Basel 3 June 2012

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Basel iii Compliance ProfessionalsAssociation (BiiiCPA)
1200G Street NW Suite800Washington, DC 20005-6705USA Tel:
202-449-9750Web: www.basel-iii-association.com
Dear Member,
Stresstestingisthemost important challengethismonth.
PressReleases
Board of Governorsof the Federal ReserveSystem
Federal Deposit InsuranceCorporation
Office of the Comptroller of the Currency
For Immediate Release May 14, 2012
Agencies Finalize Large Bank StressTesting Guidance
The Federal ReserveBoard, the Office of the Comptroller of the Currency, and the
Federal Deposit InsuranceCorporation on Monday issued final supervisory guidance
regardingstress-testingpractices at banking organizationswith total consolidated
assetsof more than $10billion.
The guidance highlightsthe importance of stresstesting at banking organizationsas
an ongoing risk management practicethat supports a banking organization's
forward-looking assessmentof its risks and better equips it to addressa range of
adverse outcomes.
The recent financial crisisunderscored the need for banking organizationsto
incorporate stresstesting into their risk management practices, demonstrating that
Basel iii ComplianceProfessionalsAssociation (BiiiCPA)
www.basel-iii-association.com

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banking organizationsunprepared for particularly adverseeventsand circumstances
can suffer acute threats to their financial condition and viability.
This guidance buildsupon previously issued supervisory guidance that discussesthe
usesand meritsof stresstesting in specific areasof risk management.
The guidance outlinesgeneral principles for a satisfactorystresstesting framework
and describesvariousstresstesting approaches and how stresstesting should be used
at variouslevelswithin an organization.
The guidance alsodiscussesthe importance of stresstesting in capital and liquidity
planning and the importanceof strong internal governance and controlsaspart of an
effective stress-testingframework.
The guidance does not implement the stresstesting requirements in the Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) or in the Federal
ReserveBoard's capital plan rule that apply to certain companies, asthose
requirementshave been or are being implemented through separate proposals by the
respective agencies.
However, the agenciesexpect that banking organizationswith total consolidated
assetsof morethan$10billion would follow theprinciplesset forth in theguidance--as
well asother relevant supervisory guidance--whenconducting stresstesting in
accordancewith the Dodd-Frank Act, the capital plan rule, and other statutory or
regulatoryrequirements.
DEPARTMENT OF THE TREASURY
FEDERAL RESERVE SYSTEM
FEDERAL DEPOSIT INSURANCE CORPORATION
Supervisory Guidance on StressTesting for Banking
Organizations with More Than $10Billion In Total
Consolidated Assets
AGENCIES: Board of Governorsof the Federal ReserveSystem (―Board‖ or
―Federal Reserve‖);Federal Deposit InsuranceCorporation (―FDIC‖); Office of the
Comptroller of the Currency, Treasury(―OCC‖).

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ACTION: Final supervisory guidance.
SUMMARY: The Board, FDIC and OCC, (collectively, the ―agencies‖) are
issuing this guidance, which outlines high-level principles for stresstesting practices,
applicable to all Federal Reserve-supervised, FDIC-supervised, and OCC-supervised
banking organizationswith more than $10billion in total consolidated assets.
The guidance highlightsthe importance of stresstesting asan ongoing risk
management practice that supports a banking organization‘s forward-looking
assessment of itsrisks and better equips the organization to addressa rangeof
adverse outcomes.
DATES: This guidance will becomeeffective on July 23, 2012.
I. Background
On June 15, 2011, the agencies requested public comment on joint proposed guidance
on the useof stresstesting asan ongoing risk management practiceby banking
organizationswith more than $10billion in total consolidated assets(the proposed
guidance).
The public comment period on the proposedguidance closed on July 29,
2011.
The agencies areadopting the guidance in final form with certain modificationsthat
arediscussedbelow (the final guidance).
Asdescribed below, this guidance does not apply to banking organizationswith
consolidated assetsof $10billion or less.
All banking organizations should have the capacityto understand their risks and the
potential impact of stressful eventsand circumstances ontheir financial condition.
The agencieshavepreviously highlighted theuseof stresstesting asameansto better
understand the range of a banking organization‘s potential risk exposures.
The 2007- 2009financial crisisfurtherunderscoredtheneedfor banking organizations
to incorporate stresstesting into their risk management, asbanking organizations
unprepared for stressful eventsand circumstancescan suffer acutethreatsto their
financial condition and viability.

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The final guidanceisintendedto beconsistent with soundindustrypracticesandwith
international supervisory standards.
Building upon previously issued supervisory guidance that discussesthe usesand
meritsof stresstesting in specific areasof risk management, the final guidance
provides principles that a banking organization should follow when conducting its
stresstesting activities.
The guidance outlinesbroad principles for a satisfactorystresstesting
framework and describesthe manner in which stresstesting should be employed as
an integral component of riskmanagementthat isapplicable at variouslevels of
aggregation within a banking organization and that contributes to capital and
liquidity planning.
While the guidance is not intended to provide detailed instructionsfor conducting
stresstesting for any particular risk or businessarea, the guidance describes several
typesof stresstesting activitiesand how they may be most appropriately used by
banking organizationssubject to this guidance.
The final guidance does not implement the stresstesting requirementsimposed by
the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
onfinancial companies regulated by theOCC, FDIC, orBoardwithtotal consolidated
assetsof morethan $10billion or bytheBoard‘scapital plan rule on U.S. bank holding
companieswith total consolidated assetsequal to or greater than $50billion.
The Dodd-Frank Act‘s stresstesting requirementsarebeing implemented through
separatenoticesof proposedrulemaking by the respective agencies.
The Board issued the final capital plan rule on November 22, 2011.
In light of theserecent rulemaking efforts on stresstesting, the guidance provides
banking organizationswith principles for conducting their stresstesting activities to,
among other things, ensure that thoseactivitiesare adequately integratedinto overall
risk management.
The agencies expectsuch companies would follow the principles set forth in the
guidance – aswell asother relevant supervisory guidance – when conducting stress
testing in accordance with statutory or regulatory requirements.

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II. Discussion of Comments on the Proposed Guidance
The agencies received 17comment letterson the proposedguidance.
Commentersincludedfinancial tradeassociations,bank holding companies, financial
advisory firms, and individuals. Commentersgenerally expressed support for the
proposedguidance.
However, several commentersrecommended changesto, or clarification of, certain
provisionsof the proposed guidance, asdiscussedbelow.
In response to these comments, the agencies have clarified the principles set forth in
the guidance and modified the proposed guidance in certain respectsasdescribed in
this section.
A. Scope of application
The proposed guidance would have applied to all banking organizations
supervised by the agencieswith more than $10billion in total consolidated assets.
Specifically,
- with respectto the OCC, thesebanking organizations would have included
national banking associationsand federal branchesand agencies;
- with respect to the Board, these banking organizations would have included state
member banks, bank holding companies, and all other institutions for which the
Board is the primary federal supervisor;
- with respectto the FDIC, thesebanking organizations would have included state
nonmember banks and all other institutionsfor which the FDIC is the primary
federal supervisor.
The proposed guidance indicated that a banking organization should
develop and implement itsstresstesting framework in a manner commensurate with
itssize, complexity, business activities, and overall risk profile.
Somecommenterssupported the total consolidated asset threshold (i.e., more than
$10billion), but othersnoted the importance and value of stresstesting for smaller
banking organizations.

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Consistent with the proposed guidance, no supervised banking organization with $10
billion or lessin total consolidated assetsis subject to this final guidance.
The agencies believe that $10billion is the appropriate threshold for the guidance
basedon the general complexity of firmsabove this size.
However, the agencies note that previously issued supervisory guidance applicable to
all supervised institutions discussesthe useof stresstesting asa tool in certain aspects
of risk management—such as for commercial real estate concentrations, liquidity risk
management, and interest-rate risk management.
The agencies receivedtwo commentssuggesting that the $10billion total
consolidated asset threshold be measuredover a four quarter period in order to
minimize thelikelihood that temporaryasset fluctuationswould trigger application of
the guidance.
The agencies donot establish an asset calculation methodology in the final guidance;
however, banking organizationswith assetsnear the threshold should usereasonable
judgment and consider, in conjunction with their primary federal supervisor as
appropriate, whether they should consider preparing to follow the guidance.
Threecommentersexpressedconcern that foreign banking organizations (FBOs) are
required to follow stresstesting guidelines established by their home country
supervisorsand suggestedthat theagenciesgive consideration to thoserequirements.
When developing the guidance, the agenciessought to ensurethat it would not
introduce inconsistencieswith internationally agreedsupervisory standards.
The agencies recognize that an FBO‘s U.S. operations are part of the FBO‘s global
enterprisesubject to requirementsof itshome country.
The agencies provided sufficient flexibility in the proposedguidance sothat the
guidance could apply to varioustypes of organizations.
In this final guidance, the agencies clarify that certain aspectsof the guidance may
not apply to U.S. branchesand agencies of FBOs (such asthe portionsrelatedto
capital stresstesting) or may apply differently (such asportionsrelated to governance
and controls).
Supervisorswill take theseissuesinto consideration when evaluating the ability of
U.S. offices of FBOs to meet the principles in the guidance.

