Methodology EU-wide Stress Test 2014 - European Banking Authority

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1 METHODOLOGYEUWIDESTRESSTEST2014 3March2014 PreliminaryDraft MethodologyEUwideStressTest2014 Version1.8

2 METHODOLOGYEUWIDESTRESSTEST2014 Contents ListofBoxes 4 ListofFigures 4 ListofTables 4 Abbreviations 5 1. ChapterIntroduction 7 1.1 Background 7 1.2 Objectivesofthisguidance 8 1.3 Sampleofbanks 8 1.4 Scopeofconsolidation 9 1.5 Macroeconomicscenariosandmarketriskshocks 9 1.6 Timehorizonandreferencedate 9 1.7 Definitionofcapital 9 1.8 Hurdlerates 10 1.9 Staticbalancesheetassumption 10 1.10 Riskcoverage 11 1.11 Overviewonstresstestingmethodologyaccordingtorisktype 11 1.12 Process 12 2. Dataneeds 15 2.1 Templatestructure 15 2.2 Detailsoncoretemplates 17 2.2.1 Advancedatacollection 17 2.2.2 Calculationsupportandvalidationdata 17 2.2.3 Transparency 18 2.3 Detailsonadditionaltemplates 19 2.3.1 Calculationsupportandvalidationdata 19 3. Quantificationofdifferentrisktypes 20 3.1 Creditrisk 20 3.1.1 Overview 20 3.1.2 Highlevelassumptionsandconstraints 22 3.1.3 Exposureclassesandassetclasses 22 3.1.4 Definitions 24 3.1.5 Startingvaluesforriskparameters 27 3.1.6 Riskparameterandexposureevolution 28 3.1.7 Calculationofdefaultedassets,impairmentsandassociatedbenchmarks 31 3.1.8 ImpactonCreditRWAandassociatedbenchmarks 33 2

3 METHODOLOGYEUWIDESTRESSTEST2014 3.1.9 RWAfordefaultedassetsandIRBexcessorshortfall 34 3.2 Marketrisk 35 3.2.1 Overview 35 3.2.2 SimplifiedmarketriskstresstestapproachfornonVaRbanks 36 3.2.3 ComprehensivemarketriskapproachforVaRbanks 37 3.2.4 EstimationofimpactonNTI,othercomprehensiveincomeandP&L 38 3.2.5 Specificrequirementsforpositionsheldfortrading 39 3.2.6 Descriptionofmarketriskscenario 40 3.2.7 AdditionalrequirementsforCVA,DVAandmarketliquidity 42 3.2.8 RWAcalculationformarketrisk 43 3.3 Treatmentofsecuritisations 44 3.3.1 Scope 44 3.3.2 EstimationofimpactonNTI,othercomprehensiveincomeandP&L 45 3.3.3 Riskweightedassetscalculationforsecuritisations 46 3.4 Costoffundingandinterestincome 46 3.4.1 Overview 46 3.4.2 Projectionoflendingandfundingrates 47 3.4.3 Additionalrequirements 49 3.4.4 Definitions 49 3.5 Sovereignrisk 52 3.5.1 Overview 52 3.5.2 Definitions 53 3.6 Noninterestincomeandexpenses 54 3.6.1 Overview 54 3.6.2 Specificrequirementsregardingincomeorexpenseitems 54 3.7 Operationalrisk 55 4. Annex:Overviewoftemplatecontent 56 5. Annex:EUwidestresstestsampleofbanks 59 3

4 METHODOLOGYEUWIDESTRESSTEST2014 ListofBoxes Box1:Defaultflowsandgranularity,anexample 29 Box2:IllustrationDPC 30 Box3:InferringstressedpointintimeparametersfromECBbenchmarks 31 Box4:Impairmentlossesonnewdefaultedassets 32 Box5:Impairmentlossesonolddefaultedassets 32 Box6:Formaliseddescriptionsimplifiedmarketriskstressapproach 37 Box7:Treatmentofadditionalriskfactors 40 Box8:Detaileddefinitionsregardingtheevolutionofportfolioandinterestincome 50 ListofFigures Figure1:Summaryofcreditriskmethodology 21 Figure2:IllustrationofstartingvalueapproachesfortheinferenceofPDpitandLGDpit 28 ListofTables Table1:OverviewofrisktypesandtheirtreatmentintheEUwidestresstest 13 Table2:Overviewoftemplatestructure 16 Table3:OverviewoftheIRBandSTAexposureclasses 23 Table4:Overviewofdetailedassetclasses 23 4

