EBA publishes its first peer review of the stress tests and the resilience of deposit guarantee schemes (DGSs)

17 June 2020

  • DGS stress tests have become an established tool to prepare for DGS interventions;
  • The EBA considers the overall resilience of DGSs to be “fair”, which is the second best result possible and means that any shortcomings identified by DGSs are unlikely to affect the ability of DGSs to perform their tasks;
  • For future peer reviews, the DGS stress testing framework would benefit from improvements to enhance comparability and consistency of reported outcomes.

The European Banking Authority (EBA) published today its first peer review of stress tests and the resilience of Deposit Guarantee Scheme (DGSs). The purpose of the peer review was to assess the resilience of DGSs based on the results of the DGS stress tests, and to identify good practices and areas for improvement.

In the Report, the EBA assessed the results of 135 DGS stress tests performed by 32 DGSs from 27 EU Member States. The priority tests covered DGS’ operational and funding capabilities, credit institutions’ single customer view (SCV) files containing depositor information to prepare for a DGS payout, and cross-border cooperation between DGSs in case of cross-border branches.

The EBA concluded that such tests have become an established tool to prepare for DGS interventions. In addition, the EBA is of the view that using the grading system outlined in the Guidelines on stress tests of DGSs, the overall resilience of DGSs across the EU is ‘fair’, which is the second best result, after ‘optimal’. This means that the identified shortcomings are isolated and/or can easily be addressed by the DGSs at the point of failure, and are unlikely to affect the ability of DGSs to perform their tasks in line with the Deposit Guarantee Schemes Directive (DGSD). The Report also identified good practices that were deployed by a number of DGSs and which can be considered by the other DGSs.

The EBA also highlighted some shortcomings and provided early indications on how to improve and enhance the framework. In particular, the EBA found that the divergence in the type of exercises performed and in the way outcomes were reported, made it difficult for the EBA to compare the tests between DGSs, thus hampering the desired consistency. The EBA, therefore, provided early indications on how to enhance the comparability for future peer reviews. These early indications will also serve as input for any potential future revision of the EBA Guidelines on stress tests of DGSs.

While the peer review performed by the EBA is a regular exercise required by the DGSD, it also includes provisions stemming from the outbreak of the COVID-19 pandemic. More specifically, the Report outlines lessons learnt from a real-life payout case in one EU Member State that coincided with the pandemic. The Report also includes early indications of how to improve the framework by exploring how to incentivise DGSs to perform ‘special’ tests, which would allow them to assess scenarios with severe business continuity problems, such as a pandemic, power outages or significant operational disruptions.

Legal basis

The DGSD requires Member States to ensure that DGSs perform stress tests of their systems. In 2016, the EBA issued Guidelines on stress tests of DGSs that set out the scope, principle-based requirements and a list of four ‘priority tests’ that DGSs are required to perform and report on to the EBA by 3 July 2019, by means of a predefined reporting template. The DGSD, in turn, requires the EBA to use these reports to conduct a peer review of all DGSs across the EU, and to do so at least every five years.

 

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Franca Rosa Congiu

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