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Twocommentersexpressedconcern regarding the application of the proposed
guidance to savingsand loan holding companies(SLHCs).
They suggestedthat the Board issue separate guidance for SLHCs, asthese
institutions would face adifferent set of stresstestingassumptionsand scenariosthan
The Board believes that the guidance is instructive to SLHCsto the samedegreeit is
for bank holding companies.
The Federal Reserve became the primary federal supervisor for SLHCson July 21,
2011, after the agencies published the proposed guidance for public comment but
before the end of the comment period.
While the Board recognizes that certain differencesdo exist betweenbank holding
companies and SLHCs, the Board believes the guidance containsflexibility adequate
to accommodatethevariationsin size, complexity, businessactivities,and overall risk
profile of all banking organizationsthat meet the asset threshold.
Thus, the guidance anticipatesthat each banking organization, including each
SLHC, would implement stresstesting in a manner consistent with itsown business
and risk profile.
Similarly, one commenter advocated that the OCC proposeseparate guidance on
stresstesting specifically tailored to savingsassociations.
The OCC becamethe primary federal supervisor for federal savingsassociationson
July 21, 2011.
While the OCC recognizesthat certain differencesdo exist betweennational banks
and federal savings associations,the OCC notes that the final guidance contains
flexibilityadequate to accommodate the variationsin size, complexity, business
activities, and overall risk profile of all banking organizationsthat meet the asset
threshold.
Thus, it is alsoexpectedthat eachfederal savingsassociation would implement the
guidance consistent with itsown businessand risk profile.
Several commentersrequestedclarification on the linkage between the stresstesting
guidanceand the stresstesting requirementsin the Dodd-Frank Act.

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In devising the guidance, the agenciesendeavored to ensure that the proposedand
final guidance is consistent with the stresstesting requirementsunder the
Dodd-Frank Act and believe that the principles set forth in the final guidance are
useful when conducting the stresstests
required under theAct.
Notably, the final guidance was framed broadly to inform a banking organization‘s
use of stresstesting in overall risk management, not just stresstests required under
the Dodd-Frank Act.
Dodd-F rank stress tes ts would generally be con sidered part o f an
organ ization‘s overall stresstesting framework asdescribed in the
stresstesting guidance.
B. StressTesting Principles
Asnoted above, the proposed guidance identified and included a discussion of four
keyprinciples for a banking organization‘s stresstesting framework and relatedstress
test results, namely that:
(1)Abanking organization‘s stresstesting framework should include activitiesand
exercises that are tailored to and sufficiently capture the banking organization‘s
exposures, activities, and risks;
(2)An effective stresstesting framework employs multiple conceptually sound stress
testing activities and approaches;
(3) An effective stresstesting framework is forward-looking and flexible; and
(4)Stresstest resultsshould be clear, actionable, well supported, and inform
decision-making.
In the final guidance, the agencieshave incorporated a fifth principle specifying that
an organization‘s stresstesting framework should include strong governance and
effective internal controls.
The elementsof the fifth principle had been set forth in sectionVI of the proposed
guidance, and the fifth principle doesnot expand on this aspect of the proposed
guidance.
Rather, the agencies reorganized this discussion into a fifth principle

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in order to underscorethe importance of governance and controls asa key element in
a banking organization‘sstresstesting framework.
Asnoted above, commentersweresupportive of the principles-based approachand
the notion that a banking organization‘s stresstesting framework should be
implemented in amanner commensurate with factorssuchasthecomplexityand size
of the organization.
With more specific regard to the proposed principles, commenterssuggested that the
final guidance addressthe standardization of stresstesting through the inclusion of
commoncoefficients, models, or benchmarks.
Thesecommentersexpressedconcernsthat banking organizationswould implement
the principles inconsistently and that standardization would help regulatorsconduct
comparative analysesacrossfirms.
Another commenter suggested that the agencies prescribe more detailed and
integrated stresstesting between different entities or businessunitswithin an
organization.
The agencies did not modify the guidance in responseto thesecomments.
Akey aspectof theguidanceis to provide organizationsflexibilityon how theydesign
their individual stresstesting frameworks.
Thus, each banking organization should design a specific stresstesting framework to
capturerisksrelevant to the organization.
The agenciesbelieve that prescribingstandardized stresstestsin this guidancewould
have its own inherent limitations and may not appropriately cover a banking
organization‘s material risks and activities.
In addition, commenterssuggested that the agenciesmandate public releaseofstress
testing resultsthrough the guidance.
The agencies haveconsideredthesecomments, but do not believe the final guidance
is the appropriate place for such a requirement given itsbroader focus on banking
organizations‘overall stresstesting frameworks.
The agencies note, however, that banking organizationsmay be required to disclose
information about their stresstests pursuant to other statutory, regulatory, or
supervisory requirements.

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Afew commentersstated that a banking organization should explain and justify the
stresstesting methodologies it utilizes to itsprimary federal supervisor.
The agencies note that supervisorswill examinefirms‘stresstesting methodologies
through the supervisory process.
One commenter noted that the guidance should explicitly indicate that liabilities
should be part of a banking organization‘s stresstesting activities; the agencies
intended that stresstesting activities would takean organization‘s liabilities into
account and have clarifiedthis in the final guidance.
Threecommenterssuggestedthat operational risk be specifically referencedin the
guidance.
In response,the agencieshave clarified in the final guidance that operational risk
shouldbe among the risksconsideredby an organization‘s stresstestingframework.
Another commenter expressed concern that the frequency of stresstesting and
communication of resultsmight eventually desensitize senior management to them.
The agenciesbelieve that regular review of stresstest resultsis useful – both during
periodsof economic downturn and benign periods– and have clarified that such
review can help a banking organization track over time the impact of ongoing
businessactivities, changesin exposures, varying economic conditions, and market
movementson itsfinancial
condition.
Aside from the inclusion of a fifth principle asdescribedabove, the agencies have
otherwiseadopted the proposed principles in the final guidance with only minor
additional refinements.
C. Stresstesting approachesand applications
The proposed guidance describedcertain stresstesting approaches and
applications– scenario analysis, sensitivity analysis, enterprise-wide testing, and
reversestresstesting – that a banking organization could consider using within its
stresstesting framework, asappropriate.
The proposed guidance provided that each banking organization should apply these
approaches and applicationscommensurate with itssize, complexity, and business
profile, and may not need to incorporate all of the details described in the guidance.

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Somecommentersquestioned the appropriatenumber and typesof stresstest
approaches an organization should utilize.
The agencies donot believe that specifying a number or particular typesof
approaches–including thenumberof scenarios–isappropriatein theguidancegiven
the wide range of stresstesting activities that different banking organizationsmay
undertake.
Abanking organization should choosethe approaches that appropriatelyconsider the
unique characteristics of that particular organization and the relevant risksit faces.
The agencies expectthat stresstesting methodologies will evolve over time as
banking organizationsdevelop approaches that best capture their individual risk
profiles.
In addition, the proposed guidance described reversestresstesting asa tool that
would allow a banking organization to assumea known adverse outcome, such as
suffering a credit lossthat causesit to breach a minimum regulatory capital ratio or
suffering severe liquidity constraintsmaking it unable to meet its obligations, and
then deduce the typesof eventsthat could lead to such an outcome.
This type of stresstesting may help a banking organization to consider scenarios
beyond itsnormal businessexpectationsand seetheimpact of severesystemic effects
on the banking organization.
It also would allow a banking organization to challengecommon assumptionsabout
itsperformanceand expected mitigation strategies.
Three commenters expressed doubts regarding the effectiveness of reverse stress
testing, as the approach could produce resultsof questionable value and captures
unlikely, ―extreme‖ scenarios.
The agencies reiterate the value of reversestresstesting, asit helpsa banking
organization evaluate the combined effect of several typesof extremeeventsand
circumstancesthat might threaten the survival of the banking organization, even if in
isolation eachof the effects might be manageable.
Another commenter expressedconcern that the resultsof severescenariosused for
reversestresstesting would directly lead to a supervisory requirement to raise capital
if the resultsof the approach were unfavorable to the organization.

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In addition, some commenterssought clarification that resultswould not be used by
regulatorsto criticize banking organizations.
As stated in the proposed guidance, a given stress test result will not necessarily lead
to immediate action by a firm, and in some casesstress test results – including those
from reversestresstests – aremost useful for the additional information they provide.
In termsof supervisory responsesto an organization‘s stresstesting activities, the
agencies expectto consider a banking organization‘s stresstest resultsand the
appropriatenessof itsoverall stresstesting framework, along with all other relevant
information, in assessingabanking organization‘s riskmanagement practices, aswell
asitscapital and liquidity adequacy.
The guidance setsforth supervisory expectationsfor prudent risk management
practices and a firm's decision not to follow the principles in this guidance will be
examinedaspart of the supervisory processand maybe cited asevidence of unsafe
and unsound practices.
D. Stresstesting for assessing adequacy of capital and liquidity
Given the importance of capital and liquidity to a banking organization‘sviability,
stresstesting should be applied to thesetwo areason a regular basis.
Stresstesting for capital and liquidity adequacyshould be conducted in coordination
with a banking organization‘s overall businessstrategy and annual planning cycles.
Resultsshould be refreshedin theevent of major strategic decisions, or other changes
that can materially impact capital or liquidity.
An effective stresstesting framework should explorethe potential for capital and
liquidity problemsto ariseat the sametime or exacerbateone another.
Abanking organization‘sliquidity stressanalysis should explore situationsin which
the banking organization maybe operating with a capital position that exceeds
regulatoryminimums, but is nonethelessviewed within thefinancial marketsor by its
counterpartiesasbeing of questionable viability.
For itscapital and liquidity stresstests, a banking organization should articulate
clearlyitsobjectivesfor apost-stressoutcome, forinstanceto remain aviablefinancial
market participant that is able to meet itsexisting and prospective obligationsand
commitments.