5 METHODOLOGYEUWIDESTRESSTEST2014 Abbreviations ABCP AssetBackedCommercialPaper ABS AssetBackedSecurity(ies) ADC AdvanceDataCollection AfS AvailableforSale(accountingportfolio) AIRB AdvancedInternalRatingsBasedapproach ALM AssetLiabilityManagement Art Article AQR AssetQualityReview CA(s) CompetentAuthority(ies) CCF CreditConversionFactor CCP CentralCounterparty CDO CreditDebtObligation CEBS CommitteeofEuropeanBankingSupervisors CMBS CommercialMortgageBackedSecurity(ies) COREP Commonreportingframeworkforcapitaladequacyinformation CRDII Directive2006/48/ECand2006/49/ECasamendedbytheDirective2009/111/EC CRDIII Directive2010/76/EU CRM ComprehensiveRiskMeasure CRR/CRDIV Regulation(EU)No575/2013andDirective2013/36/EU CSA CreditSupportAnnex CSV CalculationSupportandValidation CVA CreditValueAdjustments DPC DefaultPortfolioCharacteristicstoincorporatefactorssuchastimeindefault. DTA DeferredTaxAsset EAD ExposureatDefault EBA EuropeanBankingAuthority ECB EuropeanCentralBank EEA EuropeanEconomicArea ELBE ExpectedLossBestEstimate EMEA Europe,MiddleEastandAfrica ESRB EuropeanSystemicRiskBoard 5

6 METHODOLOGYEUWIDESTRESSTEST2014 EU EuropeanUnion Euribor EuroInterbankOfferedRate FINREP Reportingframeworkforfinancialinformation FIRB FoundationInternalRatingsBasedapproach FVA FairValueAdjustment FVO FairValueOption(accountingportfolio) HfT HeldforTrading(accountingportfolio) HtM HeldtillMaturity(accountingportfolio) IAA InternalAssessmentApproach IAS InternationalAccountingStandard ICAAP InternalCapitalAdequacyAssessmentProcess IFRS InternationalFinancialReportingStandards IRB InternalRatingsBasedapproach IRC IncrementalRiskCharge LGD LossGivenDefault LGDpit LossGivenDefaultpointintime LGDreg LossGivenDefaultregulatory NSA NationalSupervisoryAuthority Para. Paragraph PD ProbabilityofDefault PDpit ProbabilityofDefaultpointintime PDreg ProbabilityofDefaultregulatory PIT Pointintime P&L ProfitandLoss RMBS RetailMortgageBackedSecurity(ies) RW RiskWeight(s) RWA RiskWeightedAssetsrespectivelyriskexposureamount SFA SupervisoryFormulaApproach STA StandardisedApproach SVaR StressValueatRisk TTC Throughthecycle TR Transparency VaR ValueatRisk w.r.t. Withrespectto 6

7 METHODOLOGYEUWIDESTRESSTEST2014 1. Introduction 1.1 Background 1. TheEBAisrequired,incooperationwiththeEuropeanSystemicRiskBoard(ESRB),toinitiateand coordinate Unionwide stress tests to assess the resilience of financial institutions to adverse market developments. Building on experience of previous EUwide stress tests, the EBA is conductingastresstestonawidesampleofbanksin2014.Thisexerciseisbeingundertakenin coordination with national supervisory authorities, the European Central Bank (ECB), the ESRB, andtheEuropeanCommissionunderArticle32oftheEBAregulation.CoordinationwiththeECB isalsoofimportance,sincetheECBinpreparationoftheSingleSupervisoryMechanism(SSM)is conducting a comprehensive assessment comprising of a supervisory risk assessment, asset quality review and a stress test. The main features of the ECB stress test exercise will coincide withthemainfeaturesoftheEUwidestresstestexerciseasdiscussedinthiscommunication. TheAuthorityshall,incooperationwiththeESRB,initiateandcoordinateUnionwideassessments of the resilience of financial institutions to adverse market developments. To that end it shall develop: (a)commonmethodologiesforassessingtheeffectofeconomicscenariosonaninstitution'sfinancial position; (b)commonapproachestocommunicationontheoutcomesofthoseassessmentsoftheresilienceof financialinstitutions; (c)commonmethodologiesforassessingtheeffectofparticularproductsordistributionprocesseson aninstitution;and (d)commonmethodologiesforassetevaluation,asnecessary,forthepurposeofthestresstesting." 2. TheobjectiveoftheEUwidestresstestistoassesstheresilienceoffinancialinstitutionsinthe EU to adverse market developments and assess the potential for systemic risk to increase in situations of stress. The evaluation is based on consistency and comparability of the outcomes acrossbanks. 3. TheEUwidestresstestisdesignedtoprovidesupervisors,banksandothermarketparticipants withacommonexercisethatfacilitatesthecreationofbenchmarkstocontrastandcompareEU banks under adverse market conditions. Therefore, the exercise is designed to provide competent authorities (CAs) with a consistent and comparable methodology to allow them to undertake a rigorous assessment of banks resilience under stress and which can be effectively disseminatedinatransparentandcomparablefashionatanEUlevelviatheEBA.Tothisend,the EUwide stress test is focused on providing consistent transparency as a complement, not as a substitute,toothersupervisoryrequiredstresstestsincludingthosecarriedoutunderPillar2. 4. The EUwide stress test is conducted on a bankbybank basis, at the highest level of consolidation in the European Economic Area (EEA). The assessment of the reliability and robustnessofbanksassumptions,data,estimatesandresultsrestswiththeCAsandfortheSSM 7

