-2016

The 2016 EU-wide stress test requires banks to assess the impact of exchange rate movements on the quality of their foreign exchange lending. This is useful but not sufficient information for supervisors to be able to assess the implications of exchange rate risk for bank solvency. The 2016 stress test further asks banks to report in detail the expected future costs associated with already known misconduct cases. Information of this kind enables supervisors to ascertain whether banks’ current levels of provisioning for such costs are adequate. If not, supervisors should follow up by requiring banks to increase their provisioning levels to reflect projected future costs.

The 2016 EU-wide stress test requires banks to assess the impact of exchange rate movements on the quality of their foreign exchange lending. This is useful but not sufficient information for supervisors to be able to assess the implications of exchange rate risk for bank solvency. The 2016 stress test further asks banks to report in detail the expected future costs associated with already known misconduct cases. Information of this kind enables supervisors to ascertain whether banks’ current levels of provisioning for such costs are adequate. If not, supervisors should follow up by requiring banks to increase their provisioning levels to reflect projected future costs.