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In responseto comments received on the planning horizon for stresstests, the
agencies clarifiedthat whilecapital stresstestsshould generally be conducted with a
horizon of at least two years, organizationsshould recognize that the effectsof certain
stressconditionscould extend beyond that horizon.
The agencies havealsoclarified, in responseto comments, that consolidated stress
tests should account for the fact that certain legal entities within the consolidated
organization arerequired to meet regulatorycapital requirements.
Acommenter requested clarification on whether capital and liquidity stresstesting
should be evaluated in unified or separate stresstests.
The proposed guidance did not specify the precisemanner in which capital and
liquidity stresstestsshould be performed.
The final guidance notes that assessing the potential interaction of capital and
liquidity can be challenging and maynot be possible within a single stresstest, soa
banking organization should explore several avenuesto assessthat interaction.
In any case, the agenciesbelievethat stresstesting for both liquidity and capital
adequacyshould be an integral part of a banking organization‘s stresstesting
framework.
E. Governance and controls
Asnoted under the new fifth principle of the final guidance, a banking
organization‘s stresstesting framework will be effective only if it issubject to strong
governanceand controlsto ensure that the framework functionsasintended.
Strong governance and controls alsohelp ensure that the framework contains core
elements, from clearly defined stresstesting objectives to recommended actions.
Importantly, strong governance provides critical review of elementsof the stress
testing framework, especially regarding key assumptions, uncertainties, and
limitations.
Abanking organization should ensurethat thestresstesting framework isnot isolated
within a banking organization‘s risk management function, but is firmly integrated
intobusiness lines, capital and asset-liabilitycommittees, and other decision-making
bodies.

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Aspart of their overall responsibilities, a banking organization‘s board and senior
managementshould establish acomprehensive, integratedand effective stresstesting
framework that fits into the broader risk management of the banking organization.
Stresstesting resultsshould be used to inform the board about alignment of the
banking organization‘s risk profile with the board‘s chosen risk appetite, aswell as
inform operating and strategic decisions.
Stresstesting resultsshould be considered directly by the board and senior
management for decisions relating to capital and liquidity adequacy.
Senior management, in consultation with the board, should ensure that the stress
testing framework includesa sufficient rangeof stresstesting activities applied at the
appropriatelevels of thebanking organization (i.e., not just oneenterprise-widestress
test).
Several commentersraised concernsregarding the proposedresponsibilities of a
banking organization‘s board of directorswith respectto stresstests and the
framework.
One commenter believed that the board of directorsshould not review all stresstest
results, but rather only thosethat wereexpected to have a material impact on the
overall organization.
Another commenter expressed the belief that the board of directorsshould be
involved in providing direction and oversight regarding the banking organization‘s
stresstesting framework, but that the board of directorsshould not be expectedto be
involved directly in more operational aspectsof the framework.
The agencies havemodified the final guidance to clarify that senior management, not
the board of directors, should have the primary responsibilityfor stresstesting
implementation and technical design.
However, the agenciesemphasize that a banking organization‘s board of directors
should be provided with information from senior management on stresstesting
developments(including the processto design tests and develop scenarios) and on
stresstesting results(including from individual tests, wherematerial).
Asa general matter, the board of directorsis alsoresponsible for monitoring
effectiveness of the overall framework, and using the resultsto inform their decision
making process.

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In addition, the final guidance specifiesthat senior management should, in
consultation with the board of directors, review stresstesting activities and results
with an appropriately critical eye to ensure that thereis objective review and that the
stresstesting framework includesa sufficient range of stresstesting activitiesapplied
at the appropriate levels of the banking organization.
Finally, in responseto comments, the agencies have clarified that a banking
organization‘s minimum annual review and assessmentof the effectivenessof their
stresstesting framework should ensure that stresstesting coverage is comprehensive,
tests are relevant and current, methodologies aresound, and resultsare properly
considered.
IV. Administrative Law Matters
A. Paperwork ReductionAct Analysis
In accordance with the Paperwork Reduction Act (―PRA‖) of 1995 the agencies
reviewed the final guidance. The agencies may not conduct or sponsor, and an
organization is not required to respond to, an information collection unless the
information collection displays a currently valid OMB control number.
While the guidance is not being adopted asa rule, the agenciesdetermined that
certain aspectsof the guidance may constitute a collection of information and,
therefore, believed it washelpful to publish a burden estimate with the guidance.
In particular, the aspectsof the guidance that mayconstitute an information
collection are the provisions that state a banking organization should
(i)Havea stresstesting framework that includesclearly defined objectives,
well-designedscenarios tailored to the banking organization‘s businessand risks,
well-documentedassumptions, conceptually sound methodologies to assesspotential
impact on the banking organization‘s financial condition, informative management
reports, and recommendedactionsbased on stresstest results;and
(ii)Havepolicies and proceduresfor a stresstesting framework.
The agenciesestimated that the above-described information collectionsincluded in
the guidance would takerespondents, on average, 260hourseach year.
The frequency of information collection is estimatedto be annual. Respondentsare
banking organizationswith more than $10billion in total consolidated assets, as
defined in the guidance.

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The agencies receivedthree comment lettersregarding the paperwork burden of the
guidance, stating that implementation will require a multiple of the 260estimated
hours.
The agencies emphasize that the guidance doesnot implement the stresstesting
requirementsimposedby the Dodd-Frank Act or the Board‘s capital plan rule, and
doesnot otherwiseimposemandatorystresstesting requirements.
The burden of information collections associatedwith mandatory stresstestswill be
accountedfor in the respective rules that implement thoserequirements.
In addition, the agenciesbelieve that in somerespects, the information collection
elements of this guidance augment certain expectationsthat already are in place
relative to certain existing supervisory guidance.
The burden estimatesfor this guidance take into consideration only thosecollections
of information, such asdocumentation of policiesand proceduresand relevant
reports, that are specific to this guidance.
Basedon these factors, the agencies believe the burden estimatesincluded in the
proposedguidance continue to be appropriate.
V. Final supervisory guidance
The text of the final supervisory guidance is asfollows:
Federal ReserveSystem
Federal Deposit InsuranceCorporation
Guidance on StressTesting for Banking Organizations with
Total Consolidated Assets of More Than $10Billion
I. Introduction
All banking organizations should have the capacityto understand fully their risksand
thepotential impactof stressfuleventsand circumstancesontheirfinancial condition.
The U.S. federal banking agencies have previously highlighted the useof stress
testing asa meansto better understand the rangeof a banking organization‘s
potential risk exposures.

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The 2007-2009 financial crisis underscored the need for banking organizationsto
incorporate stresstesting into their risk management practices, demonstrating that
banking organizationsunprepared for stressful eventsand circumstancescan suffer
acutethreatsto their financial condition and viability.
The Federal Reserve, the Office of the Comptroller of the Currency, and the Federal
Deposit InsuranceCorporation (collectively, the ―agencies‖) are issuing this
guidance to emphasize the importanceof stresstesting asan ongoing risk
management practice that supports banking organizations‘forward-looking
assessment of risksand better equips them to addressa range of adverseoutcomes.
This joint guidance is applicable toall institutionssupervised by the agencies with
more than $10billion in total consolidated assets.
Specifically, with respect to the OCC, thesebanking organizationsinclude national
banking associations, federal savings associations,and federal branchesand
agencies;with respectto the Board, these banking organizationsinclude state
member banks, bank holding companies, savings and loan holding companies, and
all other institutionsfor which the Federal Reserveis the primaryfederal supervisor;
with respectto the FDIC, these banking organizations include state nonmember
banks, state savings associationsand insured branches of foreign banks.
The guidance doesnot apply to any supervisedinstitution below the designated asset
threshold.
Certain other existing supervisoryguidance that applies to all supervised institutions
discussestheuseof stresstesting asa tool in certain aspects of risk management,
such asfor commercial real estate concentrations, liquidity risk management, and
interest-rate risk management.
However, noinstitution at orbelow $10billion in total consolidatedassetsis subjectto
this final guidance.
Building upon previously issued supervisory guidance that discussesthe usesand
meritsof stresstesting in specific areasof risk management, this guidance provides
broad principles a banking organization should follow in conducting its stresstesting
activities, such asensuring that thoseactivitiesfit into the organization‘soverall risk
management program.
The guidanceoutlinesbroadprinciplesfor a satisfactorystresstesting framework and
describesthe manner in which stresstesting should be employed asan integral
component of risk management that isapplicable at variouslevelsof aggregation

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within a banking organization, aswell asfor contributing to capital and liquidity
planning.
While the guidance is not intended to provide detailed instructionsfor conducting
stresstesting for any particular risk or businessarea, the document describes several
typesof stresstesting activitiesand how they maybe most appropriately used by
II. Overview of StressTesting Framework
For purposesof this guidance, stresstesting refersto exercisesused to conduct a
forward looking assessment of the potential impact of variousadverse eventsand
circumstances ona banking organization.
Stresstesting occursat variouslevelsof aggregation, including on an enterprise-wide
basis.
Asoutlined in section IV, thereare several approachesand applications
for stresstesting and a banking organization should consider the useof eachin its
stresstesting framework.
An effective stresstesting framework provides a comprehensive, integrated, and
forwardlooking set of activities for a banking organization to employalong with other
practices in order to assist in the identification and measurement of its material risks
and vulnerabilities, including thosethat maymanifest themselves during stressful
economic or financial environments, or arise from firm-specificadverseevents.
Sucha framework should supplement other quantitative risk management practices,
suchasthosethat rely primarily on statistical estimatesof risk or lossestimatesbased
on historical data, aswell asqualitative practices.
Inthismanner, stresstestingcanassist in highlighting unidentified orunder-assessed
risk concentrationsand interrelationships and their potential impact on the banking
organization during timesof stress.
Abanking organization should develop and implement itsstresstesting framework in
a manner commensurate with its size, complexity, businessactivities, and overall risk
profile.
Its stresstesting framework should include clearly defined objectives, well-designed
scenarios tailored to the banking organization‘s businessand risks, well-documented