8 METHODOLOGYEUWIDESTRESSTEST2014 countries centrally with the ECB. Banks calculations should be rigorously reviewed and challengedbytherespectiveCAsandforSSMcountriesalsobytheECBbeforebeingcollectedby theEBAanddisseminatedfortransparencypurposes. 5. TheEBAwillprovideCAswithstatisticalbenchmarksforthekeyriskparametersandvariablesfor assistingthequalityassuranceprocess.Althoughsomedifferencesareexpectedinthewaythe macroeconomic scenarios will be translated by banks into the relevant risk parameters, the results are expected to be substantially consistent for comparable portfolios, institutions and recenthistoricaltrends. 6. TheEBAnotesthespecific benefitsof aconsistent and transparentstress testexercise.Atone levelitfacilitatesmarketdiscipline,throughtheproductionofgranulardataonabankbybank level illustrating how a common starting point, based on actual data, is affected by a common shock.AtthesametimeanEUwideexercisecanserveasacommongroundonwhichCAscan base their supervisory assessments of banks resilience to relevant shocks, in order to identify appropriatemitigatingactions. 1.2 Objectivesofthisguidance 7. This document aims at providing banks with adequate guidance and support in performing the EUwidestresstestbytheillustrationoftheobjective,scope,scenarios,commondefinitionsand assumptions. 8. This guidance is intended as a tool for the banks participating in the exercise and it does not coverthestepsofthequalityassuranceprocess,whicharemanagedbytheCAsandrestunder their sole responsibility. Accordingly, the guidance does not deal with possible supervisory measures to be put in place following the outcome of the stress test. Any decisions on the supervisoryreactionfunctionwillbetakenandannouncedbytherelevantCA. 9. The templates used for collecting data from the banks as well as for publicly disclosing the outcomeoftheexerciseareanintegralpartofthisdocument.CAsmayrequirebanksundertheir supervision to submit additional data for challenging firms results as part of their quality assuranceprocess. 1.3 Sampleofbanks 10.TheEUwidestresstestexerciseiscarriedoutonasampleofbankscoveringatleast50%ofthe national banking sector in each EU Member State, as expressed in terms of total consolidated assetsasofendof2013.CAsandtheECBcanexpandthesampleiftheydeemthisnecessary.The fulllistofbanksfortheEUwidestresstestisreportedintheAnnex. 8

