A new report published by the European Central Bank (ECB) arrives at the conclusion that the stress testing methods of Eurozone banks are inadequate and have been introduced in some cases only after the beginning of the
credit crisis in August 2007.
The report on "
EU Banks' Liquidity Stress Testing and Contingency Funding Plans" carried out by the ECB's Banking Supervision Committee arrives at the sour conclusion,
that there is substantial room for improvement in both areas.
Surveying 84 Eurozone banks the ECB said
that there was no common standard for the stress testing methods which were insufficient for the majority of banks.
The most common scenarios in liquidity stress tests are idiosyncratic scenarios and market scenarios, although not all banks run both types of scenario. Only a sizeable minority run integrated market and idiosyncratic scenarios.
Highlighting the shortcomings of most banks' stress tests the report points to a lack of different time frames.
Most banks run stress test scenarios that cover either short-term (e.g. four-week) or longer- term (e.g. 12-month) horizons, but only a few test market scenarios with both short and longer-term horizons. The BSC highlights the need for scenarios to be tested for all time horizons which are relevant to banks’ maturity pro?les and vulnerabilities.
Another major point for the ECB is the fact that almost all banks disregard cross-border flow problems. Admitting more than a year after beginning of the credit crisis that we are in a crisis situation, the ECB warns that such risks are particularly prevalent in these times.
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