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assumptions, sound methodologies to assesspotential impact on the banking
organization‘s financial condition, informative management reports, ongoing and
effective review of stresstesting processes,and recommendedactionsbasedon stress
test results.
Stresstesting should incorporate the useof high-quality data and appropriate
assumptionsabout the performance of the institution under stressto ensure that the
outputsarecredible and can be used to support decision-making.
Importantly, a banking organization should have a sound governanceand control
infrastructure with objective, critical review to ensurethe stresstesting framework is
functioning asintended.
Astresstestingframework shouldallow abanking organizationto conduct consistent,
repeatable exercisesthat focus on its material exposures, activities, risks, and
strategies, and alsoconduct ad hoc scenariosasneeded.
The framework should consider the impact of both firm specificand systemic stress
eventsand circumstancesthat arebased on historical experience aswell ason
hypothetical occurrencesthat could have an adverseimpact on a banking
organization‘s operations and financial condition.
Banking organizationssubject to this guidance should develop policies on reviewing
and assessing the effectivenessof their stress
testing frameworks,and usethosepolicies at leastannually to assessthe effectiveness
of their frameworks.
Suchassessmentsshould help to ensure that stresstesting coverageis
comprehensive, tests are relevant and current, methodologies are sound, and results
areproperly considered.
III. General StressTesting Principles
Abanking organization should develop and implement an effective stresstesting
framework aspart of its broader risk management and governance processes.
The framework should include severalactivitiesand exercises, and not just relyonany
single test or type of test, since every stresstest haslimitations and relieson certain
assumptions.

20
The usesof a banking organization‘s stresstesting framework should include, but are
not limited to,
- augmenting risk identification and measurement;
- estimating businessline revenuesand lossesand informing businessline
strategies;
- identifying vulnerabilities, assessing the potential impact from those
vulnerabilities, and identifying appropriate actions;
- assessing capital adequacyand enhancing capital planning; assessing liquidity
adequacyand informing contingency funding plans;
- contributing to strategic planning;
- enabling senior management to better integrate strategy, risk management, and
capital and liquidity planning decisions; and assistingwith recoveryand
resolutionplanning.
This section describes general principles that a banking organization should apply in
implementing such a framework.
Principle 1:
A banking organization‘s stress testing framework should include activities and
exercises that are tailored to and sufficiently capture the banking organization‘s
exposures, activities, and risks.
An effective stresstesting framework coversa banking organization‘s full set of
material exposures, activities, and risks, whether on or off the balancesheet, basedon
effective enterprise-widerisk identification and assessment.
Risksaddressedin a firm‘s stresstesting framework mayinclude (but are not limited
to) credit, market, operational, interest-rate, liquidity, country, and strategic risk.
The framework should also addressnon-contractual sourcesof risks, such asthose
related to a banking organization‘s reputation.
Appropriate coverage is important asstresstesting resultscould give a false senseof
comfort if certain portfolios, exposures, liabilities, or businessline activitiesare not
included.

21
Stresstesting exercisesshould be part of a banking organization‘s regular risk
identification and measurementactivities.
For example, in assessingcredit risk a banking organization should evaluate the
potential impact of adverseoutcomes, such asan economic downturn or declining
asset values, on the condition of its borrowersand counterparties, and on the value of
any supporting collateral.
Asanother example, in assessing interest-raterisk, banking organizations should
analyze the effects of significant interest rate shocks or other yield-curve movements.
An effective stresstesting framework should be applied at variouslevelsin the
banking organization, such asbusinessline, portfolio, and risk type, aswell ason an
enterprise-wide basis.
In many cases, stresstesting may be moreeffectiveat businessline and portfolio
levels, asa higher level of aggregation may cloud or underestimate the potential
impact of adverse outcomeson a banking organization‘s financial condition.
In somecases,stresstesting can also be applied to individual exposuresor
instruments.
Eachstresstest should be tailored to the relevant level of aggregation, capturing
critical risk drivers, internal and external influences,and other key considerationsat
the relevant level.
Stresstesting should capturethe interplay among different exposures, activities, and
risksand their combined effects.
While stresstesting several typesof risks or business linessimultaneously may prove
operationally challenging, abanking organization should aim to identify commonrisk
drivers acrossrisk types and businesslines that can adverselyaffect itsfinancial
condition.
Accordingly, stresstests should provide a banking organization with the ability to
identify potential concentrations – including thosethat may not be readily observable
during benign periodsand whose sensitivity to a common set of factorsis apparent
only during timesof stress– and to assessthe impact of identified concentrations of
exposures, activities, and riskswithin and acrossportfoliosand businesslinesand on
the organization asa whole.

22
Stresstesting should be tailored to the banking organization‘s idiosyncrasies and
specificbusinessmix and include all major business linesand significant individual
counterparties.
For example, a banking organization that isgeographically concentrated may
determine that a certain segment of itsbusiness maybe more adverselyaffectedby
shocksto economic activity at the state or local level than by a severe national
recession.
On the other hand, if the banking organization hassignificant global operations, it
should consider scenariosthat have an international component and stressconditions
that could affect the different aspectsof itsoperations in different ways, aswell as
conditionsthat could adverselyaffect all of its operations at the sametime.
A banking organization should use its stress testing framework to determine whether
exposures, activities, and risks under normal and stressed conditionsare aligned with
the banking organization‘s risk appetite.
Abanking organization can usestresstesting to help inform decisions about its
strategic direction and/ or risk appetite by better understanding the risksfrom its
exposuresorof engaging in certain businesspractices.
For example, if a banking organization pursuesa businessstrategyfor a new or
modified product, and the banking organization doesnot have long-standing
experience with that product or lacks extensivedata,
the banking organization can usestresstesting to identify the product‘s potential
downsides and unanticipated risks.
Scenarios used in a banking organization‘s stresstestsshould be relevant to the
direction and strategy set by itsboard of directors, aswell assufficiently severe to be
credible to internal and external stakeholders.
Principle 2:
An effective stresstesting framework employsmultiple conceptually sound stress
testing activities and approaches.
All measuresof risk, including stresstests, have an elementof uncertaintydue to
assumptions, limitations, and other factorsassociatedwith using past performance
measuresand forward-looking estimates.

23
Banking organizationsshould, therefore, usemultiple stresstesting activities and
approaches (consistent with section IV), and ensure that eachis conceptually sound.
Stresstestsusually varyin design and complexity, including the number of factors
employed and the degreeof stressapplied.
Abanking organization should ensure that the complexity of any given test doesnot
undermine itsintegrity, usefulness, or clarity.
In somecases, relativelysimple testscan be very useful and informative. Additionally,
effective stresstesting relies on high-quality input data and information
to produce credible outcomes.
A banking organization should ensure that it hasreadily available data and other
information for the types of stress tests it uses, including key variables that drive
performance.
In addition, a banking organization should have appropriate management
information systems(MIS) and data processesthat enable it to collect, sort,
aggregate, and update data and other information efficiently and reliably within
businesslines and acrossthe banking organization for usein stresstesting.
If certain data and information are not current or not available, or if proxies are used, a
banking organization should analyze the stresstest outputs with an understanding of
thosedata limitations.
Abanking organization should alsodocument the assumptionsused in itsstresstests
and note the degreeof uncertainty that maybe incorporated into the tools used for
stresstesting.
In somecases, it maybe appropriate to present and analyze test resultsnot just in
termsof point estimates,but also including the potential margin of error or statistical
uncertaintyaround the estimates.
Furthermore, almost all stresstests, including well-developed quantitative tests
supported by high-quality data, employ a certain amount of expert or business
judgment, and the role and impact of such judgment should be clearly documented.
In somecases,when credible data are lacking and more quantitative tests are
operationally challenging or in the early stagesof development, a banking

24
organization may choose to employ more qualitatively based tests, provided that the
tests are properly documented and their assumptionsaretransparent.
Regardlessof the type of stresstests used, a banking organization should understand
and clearly document all assumptions, uncertainties, and limitations, and provide that
information to usersof the stresstesting results.
Principle 3:
An effective stresstesting framework is forward-looking and flexible.
Astresstesting framework should be sufficiently dynamic and flexible to incorporate
changesin a banking organization‘s on- and off-balance-sheet activities, portfolio
composition, asset quality, operating environment, businessstrategy, and other risks
that mayariseover time from firm-specificevents, macroeconomic and financial
market developments, or some combination of theseevents.
Abanking organization should also ensure that itsMISare capable of incorporating
relatively rapid changesin exposures, activities, and risks.
While stresstesting should utilize available historical information, a banking
organization should look beyond assumptionsbased only on historical data and
challengeconventional assumptions.
Abanking organization should ensure that it is not constrained by past experience
and that it considersmultiple scenarios, even scenarios that have not occurredin the
recent past or during the banking organization‘shistory.
For example, a banking organization should not assumethat if it hassuffered no or
minimal lossesin a certain businessline or product that such a pattern will continue.
Structural changesin customer, product, and financial marketscan
presentunprecedented situations for a banking organization.
Abanking organization with any type of significant concentration can be particularly
vulnerable to rapid changesin economic and financial conditionsand should tryto
identify and better understand the impact of thosevulnerabilitiesin advance.
For example, the risksrelated to residential mortgageswere underestimatedfor a
number of yearsleading up to the 2007-2009financial crisis by a large number of
banking organizations, and thoserisks eventually affectedthe banking organizations
in a variety of ways.