9 METHODOLOGYEUWIDESTRESSTEST2014 1.4 Scopeofconsolidation 11.The exercise is run at the highest level of consolidation. The scope of consolidation is the perimeter of the banking group as defined by the CRR/CRD IV. The exclusion of insurance activitiesistobedonebothfromthebalancesheetandtherevenuesandcostssideoftheP&L. 1.5 Macroeconomicscenariosandmarketriskshocks 12.The EUwide stress test will assess the resilience of EU banks under a common baseline and adverse macroeconomic scenario developed in close cooperation with the CAs, European Commission,theESRBandtheECB.Thescenarioswillcovertheperiodof20142016.Macro economicscenarioswillbeagreedbyparticipatingauthorities. 13.Forthetreatmentofpositionsheldfortrading(HfT),availableforsale(AfS)anddesignatedatfair valuethroughprofitandloss(FVO)includingsovereignpositionsintheseaccountingcategories asetofcommonstressedmarketparametersisdirectlyappliedonthepositions. 14.CAsmaydevelopadditionalandspecificmacroeconomicsensitivitiesandmarketriskshocksin order to incorporate country specific features as deemed necessary. Banks are, however, requiredtosubmittotheEBAtheresultsbasedonthecommonmacroeconomicscenariosand market risk shocks. The EBA published results should allow understanding the impact of the commonscenariosandshocksinisolation,consistentlywiththeobjectiveofensuringcrossbank consistencyandcomparability. 1.6 Timehorizonandreferencedate 15.Theexerciseiscarriedoutonthebasisoftheconsolidatedyearend2013figuresandthe scenarioswillbeappliedoveraperiodofthreeyears(from2014to2016). 1.7 Definitionofcapital 16.The impact of the EUwide stress test will be assessed in terms of Common Equity Tier 1. Additional Tier 1 and Tier 2 instruments eligible as regulatory capital under the CRR provisions thatconvertintoCommonEquityTier1orarewrittendownuponatriggereventarereportedas aseparateitemiftheconversiontriggerisabovethebanksCommonEquityTier1ratiointhe adversescenario. 17.ThedefinitionofCommonEquityTier1thatisvalidduringthetimehorizonofthestresstestis used(i.e.CRR/CRDIVdefinitionofcapitalwithtransitionalarrangementsasperDecember2013, December 2014, December 2015 and December 2016). Capital components subject to transitional arrangements (for instance, deferred tax assets) are reported as memo items and publiclydisclosed. 9

10 METHODOLOGYEUWIDESTRESSTEST2014 18.CAs may, in addition, assess the impact of the stress test on other yardsticks, including fully loadedCRR/CRDIVCommonEquityTier1.Possiblesupervisorymeasuresmaybelinkedtooneor moreyardsticksatthediscretionoftherelevantCA. 1.8 Hurdlerates 19.ForthepurposeoftheEUwidestresstestthefollowinghurdleratesareappliedasaminimum acrossallparticipatingbanks: Thecapitalhurdlerateissetat8%CommonEquityTier1ratioforthebaselinescenario. Thecapitalhurdlerateissetat5.5%CommonEquityTier1ratiofortheadversescenario. 20.TherelevantCAmaycalibratepossiblesupervisorymeasuresbasedonaladderofintervention points arising from the stress test and may also more formally set higher hurdle rates and formallycommittotakespecificactionsonthebasisofthosehigherrequirements. 1.9 Staticbalancesheetassumption 21.Givenitsobjectives,theEUwidestresstestisconductedontheassumptionofastaticbalance sheet.Thezerogrowthassumptionappliesonasolo,subconsolidatedandconsolidatedbasisfor both the baseline as well as the adverse scenario. Assets and liabilities that mature within the time horizon of the exercise should be replaced with similar financial instruments in terms of type,creditqualityatdateofmaturityandresidualmaturityasatthestartoftheexercise.No workoutofdefaultedassetsisassumedintheexercise. 22.The static balance sheet assumption should also be assumed for assets and liabilities denominated in currencies other than domestic currency, hence the effect of currency fluctuationsshouldnotaffecttheenforcementofthisassumption. 23.Furthermore,itisassumedintheexercisethatbanksmaintainthesamebusinessmixandmodel (geographical,productstrategiesandoperations)throughoutthetimehorizon.Withrespectto theP&L,revenueandcost,assumptionsmadebybanksshouldbeinlinewiththeconstraintsof zerogrowthandastablebusinessmix. 24.While the exercise is based on the static balance sheet assumption and the results should be presented accordingly, CAs may deem it useful to analyse banks response functions and managerial actions for mitigating the impact of the stress test as well as variables such as the evolution of credit growth under the scenarios as part of the process for identifying possible supervisorymeasuresforaddressingpossiblecapitalshortfallsemergedintheexercise. 25.Exemptionsfromthestaticbalancesheetassumptioncanbegrantedduetothelikelycompletion ofmandatoryrestructuringplansthathavebeenpubliclyannouncedbefore31/12/2013.These 10

