Stress tests, risk-free rates and cross-currency swaps

The week on, October 19–25, 2019

7 days montage 251019

Keeping watch: EBA stress-testing head plans overhaul

Top-down approach, dynamic balance sheet and multiple shock scenarios all possible for 2022

Race to create term risk-free rates hots up

Markit joins term Sonia hopefuls; four providers release term €STR plans

Morgan Stanley, JP clear first cross-currency swap at Eurex

Two more banks onboarding; CCP hoping to extend service to clients in 2020


COMMENTARY: Put to the test

Large European banks continue to feel the heat under the regulatory spotlight. As well being hit hardest by Basel III reforms to the risk weightings of their exposures captured by internal models, firms now learn that the European Banking Authority is planning to overhaul the stress tests it conducts every two years on those based on the continent.

Banks will be relieved that the upcoming round of stress tests due to take place next year will not carry significant changes. But, in an interview with, the EBA says a more fundamental review is underway for the tests in 2022.

The reason for the re-examination lies in a July report from the European Court of Auditors that found weaknesses in the regulator’s 2018 stress tests.

Revamped evaluations could in future mean banks are asked to produce more data for so-called ‘top-down’ stress tests that probe their existing positions. New tests might also introduce asymmetric scenarios – such as one with rising and one with falling interest rates – that are harder for banks to game.

European banks did though receive some succour this month when the European Commission launched a consultation on the implementation of Basel III standards in the European Union. It suggests that historical loss-based assessments that help determine operational risk capital requirements could be neutralised.

Using historical losses to set capital levels could result in major hikes in risk-weighted assets – more than 50% for the largest banks – if the internal loss multiplier (ILM) is allowed to exceed a factor of one. Based on losses over the past 10 years in relation to their size, the ILM is a scaling factor that sets the Pillar 1 capital banks must hold.

The Commission’s approach might let UK banks, for example, avoid capturing in their calculations large operational losses experienced in the payment protection insurance scandal.

However, it should be noted that the EBA may need to be convinced about the idea. In contrast to the EC, the EBA favours using historical losses to set capital levels, and in a recent regulatory study it found that recognising past failures leads to more robust outcomes – mitigating against net losses overshooting op risk capital.


Provisions for credit losses taken by the eight US global systemically important banks were $577 million higher in the third quarter than in Q2 2019, with JP Morgan’s increasing the most – credit loss reserves up 12% in Q3 at large US banks.


“A lot of clients want to make that transition, even in the most carbon-intensive sectors. We want to move from pure exclusion to transition. Maybe, at the end of the process, we will stop lending to a few companies entirely” – Karen Degouve, Natixis, on the bank’s green weighting factor for allocating capital to transactions based on their climate impact.

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