25
Effective stresstesting can help a banking organization identify any such
concentrationsand help understand the potential impact of several key aspectsof the
businessbeing exposedto common drivers.
Stresstesting should be conducted over various relevant time horizonsto adequately
capture both conditionsthat may materialize in the near term and adverse situations
that take longer to develop.
For example, when a banking organization stresstests a portfolio for market and
credit risks simultaneously, it should consider that certain credit risk lossesmay take
longer to materialize than market risk losses, and alsothat the severity and speed of
mark-to-market lossesmay createsignificant vulnerabilitiesfor the firm, even if a
more fundamental analysis of how realized lossesmay play out over time seemsto
show lessthreatening results.
Abanking organization should carefully consider the incremental and cumulative
effectsof stressconditions, particularly with respectto potential interactionsamong
exposures, activities, and risksand possible second-order or ―knock-on‖ effects.
In addition to conducting formal, routine stresstests, a banking organization should
havetheflexibility to conduct new or ad hoc stresstestsin a timely mannerto address
rapidly emerging risks.
Theselessroutine tests usually can be conducted in a short amount of time and may
be simpler and lessextensivethan a banking organization‘s more formal, regular
tests.
However, for its ad hoc tests a banking organization should still have the capacityto
bring together approximated information on risks, exposures, and activities and
assesstheir impact.
More broadly, a banking organization should continue updating and maintaining its
stresstesting framework in light of new risks, better understanding of the banking
organization‘s exposuresand activities, new stresstestingtechniques, and any
changesin itsoperating structure
and environment.
Abanking organization‘sstresstesting development should beiterative, with ongoing
adjustmentsand refinementsto better calibratethe tests to provide current and
relevant information.
Banking organizationsshould document the ongoing development of their stress
testing practices.

26
Principle 4:
Stresstest resultsshould be clear, actionable, well supported, and inform
decision-making.
Stresstesting should incorporate measuresthat adequately and effectively convey
resultsof the impact of adverse outcomes.
Suchmeasuresmayinclude, for example, changesto asset values, accounting and
economic profit and loss, revenue streams, liquidity levels, cash flows, regulatory
capital, risk-weightedassets,the loan lossallowance, internal capital estimates, levels
of problem assets, breachesin covenantsor keytrigger levels, or other relevant
measures.
Stresstest measuresshould be tailored to the type of test and the particular level at
which the test isapplied (for example, at the businessline or risk level). Some stress
tests mayrequire using a range of measuresto evaluate the full impact of certain
events, such asa severesystemic event.
In addition, all stresstest resultsshould be accompanied by descriptive and
qualitative information (such askey assumptionsand limitations) to allow usersto
interpret the exercisesin context.
The analysis and the processshould be well documented sothat stresstesting
processescan be replicatedif need be.
Abanking organization should regularly communicate stresstest resultsto
appropriate levels within the banking organization to foster dialogue around stress
testing, keep the board of directors,management, and staff apprised, and to inform
stresstesting approaches, results, and decisions in other areasof the banking
organization.
Abanking organization should maintain an internal summaryof test resultsto
document at a high level therangeof itsstresstesting activitiesand outcomes, aswell
asproposedfollow-up actions.
Regular review of stresstest resultscan be an important part of a banking
organization‘s ability over time to track the impact of ongoing businessactivities,
changesin exposures, varying economic conditions, and market movementson its
financial condition.
In addition, management should review stresstesting activities on a regular basis to
determine, among other things, the validity of the assumptions, the severityof tests,

27
the robustnessof the estimates, the performanceof any underlying models, and the
stability and reasonablenessof the results.
Stresstest resultsshould inform analysis and decision-making related to business
strategies, limits, risk profile, and other aspectsof risk management, consistent with
the banking organization‘s established risk appetite.
Abanking organization should review the resultsof itsvariousstresstests with the
strengthsand limitationsof each test in mind (consistent with Principle 2),
determines which resultsshould be given greater or lesser weight, analyze the
combined impact of its tests, and then evaluate potential coursesof action based on
that analysis.
Abanking organization may decide to maintain itscurrent coursebased on test
results;indeed, the resultsof highly severe stresstests need not alwaysindicate that
immediateactionhas to be taken.
Wherever possible, benchmarking or other comparative analysis should be used to
evaluatethe stresstesting resultsrelative to other tools and measures– both internal
and external to the banking organization – to provide proper context and a check on
results.
Principle 5:
An organization‘s stresstesting framework should include strong governance and
effective internal controls.
Similar to other aspectsof itsrisk management, a banking organization‘sstress
testing framework will be effective only if it is subject to strong governance and
effective internal controls to ensure the framework is functioning asintended. Strong
governanceand effective internal controls help ensure that the framework contains
coreelements, from clearly defined stresstesting objectives to recommendedactions.
Importantly, strong governance providescritical review of elementsof the stress
testing framework, especially regarding key assumptions, uncertainties, and
limitations.
Abanking organization should ensurethat thestresstesting framework isnot isolated
within a banking organization‘s risk management function, but is firmly integrated
intobusiness lines, capital and asset-liability committees, and other decision making
bodies.

28
Along thoselines, theboard of directorsand senior managementshould play keyroles
in ensuring strong governance and controls.
The extent and sophistication of a banking organization‘s governance over its stress
testing framework should align with the extent and sophisticationof that framework.
Additional details regarding governance and controls of an organization‘s stress
testing framework areoutlined in section VI.
IV. StressTesting ApproachesandApplications
This section discussessomegeneral typesof stresstesting approaches and
applications.
For any type of stresstest, banking organizationsshould indicate thespecific purpose
and the focus of the test.
Defining the scopeof a given stresstest isalsoimportant, whether it applies at the
portfolio, businessline, risk type, or enterprise-wide level, or even just for an
individual exposureor counterparty.
Basedon the purposeand scope of the test, different stresstesting techniques are
most useful.
Thus, a banking organization should employ several approaches and
applications;these might include scenario analysis, sensitivity analysis,
enterprise-wide stresstesting, and reversestresstesting.
Consistent with Principle 1, banking organizations should apply thesecommensurate
with their size, complexity, and businessprofile, and may not need to incorporate all
of the details describedbelow.
Consistent with Principle 3, banking organizations should also recognizethat stress
testing approaches will evolve over time and they should update their practices as
needed.
ScenarioAnalysis
Scenario analysis refersto a type of stresstesting in which a banking organization
applies historical or hypothetical scenariosto assessthe impact of various eventsand
circumstances, including extremeones.

29
Scenarios usually involve somekind of coherent, logical narrativeor ―story‖ asto why
certain eventsand circumstances canoccur and in which combination and order,
such asa severe recession, failureof a major counterparty, lossof major clients,
natural or man-made disaster, localized economic downturn, disruptionsin funding
or capital markets,or a sudden change in interestratesbrought about by unfavorable
inflation developments.
Scenario analysis can be applied at various levels of the banking organization, such as
within individual businesslinesto help identify factorsthat could harm thosebusiness
linesmost.
Stressscenariosshould reflect a banking organization‘s unique vulnerabilitiesto
factorsthat affect itsexposures, activities, and risks.
Forexample,if abanking organization is concentratedin aparticularlineof business,
such ascommercial real estateor residential mortgage lending, it would be
appropriate to explorethe impact of a downturn in thoseparticular market segments.
Similarly, a banking organization with lending concentrations to oil and gas
companiesshould include scenariosrelated to the energysector.
Other relevant factorsto be considered in scenario analysis relateto operational,
reputational and legal risksto a banking organization, such assignificant eventsof
fraud or litigation, or a situation when a banking organization feels compelled to
provide support to an affiliate or provide other types of non-contractual support to
avoid reputational damage.
Scenarios should be internally consistent and portray realistic outcomesbased on
underlying relationshipsamong variables, and should include only thosemitigating
developmentsthat areconsistent with the scenario.
Additionally, a banking organization should consider the best manner to try to
capturecombinationsof stressful eventsand circumstances, including second-order
and ―knock-on‖ effects.
Ultimately, a banking organization should select and design multiple scenariosthat
arerelevant to itsprofile and make intuitive sense, use enough scenariosto explore
the range of potential outcomes, and ensure that the scenarioscontinue to be timely
and relevant.

30
Abanking organization may apply scenario analysis within the context of itsexisting
risk measurement tools (e.g., the impact of a severedeclinein market prices on a
banking organization‘s value-at-risk (VaR) measure) or useit asan alternative,
supplemental measure.
Forinstance, abanking organization mayusescenario analysis to measuretheimpact
of a severe financial market disturbance and comparethoseresultsto what is
produced by its VaR or other measures.
This type of scenario analysis should account for known shortcomingsof other risk
measurementpractices.
For example, market risk VaR models generally assumeliquid markets
with known prices.
Scenario analysis could shed light on the effects of a breakdown in liquidity and of
valuation difficulties.
Oneof the keychallengeswith scenario analysisis to translatea scenariointobalance
sheet impact, changesin risk measures, potential losses, or other measuresofadverse
financial impact, which would vary depending on the test design and the type of
scenario used.
For someaspectsof scenario analysis, banking organizationsmayuseeconometric or
similartypesof analysis to estimatea relationship betweensomeunderlying factorsor
drivers and risk estimatesor lossprojectionsbased on a given data set, and then
extrapolateto seethe impact of more severeinputs.
Careshould be taken not to make assumptionsthat relationshipsfrom benign or
mildly adversetimeswill hold during more severe timesor that estimatingsuch
relationshipsis relativelystraightforward.
For example, linear relationships betweenrisk drivers and lossesmay
becomenonlinear during timesof stress.
In addition, organizations should recognize that therecan be multiple permutations
of outcomesfrom just a few key risk drivers.