11 METHODOLOGYEUWIDESTRESSTEST2014 restructuringplansneedtobeformallyagreedwiththeEuropeanCommission.Theseexemptions shouldbeappliedconsistentlyacrossallcomponentsofthebalancesheet. 1.10 Riskcoverage 26.TheEUwidestresstestisprimarilyfocusedontheassessmentoftheimpactofriskdriversonthe solvencyofbanks.Bothtradingandbankingbookassets(includingoffbalancesheetexposures) aresubjecttostressatthehighestlevelofconsolidationofthebankinggroup. 27.Banksarerequiredtostresstestthefollowingcommonsetofrisks: Creditrisk Marketrisk Sovereignrisk Securitisation Costoffunding 28.Althoughthefocusoftheexerciseremainsoncreditandmarketrisk,banksarealsorequestedto assess the impact on interest income, including the increase in the cost of funding, over the stresstesttimehorizon.Inaddition,capitalrequirementsforoperationalriskarealsotakeninto accountintheexerciseusingasimplifiedapproach. 29.CAsmayincludeadditionalrisks(e.g.sectorspecificrisks,conductrisk)beyondthecommonset identified for the EUwide stress test. Banks are, however, required to submit to the EBA the resultsbasedonthecommonsetofrisks.Theresultspublishedshouldallowtheunderstanding oftheimpactofthecommonsetofrisksinisolation,consistentlywiththeobjectiveofensuring crossbankconsistencyandcomparability. 1.11 Overviewonstresstestingmethodologyaccordingtorisktype 30.The credit risk section covers all counterparties (e.g. sovereigns, institutions, financial and non financialfirmsandhouseholds)andallpositionsexposedtorisksstemmingfromthedefaultofa counterparty (loan portfolio positions, held to maturity securities positions and where applicable positions in the available for sale and designated at fair value through profit and loss).Creditriskwillbeassessedthroughtheimpactoftheeconomicscenarioondefaultandloss parameters. 31.The market risk section covers all positions exposed to risks stemming from the changes of market prices. Market risk is to be assessed by applying a common set of stressed market parameters to positions held for trading, available for sale and positions at fair value through profitandlossincludingsovereignpositionsintheseaccountingcategories.Creditspreadriskin 11

12 METHODOLOGYEUWIDESTRESSTEST2014 accountingcategoriessensitivetomarketriskevolutionsarealsosubjecttothestressedmarket parameters. 32.The use of prudential filters for sovereign exposures in the AFS portfolio is currently under the discretion of the CA as provided for by the CRR/CRD IV and the EBA is assessing, in close cooperationwiththeSSM,whethertherearetheconditionsforagreeingonacommonapproach across the EU for the application of this prudential filter in the 2014 EUwide stress test. The approachfollowedanditsimpactonthestresstestresultswillbepubliclydisclosed.Exposures arecoveredinaccordancewiththeircurrentaccountingtreatmentunderthecreditrisksection (amortised cost approach, e.g. held to maturity securities positions) or/and market risk section (marktomarketapproach,e.g.heldfortrading,availableforsale). 1.12 Process 33.TheprocessforrunningthecommonEUwidestresstestinvolvesclosecooperationbetweenthe EBA,theCAsandtheECB.Commonagreementonthescenarios,methodologyandtemplatesis to be followed by direct engagement with participating banks by CAs. CAs are responsible for conveyingtheinstructionsoncompletingtheexercisetobanksandreceiveinformationdirectly from banks. The EBA coordinates this exercise in cooperation with the ECB (in case of SSM countries)andhostsacentralQ&Afacility.TheEBAactsasadatahubforthefinaldissemination of the common exercise. The EBA also provides some common EUbenchmarks to CAs for the purposes of consistency checks. CAs and the ECB are responsible for the quality assurance process,aswellasforcommunicatinganyadditionalsensitivities(ontopofthecommonEUwide scenario)andthesupervisoryreactionfunction. 34.Asset quality reviews (AQRs) are being undertaken across the EU in 2014 and the outcomes of these AQRs may helpfully inform the starting point for the stress test. The technical details on howtheresultsofAQRswillbelinkedtothestresstestarecurrentlybeingdeveloped. 12

