Investments linked to business expansion (e.g., investments in marketing, product development or strategic acquisitions) are (a) closely linked to the future growth which they are expected to generate, and (b) such investments in business expansion can be stopped at short notice with little impact on the existing business. Where it is not possible to reflect growth - e.g., in a static balance sheet stress test - it could be misleading to include the related investment costs in a recurring baseline cost base. In comparison, reducing investment costs for a bank that needs to replace outdated and complex infrastructure may be a very challenging management action.  

Institutions with short credit duration (e.g., average duration of 2 months) can steer credit portfolio size and quality in the short term if a stress situation is identified. As such, within a medium-term scenario, they could more credibly manage their credit exposure to reduce credit losses compared to longer duration credit portfolios. Thus, not considering that such an institution would be able to take action, and/or has proven to do so in past stressed situations, to change the credit profile over a three-year horizon when the balance sheet has turned multiple times could lead to an unrealistic or misleading outcome from the stress test. It should further be noted that European Commission’s proposed amendment to Regulation EU No. 575/2013 from 27th of October 2021  lowers the risk weight of transactor exposures (from 75% to 45%), which indicates that some short-term assets are also believed from a prudential perspective to give rise to relatively lower risk exposure. 

The above should also be seen in the light of EBA/GL/2018/03 Article 587b that explicitly allows competent authorities to use dynamic balance sheet assumptions, in which the above consideration could be more directly considered compared to a static balance sheet approach including relevant management actions.