31
Sensitivity Analysis
Sensitivityanalysis refersto a banking organization‘s assessment of itsexposures,
activities, and risks when certain variables, parameters,and inputsare―stressed‖ or
―shocked.‖
Akey goal of sensitivity analysis is to test the impact of assumptionson outcomes.
Generally, sensitivity analysis differsfrom scenario analysis in that it involves
changing variables, parameters,or inputs without an explicit underlying reasonor
narrative, in order to explorewhat occursunder a range of inputsand at extremeor
highly adverselevels.
In this type of analysis a banking organization may realize, for example, that a given
relationship is much more difficult to estimate at extremelevels.
Abanking organization may apply sensitivity analysis at variouslevelsof aggregation
to estimate the impact from a change in one or more key variables.
The resultsmayhelp abanking organization better understand therangeof outcomes
from some of its models, such asdeveloping a distribution of output based on a
varietyof extremeinputs.
For example, a banking organization may chooseto calculatea range of changesto a
structured security‘s overall value using a range of different assumptions about the
performanceand linkageof underlying cash flows.
Sensitivityanalysis should be conducted periodically due to potential changesin a
banking organization‘s exposures, activities, operating environment, or the
relationship of variables to one another.
Sensitivityanalysis can also help to assessa combined impact on a banking
organization of several variables, parameters,factors, or drivers.
For example, a banking organization could better understand the impact on itscredit
lossesfrom a combined increase in default ratesand a decrease in collateral values.
Abanking organization could also explore the impact of highly adversecapitalization
rates, declines in net operating income, and reductionsin collateral when evaluating
itsrisks from commercial real estateexposures.

32
Sensitivityanalysis canbe especially useful becauseit is not necessarily accompanied
by a particular narrative or scenario; that is, sensitivity analysis can provide banking
organizationsmoreflexibility to explore the impact of potential stressesthat theymay
not be able to capturein designed scenarios.
Furthermore, banking organizationsmay decide to conduct sensitivity analysis of
their scenarios, i.e., choosing different levels or paths of variables to understand the
sensitivities of choices made during scenario design.
For instance, banking organizationsmay decide to apply a few different interest-rate
pathsfor a given scenario.
Enterprise-Wide StressTesting
Enterprise-widestresstestingisanapplication ofstresstestingthatinvolves assessing
the impact of certain specified scenarioson the banking organization asa whole,
particularly with regard to capital and liquidity.
Asis the casewith scenario analysis moregenerally, enterprise wide stresstesting
involves robust scenario design and effective translation of scenarios into measuresof
impact.
Enterprise-widestresstests canhelp abanking organization in itseffortsto assessthe
impact of its full set of risks under adverse eventsand circumstances, but should be
supplementedwith other stresstests and other risk measurementtools given inherent
limitations in capturing all risksand all adverseoutcomesin one test.
Scenario design for enterprise-wide stresstesting involvesdeveloping scenariosthat
affect the banking organization asa whole that stem from macroeconomic,
market-wide, and/or firm-specificevents.
Thesescenariosshould incorporate the potential simultaneousoccurrenceof both
firm-specific and macroeconomic and market-wide events, considering system-wide
interactionsand feedback effects.
For example, price shocks may lead to significant portfolio losses, rising funding
gaps, a ratings downgrade, and diminished accessto funding.
In general, it is a good practiceto consult with a large set of individualswithin the
banking organization – in variousbusiness lines, researchand risk areas– to gain a
wide perspectiveon how enterprisewide scenarios should be designed and to ensure

33
that the scenarioscapturethe relevant aspectsof the banking organization‘s business
and risks.
Banking organizations should alsoconduct scenariosof varying severityto gauge the
relative impact.
At least somescenarios should be of sufficient severityto challengethe viability of the
banking organization, and should include instantaneousmarket shocksand stressful
periodsof extended duration (e.g., not just a one or two-quarter shock after which
conditionsreturn to normal).
Selectionof scenario variables is important for enterprise-wide tests, because these
variables generally serveasthe link betweenthe overall narrative of the scenario and
tangible impact on the banking organization asa whole.
For instance, in aiming to capture the combined impact of a severe recession and a
financial marketdownturn, abanking organizationmaychoosea set of variables such
aschangesin grossdomesticproduct(GDP), unemployment rate,interestrates,stock
market levels, or home price levels.
However, particularly when assessing the impact on the whole banking organization,
usingalargenumber of variables can makea test morecumbersomeand complicated
– soa banking organization mayalsobenefit from simpler scenarios or from those
with fewervariables.
Banking organizations should balance the comprehensivenessof contributing
variables and tractability of the exercise.
Aswith scenario analysis generally, translating scenariosinto tangible effectson the
banking organization asa whole presentscertain challenges.
Abanking organization should identify appropriate and meaningful mechanismsfor
translating scenariosinto relevant internal risk parametersthat provide a firm-wide
view of risks and understanding of how these risksaretranslated into lossestimates.
Not all businessareasare equally affected by a given scenario, and problemsin one
businessareacan have effects on other units.
However, for anenterprise-widetest, assumptionsacrossbusinesslinesand riskareas
should remain constant for the chosen scenario, since the objective is to seehow the
banking organization asa whole will be affectedby a common scenario.

34
Reverse StressTesting
Reversestresstesting is a tool that allows a banking organization to assumea known
adverseoutcome, suchassuffering a credit lossthat breachesregulatorycapital ratios
or suffering severeliquidity constraintsthat render it unable to meet its obligations,
and then deduce the typesof eventsthat could lead to such an outcome.
This type of stresstesting may help a banking organization to consider scenarios
beyond itsnormal businessexpectationsand seetheimpactof severesystemic effects
on the banking organization.
It also allows a banking organization to challenge common assumptionsabout its
performanceand expected mitigation strategies.
Reversestresstesting helps to explore so-called ―break the bank‖ situations, allowing
a banking organization to set aside the issue of estimating the likelihood of severe
eventsand to focus more on what kinds of eventscould threaten the viability of the
banking organization.
This type of stress testing also helps a banking organization evaluate the combined
effect of several types of extreme events and circumstances that might threaten the
survival of the banking organization, even if in isolation each of the effects might be
manageable.
For instance, reversestresstesting may help a banking organization recognize that a
certain level of unemployment would have a severe impact on credit losses,that a
market disturbance could createadditional lossesand result in rising funding costs,
and that a firm-specificcaseof fraud would causeeven furtherlossesand reputational
impact that could threaten a banking organization‘s viability.
In somecases, reversestresstestscould reveal to a banking organization that
―breaking the bank‖ isnot asremote an outcome asoriginally thought.
Given the numerouspotential threats to a banking organization‘s viability, the
organization should ensurethat it focusesfirston thosescenariosthat havethelargest
firm-wide impact, such asinsolvency or illiquidity, but also on thosethat seemmost
imminent given the current environment.
Focusing on the most prominent vulnerabilitieshelpsa banking organization
prioritize its choice of scenariosfor reversestresstesting.

35
However, a banking organization should alsoconsider a widerrange of possible
scenarios that could jeopardize the viability of the banking organization, exploring
what could representpotential blind spots.
Reversestresstesting can highlight previously unacknowledgedsourcesof risk that
could be mitigated through enhanced risk management.
V. StressTesting for Assessing theAdequacy of Capital and
Liquidity
There are many usesof stresstesting within banking organizations.
Prominent amongthesearestresstestsdesignedto assesstheadequacyof capital and
liquidity.
Given the importance of capital and liquidity to a banking organization‘sviability,
stresstesting should be applied in thesetwo areasin particular, including an
evaluation of theinteractionbetweencapital and liquidity and thepotential for both to
becomeimpaired at the same time.
Depletionsand shortagesof capital or liquidity can causea banking organization to
no longer perform effectively asa financial intermediary, be viewed by its
counterpartiesasno longer viable, becomeinsolvent, or diminish itscapacity to meet
legal and financial obligations.
Abanking organization‘scapital and liquidity stresstesting should consider how
losses, earnings,cashflows, capital, and liquidity wouldbeaffectedin anenvironment
in whichmultiple risksmanifest themselvesatthesametime,for example,anincrease
in credit lossesduring an adverse
interest-rate environment.
Additionally, banking organizationsshould recognize that at the end of the time
horizon consideredby a given stresstest, they may still have substantial residual risks
or problem exposuresthat may continue to pressurecapital and liquidity resources.
Stresstesting for capital and liquidity adequacy should be conducted in coordination
with a banking organization‘s overall strategyand annual planning cycles.
Resultsshould be refreshedin the event of major strategic decisions, or other
decisions that can materially impact capital or liquidity.

36
Banking organizationsshould conduct stresstesting for capital and liquidity
adequacyperiodically.
Capital StressTesting
Capital stresstesting resultscan serveasa useful tool to support a banking
organization‘s capital planning and corporate governance.
They may help a banking organization better understand itsvulnerabilities and
evaluatethe impact of adverse outcomeson itscapital position and ensurethat the
banking organization holdsadequate capital given itsbusiness model, including the
complexity of its activitiesand itsrisk profile.
Capital stresstesting complementsa banking organization‘s regulatory capital
analysis by providing a forward-looking assessmentof capital adequacy, usually with
a forecasthorizon of at least two years(with the recognition that the effects of certain
stressconditionscould extend beyond two yearsfor some stresstests), and
highlighting the potential adverse effects on capital levels and ratiosfrom risks not
fully captured in regulatory capital requirements.
It should also be used to help a banking organization assessthe quality and
composition of capital and itsability to absorb losses.
Stresstesting can aid capital contingency planning by helping management identify
exposuresor risksin advancethat would needto be reducedand actionsthat could be
taken to bolster capital levels or otherwisemaintain capital adequacy, aswell as
actionsthat in timesof stressmight not be possible – such asraising capital.
Capital stresstesting should include exercisesthat analyze the potential for changes
in earnings, losses, reserves, and other potential effects on capital under a variety of
stressful circumstances.
Suchtesting should alsocaptureany potential change in risk-weighted assets, the
ability of capital to absorb losses, and any resulting impact on the banking
organization‘s capital ratios.
It should include all relevant risk typesand other factorsthat have a potential to affect
capital adequacy, whetherdirectly or indirectly, including firm-specificones.
A banking organization should also explore the potential for possible balance sheet
expansion to put pressure on capital ratios and consider risk mitigation and capital
preservationoptions, other than simply shrinking the balance sheet.