13 METHODOLOGYEUWIDESTRESSTEST2014 Table1:OverviewofrisktypesandtheirtreatmentintheEUwidestresstest Costof fundingand Creditrisk Marketrisk Securitisationrisk Sovereignrisk Operationalrisk Other interest income Sovereignexposures (directdebt Allassetsinthebanking Securitisationand Allfinancialassets exposuresaswellas Nonfinancial bookwhichareexposed resecuritisation andliabilities indirectexposuresto tangibleassets(real tocreditriskincluding positionsassessed assessedatfairvalue centralandlocal Operationalrisk estateexposures), counterpartycreditriskas atfairvalue(HfT, Interest 1 (positionsinHfT,AfS governments) asmeasuredfor participations. Scope definedbytheCRR/CRDIV AfS,designatedat bearingassets anddesignatedat assessedatfairvalue regulatory Otherincome(non (i.e.includingonandoff fairvaluethrough andliabilities. fairvaluethrough (HfT,AfS,designated purposes. interest,non balancepositions). profitandloss)and profitandloss atfairvaluethrough tradingincome)and Methodologyalsoapplied amortisedcost portfolios).2 profitandloss)and expenses. toIRC. positions. amortisedcost positions. IncreaseofRWA Allfairvalue i)Simplified dependingonrisk positions:application Haircutsasforreal Sensitivity approach:bank profileforall ofmarketrisk estatefundsgivenin analysisofthe StressedpointintimePD specificreductionin securitisationand methodologyto marketriskfactors, P&Leffectfor andpointintimeLGDfor nettradingincome. resecuritisation capturechangesin Proxyofyear impairmentfor deterioration provisioning,potential ii)Comprehensive positions; marketprices3. onyearchanges participations inwholesale ratingmigrationand approach:applying impairment Regulatorybanking inoperating estimatedbybanks. Methodology funding stressedIRBregulatory marketrisk estimatesfor bookpositions: profitofthe Simplifiedapproach marketsanda parametersforRWA parametersto positionsnotheld applicationofcredit participating basedonpastyears significant calculationbasedon respectivepositions fortrading. riskmethodologyfor institutions. orinternal increasein banks'internalmodels. translatesintolosses Applicationof impairment estimatesforother reatailfunding viafullrevaluationof marketrisk estimatesinorderto income.Fixed costs. exposures. methodologyfor capturecounterparty expenses. fairvaluepositions. creditrisk. 1 Fordetailsonthescopeofeachtypeofriskspleaserefertosubsection1.11. 2 Fordetailsonthescope,inparticularthetreatmentoffairvalueliabilities,pleaserefertosection3.2. 3 Nosimplifiedapproachforsovereignpositions 13

14 METHODOLOGYEUWIDESTRESSTEST2014 Costof fundingand Creditrisk Marketrisk Securitisationrisk Sovereignrisk Operationalrisk Other interest income Reductioninnet tradingincomeor P&Limpactdueto fairvaluevariation. Impairmentsfor Impairmentson Valuation securitisation Increaseof Expectedlossbasedon DirectP&Limpactfor nonfinancial adjustmentsondebt positionsnotheld costof pointintimeparameters positionsaccounted tangibleassets(real securitiesandP&L fortrading.Mark funding usedtocalculatecredit foratfairvalue. estateexposures) gainsresultingfrom tomarket partially Bankinternal ImpactonP&L risklossesonperforming Furtherimpairment andimpairmentsfor creditspread treatmentfor mitigatedby estimates. portfolio.Additionallosses estimatesfor participations. wideningofown positionsatfair anincreasein ondefaultedportfolio regulatorybanking Directeffectof liabilitiescannotbe valueinlinewith interest basedonworseningLGDs. bookassets. incomeandexpense takenintoaccount. marketrisk income. assumptions. Furtherimpairment methodology. estimatesfor regulatorybanking bookassets. RWAincreasefor VaRandCRM (capitalcharges)due RWAincreasedueto StressedRWAinIRBand RWAincreaseforall RWAincrease topredefined worsenedrisk ImpactonRWA STA.RWAflooredat2013 securitisation ./. foroperational ./. assumptions;IRC parametersinIRB levels. positions. risk. andCVAincrease andSTA. duetoworsenedrisk parameters. 14

