In recent years, the European Banking Authority (EBA) has been regularly performing stress testing exercises across the European Union. According to the EBA, the aim is to assess the resilience of EU banks against a common set of adverse economic developments in order to identify potential risks, inform supervisory decisions and increase market discipline. In fact, the European Central Bank (ECB) and other European competent authorities support these exercises and use them for supervisory decisions.
While EBA and ECB stopped the stress testing exercise in March 2020 due to the COVID-19 outbreak in Europe and its unprecedented effects, they are now determined to complete a full stress test exercise in 2021.
Challenges with Stress Testing
To perform the EBA EU-wide stress tests, European banks need to fill out very granular data sheets with approx. 200k data points. These sheets provide detailed information on the solvency of banks for the past, the present and - most important - the simulated future in the event of adverse shocks.
Main challenges for banks are the following:
- Short timelines to provide information to EBA and supervisors
- Achieving good data quality to pass validation checks from supervisors
- Complying with methodological EBA constraints not applied for bank internal simulations
- High level of effort for banks, especially to set up solutions specifically for EBA stress tests
- Risk of negative simulation results, especially in the 2021 exercise, where a stress scenario is applied starting from an already stressed state due to COVID-19
Our services and tools
KPMG supports banks in handling the regulatory stress testing exercises front to back. Depending on client needs, we help the bank “hands on” throughout the complete chain from data gathering to filling sheets, we provide strategic guidance based on benchmarking information and supervisory insights and/or we simply help banks to increase their stress testing efficiency by using our tools.
KPMG EBA stress test tools
In recent years KPMG has developed a series of tools for our clients. These tools have already helped more than 20 European banking groups to conduct stress testing more efficiently and effectively. KPMG offers these tools for a minor one-time fee including tool updates as well as tool support for the given stress test season.
NIICE - NII Calculation Engine
NIICE is a VBA-based tool, which facilitates automated stress projection and population of the template CSV_NII_CALC
- Significant efficiency gains via centralized calculation and optimization at template level
- Optimized simulation results compliant with EBA methodology and constraints
- Usual savings of 30 to 40 person days
- Proven methodology from previous EBA/ECB stress tests, adapted to latest requirements
- Enhanced transparency enables increased data quality and effective discussion with regulator
- Efficient NII driver analysis and reporting of results due to dynamic visualization function
ICE - Impairment Calculation Engine
ICE is an Excel-based tool which allows automated generation of ECB benchmarks and population of the template CSV_CR_SCEN
- Significant efficiency gains by automatic processing of ECB credit risk path generator
- Due to automated approach and quality assured transformation routine reduces potential errors
- Proven approach from previous EBA/ECB stress tests adapted to latest requirements
- Transparent mapping from ECB credit risk path generator to line items in CSV_CR_SCEN
- Detailed impact analysis between internal and benchmark parameters
- Savings of 30-40 person days by using ICE benchmark projections instead of internal projections
QuEST - Quality Evaluator for Stress Testing
QuEST is a Net software solution, which allows automated validation of data consistency and compliance with EBA/ECB stress test guidelines and principles
- Data inconsistencies are quickly identified and can be mitigated before official submission: consideration of/adherence to DQ approach and STAR-Portal of ECB
- A decentralized application offers tremendous benefits for partial submissions
- Time savings during consolidation due to high quality of data delivered
- Checks defined by KPMG experts reveal cross-references within template and to other regulatory reports
- Based on experience from more than 20 banking groups applying KPMG's data quality checks for the EBA/ECB stress tests 2018 and 2020, and 12 banking groups applying QuEST for LiST19
PLATOS - Population Tool for Stress Testing
PLATOS is a R or Python based tool, which allows efficient and automated data aggregation, population and versioning of EBA/ECB stress test templates
- Centralized data aggregation ensures transparently documented data sources, delivery format and aggregation logic and thus enables proper knowledge transfer for future exercises
- Time efficiency due to high-performance automated data aggregation and versioning feature
- Tool features based on experience from previous EBA/ECB stress test exercises
DAS - Driver Analysis and Simulation
DAS is a customizable out-of-the-box solution based on Excel and PowerQuery which provides various dynamic illustrations of EBA/ECB stress test results as well as top-down simulation functionalities in order to analyze and optimize EBA/ECB stress test results.
- Instant visualization enables efficient analysis and interpretation of EBA/ECB stress test results
- Top-down simulation allows for an approximation of EBA/ECB stress test results before bottom-up calculation of exact results
- Easy and user-friendly tailoring of charts and tables for reporting purposes
- Well-shaped data model and quality assured transformation routine reduce potential errors in reporting of EBA/ECB stress test results
In addition to our tools, we offer effective consulting services on stress testing on a time and material basis to our European clients to gain transparency and overcome any challenges effectively. Typical scenarios in this regard are:
Project example 1: Overall project management
Overall project management for the ECB stress test exercise as part of comprehensive assessment and ECB onboarding for several Brexit banks.
- Set-up project governance with global and local stakeholders, milestone planning and coordination of all workstreams including senior management reporting and escalation
- Teach-in sessions and expert advisory services for all workstreams with guidance on methodology and benchmark knowhow on best-practice approaches
- Implementing central data hub for template population and consolidation
- Overall quality assurance and challenge of delivery
- Coordination and quality assurance of explanatory notes and supplementary documentation
- Strategic advice on negotiation with regulator
Project example 2: Workstream lead and SME support for specific workstreams
Workstream lead and SME support in particular for NII, Credit Risk, Market Risk and OpRisk for large German universal banks and Landesbanken.
- Leverage of the Eurozone-wide KPMG network of experts to provide sound and market standard interpretations of the methodology
- Conceptual design and implementation of processes and models
- Automated data processing of Risk and Finance data, including quality assurance and reconciliation with COREP/FINREP reporting
- Challenge of the underlying data and simulation results
- Use of KPMG tools, especially for NII simulation, automated data processing, data quality and plausibility checks of the stress test templates
Project example 3: Tool support and expert advice on demand
Tool support and expert advice on demand for several large universal banks in Europe.
- Provide KPMG tools and training sessions for tool usage
- Provide update for KPMG tools on short notice in case of updated templates or methodology
- Expert advice, guidance on methodology and benchmark knowhow on best-practice approaches for all topics on demand