37
Capital stresstesting should assessthepotential impact of a banking organization‘s
material subsidiaries suffering capital problemson their own – such asbeing unable
to meet local country capital requirements– even if the consolidated banking
organization is not encountering problems.
Wherematerial relative to the banking organization's capital, counterparty exposures
should alsobe included in capital stresstesting.
Enterprise-widestresstesting, asdescribedin sectionIV, should beanintegral part of
a banking organization‘scapital stresstesting.
Suchenterprise-wide testing should include proforma estimatesof not only potential
lossesand resourcesavailable toabsorb losses, but also potential planned capital
actions(such asdividends or sharerepurchases)that would affect the banking
organization‘s capital position, including regulatoryand other capital ratios.
There should alsobe consideration of the impact on the banking organization‘s
allowancefor loan and leaselossesand other relevant financial metrics.
Even with very effective enterprise-wide tests, banking organizationsshould use
capital stresstesting in conjunction with other internal approaches (in addition to
regulatorymeasures) for assessing capital adequacy, such asthosethat rely primarily
on statistical estimatesof risk or lossestimates based on historical data.
Liquidity stresstesting
Abanking organization should alsoconduct stresstesting for liquidity adequacy.
Through such stresstesting a banking organization can work to identify
vulnerabilitiesrelated to liquidity adequacy in light of both firm-specificand
market-wide stressevents and circumstances.
Effective stresstesting helpsa banking organization identify and quantify the depth,
source, and degreeof potential liquidity and funding strain and to analyze possible
impactson itscash flows, liquidity position, profitability, and other aspectsof its
financial condition over varioustime horizons.
For example, stresstesting can be used to explorepotential funding shortfalls,
shortagesin liquid assets, the inability to issue debt, exposure to possible deposit
outflows, volatility in short-term brokered deposits, sensitivity of funding to a ratings
downgrade, and the impact of reducedcollateral values on borrowing capacity at the
Federal Home Loan Banks, the Federal Reservediscount window, or other secured

38
wholesale funding sources.
Liquidity stresstesting should explore the potential impact of adverse developments
that mayaffect market and asset liquidity, including the freezing up of credit and
funding markets, and the corresponding impact on the banking organization.
Suchtestscan also help identify the conditions under which balance sheets might
expand, thus creatingadditional funding needs (e.g., through accelerateddrawdowns
on unfunded commitments).
Thesetests alsohelp determine whether the banking organization has a sufficient
liquidity buffer to meet varioustypesof future liquidity demandsunder stressful
conditions.
In this regard, liquidity stresstesting should be an integral part of the development
and maintenanceof a banking organization‘s contingency funding planning.
Liquidity stresstesting should include enterprise wide tests as discussed in section IV,
but should also be applied, as appropriate, at lower levels of the banking organization,
and in particular should account for regulatoryor supervisory restrictionson
inter-affiliate funding and asset transfers.
Aswith capital stresstesting, banking organizationsmay need to conduct liquidity
stresstests at both the consolidated and subsidiary level.
In undertaking enterprise-wide liquidity tests banking organizationsshould make
realisticassumptionsasto the implicationsof liquidity stressesin one part of the
banking organization on other parts.
An effective stresstesting framework should explorethe potential for capital and
liquidity problemsto ariseat the sametime or exacerbate oneanother.
For example, a banking organization in a stressedliquidity position is often required
to takeactionsthat have a negative direct or indirect capital impact (e.g., selling
assetsat a loss or incurring funding costsat above market ratesto meet funding
needs).
Abanking organization‘sliquidity stressanalysis should explore situationsin which
the banking organization maybe operating with a capital position that exceeds
regulatoryminimums, but is nonethelessviewed within thefinancial marketsor by its
counterpartiesasbeing of questionable viability.

39
Assessingthepotential interactionofcapital and liquiditycanbechallengingand may
not be possible within a single stresstest, soorganizationsshould explore several
avenuesto assessthat interaction.
Aswith other applicationsof stresstesting, for itscapital and liquidity stresstests, it is
beneficial for a banking organization to articulate clearly itsobjectives for a
post-stressoutcome, for instance to remain a viable financial market participant that
is able to meet itsexisting and prospective obligations and commitments.
In such cases,banking organizationswould have to consider which measuresof
financial condition would need to be met on a post-stressbasis to securethe
confidenceof counterpartiesand market participants.
VI. Governance and Controls
Asnoted under Principle 5, a banking organization‘s stresstesting framework will be
effective only if it is subject to strong governance and controls to ensure the
framework is functioning asintended.
The extent and sophistication of a banking organization‘s governance
over its stresstesting framework should align with the extent and sophistication of
that framework.
Governanceover a banking organization‘s stresstesting framework restswith the
banking organization‘s board of directorsand senior management.
Aspart of their overall responsibilities, a banking organization‘s board and senior
managementshould establish acomprehensive, integratedand effective stresstesting
framework that fits into the broader risk management of the banking organization.
While the board is ultimately responsible for ensuring that the banking organization
has an effective stresstesting framework, senior management generally has
responsibilityfor implementing that framework.
Senior management duties should include establishing adequate policiesand
proceduresand ensuring compliance with those policies and procedures, assigning
competent staff, overseeing stresstest development and implementation, evaluating
stresstest results, reviewing any findings relatedto the functioning of stresstest
processes,and taking prompt remedial action wherenecessary.
Senior management, directly and through relevant committees, also should be

40
responsible for regularly reporting to the board on stresstesting developments
(including the processto design tests and develop scenarios) and on stresstesting
results(including from individual tests, wherematerial), aswell ason compliance
with stresstesting policy.
Board members should actively evaluate and discuss this information, ensuring that
the stress testing framework is in line with the banking organization‘s risk appetite,
overall strategy and business plans, and contingency plans, directing changes where
appropriate.
Abanking organization should have writtenpolicies, approved and annually reviewed
by the board, that direct and govern the implementation of the stresstesting
framework in a comprehensivemanner.
Policies, along with proceduresto implement them, should:
Describe the overall purposeof stresstesting activities;
Articulate consistent and sufficiently rigorousstresstesting practices acrossthe
entirebanking organization;
Indicate stresstesting roles and responsibilities, including controls over external
resourcesusedfor any part of stresstesting (such asvendorsand data providers);
Describe the frequencyand priority with which stresstesting activitiesshould be
conducted;
Indicate how stresstest resultsareused, by whom, and outline instancesin which
remedial actionsshould be taken; and
Bereviewedand updated asnecessaryto ensurethat stresstesting practices remain
appropriate and keepup to date with changesin market conditions, banking
organization productsand strategies, banking organization exposuresand activities,
the banking organization‘s established risk appetite, and industry stresstesting
practices.
Astresstesting framework should incorporate validation or other type of independent
review to ensure the integrity of stresstesting processesand results, consistent with
existingsupervisory expectations.
If a banking organization engagesa third party vendor to support some or all of its
stresstesting activities, thereshould be appropriate controls in place to ensure that

41
thoseexternally developed systemsand processesaresound, applied correctly, and
appropriate for the banking organization‘s risks, activities, and exposures.
Additionally, senior management should be mindful of any potential inconsistencies,
contradictions, or gapsamong itsstresstests and assesswhat actions should be taken
asa result.
Internal audit should alsoprovide independent evaluation of the ongoing
performance, integrity, and reliabilityof the stresstesting framework.
Abanking organization should ensure that itsstresstests are documented
appropriately, including a description of the typesof stresstests and methodologies
used, key assumptions, results, and suggestedactions.
Senior management, in consultation with the board, should review stresstesting
activities and resultswith an appropriately critical eye and ensure that there is
objective review of all stresstesting processes.
The resultsof stresstesting analysesshould facilitate decision-making by the board
and senior management.
Stresstesting resultsshould be used to inform the board about alignment of the
banking organization‘s risk profile with the board‘s chosen risk appetite, aswell as
inform operating and strategic decisions.
Stresstesting resultsshould be considered directly by the board and senior
managementfor decisionsrelatingto capital andliquidityadequacy, including capital
contingency plans and contingency funding plans.
Senior management, in consultation with the board, should ensure that the stress
testing framework includesa sufficient rangeof stresstesting activities applied at the
appropriatelevels of thebanking organization (i.e., not just oneenterprise-widestress
test).
Sound governance also includes using stresstesting to consider the effectivenessof a
banking organization‘s risk mitigation techniquesfor variousrisk types over their
respective time horizons, such asto explore what could occur if expected mitigation
techniques break down during stressful periods.
VII. Conclusion
Abanking organization should usethe principleslaid out in this guidance to develop,

42
implement, and maintain an effective stresstesting framework.
Sucha framework should be adequately tailored to the banking organization‘s size,
complexity, risks, exposures, and activities.
Akey purposeof stresstesting is to explore varioustypes of possible outcomes,
including rareand extremeeventsand circumstances, assesstheir impact on the
banking organization, and then evaluate the boundaries up to which the banking
organization plansto be able to withstand such outcomes.
Stresstesting maybe particularly valuable during benign periodswhen other
measuresmaynot indicate emerging risks.
While stresstesting can provide valuable information regarding potential future
outcomes, similar to any other risk management tool it haslimitations and cannot
provide absolutecertainty regarding the implicationsof assumedeventsand impacts.
Furthermore, management should ensure that stress testing activities are not
constrained to reflect past experiences, but instead consider a broad range of
possibilities.
Nosingle stresstest can accuratelyestimate the impact of all stressful eventsand
circumstances;therefore, a banking organization should understand and account for
stresstesting limitationsand uncertainties, and use stresstests in combination with
other risk management tools to make informed risk management and business
decisions.