15 METHODOLOGYEUWIDESTRESSTEST2014 2. Dataneeds 2.1 Templatestructure 35.Takingintoaccountthedefinedfeaturesofthestresstest,thetemplateshavebeenorganised asfollows: Core templates: Data required as minimum adequate reporting requirement for the stress testexercise,collectedandprocessedbytheEBA(viaCAs);templatesdesignedbytheEBAin cooperationwithCAs,qualitytobeassessedbyCAs. Advance Data Collection (ADC): Data collected prior to commencing the stress test exercise, intending to supply benchmarks to the national CAs as input to the stress test exercise. CalculationSupportandValidationdata(CSV):Datarequiredforstatisticalanalysesofthe resultsofthestresstesttobesuppliedtoCAsasinputtotheirqualityassuranceprocess; tobeusedaswelltoautomaticallypopulatetransparencytemplates. Transparency(TR):Dataonstresstestoutcomestobedisclosedonabankbybankbasis. Additional templates: Data not required by the EBA but can be required, hosted and processed by CAs for production and validation of stress test results; proposed templates designedbyEBA(incooperationwithCAs)butusagedecidedbyCAs. Calculation support and validation data (CSV): Detailed data on stress testing inputs, intermediate steps and results for conducting the stress test and validation of results by CAs; translation of methodology and related information into templates; formalised supportforcalculatingthestressimpactperrisktype. 36.AsregardsthesubmissionrequirementsfromCAstoEBA,allcoretemplatesneedtobefilled inandprovidedtotheEBA.AdditionaltemplatesdonotneedtobesubmittedtotheEBA. 15

16 METHODOLOGYEUWIDESTRESSTEST2014 Table2:Overviewoftemplatestructure CollectionType CoreTemplates AdditionalTemplates AdvanceData 1.ADC_CreditRisk_MAN Collection(ADC) 2.ADC_BalanceSheet_MAN 3.CSV_CR2014Baseline_ADD 4.CSV_CR2015Baseline_ADD 5.CSV_CR2016Baseline_ADD 6.CSV_CR2014Adverse_ADD 7.CSV_CR2015Adverse_ADD 8.CSV_CR2016Adverse_ADD 9.CSV_CreditRisk_MAN 10.CSV_Funding_MAN 11.CSV_EvolutionofP&L_MAN 12.CSV_MarketRiskSimp_MAN 13.CSV_MarketRiskComp_MAN Calculation 14.CSV_CVAbasis_ADD Supportand Validationdata 15.CSV_AFSFVOAssets_ADD (CSV) 16.CSV_Sovereign_MAN 17.CSV_RWAGeneralEvo_MAN 18.CSV_RWASTAFloor_MAN 19.CSV_RWAIRBFloor_MAN 20.CSV_RWATradingBook_MAN 21.CSV_SecuritBBSTA_ADD 22.CSV_SecuritTBSTA_ADD 23.CSV_SecuritBBIRB_ADD 24.CSV_SecuritTBIRB_ADD 25.CSV_SecuritSummary_MAN 26.CSV_Capital_MAN 27.CSV_RestructScenarios_MAN 28.TR_Summary 29.TR_CreditRisk 30.TR_EvolutionofP&L 31.TR_RWA Transparency(TR) 32.TR_MarketRisk 33.TR_Securitisation 34.TR_Sovereign 35.TR_Capital 36.TR_RestructScenarios 16

17 METHODOLOGYEUWIDESTRESSTEST2014 2.2 Detailsoncoretemplates 2.2.1 Advancedatacollection 37.Duringtheadvancedatacollection,creditexposuredataandselectedriskparameterswillbe collected using the template structure of the 2013 EUwide transparency exercise, including riskparameters.TheinformationwillbeusedtosupplynationalCAswithdatatocarryouta crosssectional benchmarking of risk parameters like default rates and loss rates. Main characteristicsofthetemplatesare: Credit risk data collected as of 31/12/2013; no historical data collected to reduce the reportingburden; Portfolio breakdown: In line with COREP and the 2013 EUwide transparency exercise, e.g. including corporate, SME, Retail and Real Estate related exposures classes; no further breakdownofassetclasses; Data:Exposure,RWA,valueadjustmentsandprovisions,defaultandlossrates,PD,LGD,LTV (allfordefaultedandnondefaultedassets;distinctionforIRBandSTAbanks); Countrycoverage:Minimumof95%oftotalexposure(intermsofexposurevalue)ortop10 countries; Inaddition,highlevelbalancesheetdatatobecollected. 38.The submission of the populated advance data collection template set to the EBA via CAs is compulsoryforallbanksparticipatingintheEUwidestresstest. 2.2.2 Calculationsupportandvalidationdata 39.Selecteddataiscollectedfrombankstoautomaticallyfillaggregatetemplatesandtocarryout astatisticalanalysisoftheresultsandsupplyittonationalCAs.Thepurposeisnottochallenge banksresultsonagranularlevelbuttoimplementacrosssectionaloutlieranalysisacrossthe fullsampleandtoidentifyexceptionsfromthecommonmethodology.4Thetemplateswillalso beusedforcalculationsupportandvalidationbytheCAs.Datarequiredincludes: Projected creditrisk parametersto benchmarkfor instancethe evolutionofimpairments or RWA; Fundinginstruments,maturitiesandeffectiveinterestrates; DetailedP&Lprojections; 4 Forinstancemandatoryrestructuringplans 17