43
Guidelines on Stressed Value-At-Risk (Stressed VaR) and on the
Incremental Default and Migration Risk Charge (IRC)
16May 2012
The EBApublished today twosets of Guidelines on Stressed Value-At-Risk (Stressed
VaR) and on the Incremental Default and Migration Risk Charge(IRC) modelling
approaches employed by credit institutionsusing the Internal Model Approach
(IMA).
TheseGuidelines are seen asan important meansof addressing weaknessesin the
regulatorycapital framework and in the risk management of financial institutions.
Their objective is to contribute to a level playing field and to enhanceconvergence of
supervisory practices acrossthe EU.
National competent authorities areexpected to implement the provisions set out in
the Guidelines within six monthsafter their publication.
After that date, the competent authorities must ensure that institutions comply with
the Guidelines effectively.
Guidelines on Stressed Value-At-Risk (Stressed VaR)
TheseGuidelines include provisions on StressedVaR modelling by credit institutions
using the Internal Model Approach for the calculationof the required capital for
market risk in the trading book.
The main provisions of the Guidelines relateto:

44
-The identification and the review of the stressedperiod;
- The Stressed VaR methodology;
- The Usetest.
Guidelines on the Incremental Default and Migration Risk
Charge (IRC)
TheseGuidelines include provisions on the IRC modelling approachesemployed by
credit institutionsusing the Internal Model Approach (‗IMA‘) for the calculation of
the required capital for specific interest risk in the trading book.
The incremental risk charge is intended to complement additional standardsbeing
applied to the value-at-risk (VaR) modelling framework in the trading book.
The main provisions of the Guidelines relateto:
- The scope of application; Individual modelling of all aspectsof the IRC approach
- The interdependencebetweendefault and migration events;
-The profit and losses(P&L) valuation including how ratingschangesimpact on
market prices and on the computation of P&L;
- The liquidity horizons;
- The validation and use test for IRC models.
Notes
1) According to the amendmentsof the Capital RequirementsDirective by Directive
2010/76/EU, entered into force on 31December 2011, the EBAis tasked with
monitoring the rangeof practices in theareaof StressedValue-at-Risk (StressedVaR)
and Incremental Default and Migration Risk Charge (IRC) in the trading book.
The EBAshall draw up guidelines in order to ensureconvergence of supervisory
practices.

45
2) In accordancewithArticle 16(3) of the EBARegulation, Guidelines set out the
EBA‘sview of appropriate supervisory practiceswithin the European System of
Financial Supervision or of how Union law should be applied in a particular area.
Competent authoritiesand financial market participantsmust make every effort to
comply with the guidelines.
Beforethe deadlineindicated in the Guidelines, i.e 6 months from the date of
publication, Competent authorities must notify the EBAasto whether theycomply or
intendto comply with theseguidelines,orotherwisewithreasonsfor non-compliance.
The notificationsshall be published on the EBAwebsite.
EBAGuidelineson Stressed ValueAt Risk (Stressed VaR)
16.05.2012
I. Executive Summary
The amendmentsto the Capital RequirementsDirective1 by Directive 2010/76/EU
(CRD III) relate, among others, to StressedValue-at-Risk (Stressed VaR) in the
trading book.
According to theseamendments, the predecessorof the EBA, the Committee of
European Banking Supervisors(CEBS) is tasked with monitoring the range of
practices in this areaand drawing up guidelinesin order to ensureconvergence of
supervisory practices.
The amendmentsto the Capital RequirementsDirective by Directive 2010/76/EU
(CRD III) entered into force on 31December2011.
Providing guidance on Stressed VaR modelling by credit institutions using the
Internal ModelApproach (‗IMA‘) for the calculation of therequiredcapital for market
risk in the trading book, is seenasan important meansof addressing weaknessesin
the regulatorycapital framework and in the risk management of financial institutions
that contributed to the turmoil in global financial markets.
It isalsoexpected to reducereliance on cyclical VaR-basedcapital estimatesaswell
asto contribute to the development of a morerobust financial system.

46
The first chapter, on ‗Identification and validation of the stressedperiod‘, elaborates
on the value-at-risk model inputs calibratedto historical data from a continuous
12-month period of significant financial stressrelevant to an institution‘s portfolioand
deals with
i)The length of the stressedperiod,
ii) The number of stressed periodsto usefor calibration,
iii) The approach to identify the appropriate historical period and
iv)The required documentation to support the approach used to identify the stressed
period.
The second chapter, on ‗Review of the stressed period‘ provides guidance on the
frequencyand monitoring of a stressed period.
The third chapter on ‗StressedVaR methodology‘ deals with
i) Consistencyissuesbetweenthe VaR and StressedVaR methodologies and
ii) The useand validation of proxies in Stressed VaR modelling.
The fourth and final chapter, entitled ‗Use tests‘specifies use test requirements.
The Guidelines on Stressed VaR are expected to contribute to a level playing field
among institutionsand to enhanceconvergence of supervisory practices among the
competent authoritiesacrossthe EU.
It isexpected that the national competent authorities around the EU will implement
the Guidelines by incorporating them within their supervisory procedures within six
monthsafter publication of the final guidelines.
After that date, the competent authorities must ensure that institutions comply with
the Guidelines effectively.
II. Background and Rationale
The CRD III trading book amendments, including the requirement of Stressed Value
at Risk (VaR) modelling for the calculation of the regulatory capital for market risk in
the trading book, arethe result of widespread international (G20, Basel, FSF)

47
recognition in 2008that further regulatoryreform wasneeded to addressweaknesses
in the current regulatory capital framework and in the risk management of financial
institutions that contributed to the turmoil in global financial markets.
In January 2009, the Basel Committee on Banking Supervision (BCBS) proposed
supplementing the current VaR-based trading book framework with, among other
measures, an incremental risk capital charge (IRC), which includesdefault risk as
well asmigration risk for unsecuritised credit productsand a stressed value-at-risk
requirement.
Asobserved lossesin banks' trading books during the financial crisis have been
significantly higher than the minimum capital requirementsunder the Pillar 1market
risk rules, the BCBSproposed to enhancethe framework through requiring banks to
calculate, in addition to the current VaR, a stressed VaR taking into account a
one-year observation period relating to significant losses.
The additional stressed VaR requirement is expected to help reduce the
pro-cyclicality of the minimum capital requirementsfor market risk.
In the processof refining capital requirementsfor market risk, the BCBSconducted a
quantitative impact study.
In thesummerof 2009, the Trading Book Group (TBG) investigated the impactof the
provisionsof the ‗Revisionsto the Basel II market risk framework‘ and of the
‗Guidelines for computing capital for incremental risk in the trading book‘
consultation paperspublished in January 2009, focusing (generally) on big
internationally-active banks with extensivetrading activities.
The amendmentsto the Capital RequirementsDirective by Directive 2010/76/EU
(CRD III) relatingto StressedVaRin thetradingbook areadirecttransposition of the
proposalsfrom the BCBSin the EU context.
The European BankingAuthority is requestedto monitor the rangeof practices in
this areaand to provide guidelines on Stressed VaR models.
The objectives of these Guidelines on StressedVaR are:
I. To achieve a common understanding among the competent authoritiesacrossthe
EU on StressedVaR modelling in order to enhanceconvergence of supervisory
practices;

48
II.To create more transparency for institutions when implementing Stressed VaR into
the calculation of the required capital for market risk in thetrading book and into their
risk management practices;and
III. To create a level playing field among institutionsin this area.
The guidelines presented in this paper do not aim to be a comprehensive set of rules,
but rather to complement the new CRD provisionsrelating to Stressed VaR where
additional guidance by the EBAwasdeemed necessaryor appropriate.
Given that the Guidelinesdiscussedin this paper do not go beyond the provisions of
the CRD but rather clarify how the rules are to be applied in practicea detailed
assessment of the costsand benefitsassociatedwith them is not required.
Thesecostsand benefits are unlikely to be incremental to thoseidentified in the EU
Commission‘s ImpactAssessment accompanying itsCRDIII proposal.
III. EBAGuidelines on Stressed VaR
Statusof these Guidelines
1.This document containsguidelinesissuedpursuant toArticle 16of Regulation(EU)
No1093/2010of the European Parliamentand of the Council of 24November 2010
establishing a European SupervisoryAuthority (European BankingAuthority),
amending Decision No 716/2009/EC and repealingCommission Decision
2009/78/EC (‗the EBARegulation‘).
In accordancewithArticle 16(3) of the EBARegulation, competent authorities and
financial market participants must make every effort to comply with the guidelines.
2. Guidelines set out the EBA‘s view of appropriate supervisory practiceswithin the
European System of Financial Supervision or of how Unionlaw should beapplied in a
particular area.
The EBAthereforeexpectsall competent authorities and financial market
participants to whom guidelines are addressed to comply.
Competent authoritiesto whom guidelines apply should comply by incorporating
them into their supervisory practices asappropriate (e.g. by amending their legal
framework or their supervisory rules and/or guidance or supervisory processes),
including whereparticular guidelines are directed primarily at institutions.

Basel 3 June 2012

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