18 METHODOLOGYEUWIDESTRESSTEST2014 Information on Net Trading Income and detailed market risk information, including e.g. notional,P&Leffectandsensitivitiesbymarketriskfactorandperscenario; Projectionsofsovereignexposureandvaluationlosses; EvolutionofRWAacrossrisktypes,andapplicationofRWAfloorsforcreditrisk; Exposure values, RWA, impairment and fair value changes for securitisations by accounting category; Detailedevolutionofcapitalincludingrestructuringmeasures. 40.ThesubmissionofthepopulatedcorecalculationsupportandvalidationdatatotheEBAvia CAsiscompulsoryforallbanksparticipatingintheEUwidestresstest. 2.2.3 Transparency 41.TheEBAwillconducttheEUwidestresstestprimarilyasatransparencyexercise.Therefore, thefocusandpurposeofdisclosuretemplatesistocompileanyinformationrequiredforthe disclosureofstresstestresultsbytheEBAonabankbybankbasisperyearoftheexercise. Data included in templates for publication is in line with the disclosure of the 2011 EUwide stresstestandthetransparencyexercisein2013.Itincludesactualandprojectedbaselineand adversevaluesfor: Creditrisk:Exposure,RWA,valueadjustmentsandprovisions,defaultandlossrates5; Compiled information on main P&L items like net interest income, net trading income, impairmentsforfinancialassetsandothercomprehensiveincome; RWAbyrisktype; Marketriskpositionbymainrisktypes; Securitisationexposure,RWAandimpairments; Sovereignexposurebycountry,maturityandaccountingtreatment; Capital position, components and adequacy (including stressed solvency ratios) and capital restructuring. 42.The submission of the populated transparency data to the EBA via CAs is compulsory for all banksparticipatingintheEUwidestresstest. 5 Inaccordancewiththeadvancedatacollectionandtransparencyexercisein2013nodisclosureofcreditrisk parametersisenvisaged. 18

19 METHODOLOGYEUWIDESTRESSTEST2014 2.3 Detailsonadditionaltemplates 2.3.1 Calculationsupportandvalidationdata 43.The stress test calculation support and validation data is a parallel and more detailed set of templates.Itismeanttotranslatethecommonmethodologicalrequirementsintoaformalised dataset.Tothisend,thetemplatesincludedetailedinformationontherisktypescoveredand to allow challenge by CAs on a bankbybank basis. The templates provide CAs and banks thereforewithformalisedsupporttocalculateorvalidate: Credit risk: Starting values, detailed evolution of defaulted and nondefaulted assets, impairmentflowandstockofprovisions,actual,projectedbaselineandadversescenario; CVA:FairvalueofOTCderivativesbycounterpartygroup,actualandbyscenario; AFSassetsanddesignatedatfairvaluethroughprofitandloss:Positionbyassetclass,actual andperscenario; Securitisation risk: Exposure and stress impact by regulatory and accounting treatment, actual,projectedbaselineandadversescenario. 44.Creditrisktemplatesincludedincalculationsupportandvalidationdataallowamoregranular breakdownofCOREPassetclassesinordertoallowforinstanceforcorporateorretailasset classes to display specific real estate related exposures (e.g. buytolet). The more detailed breakdown has been defined to allow reaggregating to COREP classes. This is seen vital for populatingthetransparencydatawhichwillineithercasebebasedincommonCOREPclasses. Consequently,thetemplatescanalsobeusedforcollectingdataonthelevelofCOREPclasses withoutusingthemoregranularassetclassbreakdowngiven. 45.Templates are based on the common methodology for the EUwide stress test 2014. These templatesareprovidedtotheCAsforvalidatingbanksresults,buttheiruseisnotcompulsory andCAsmaydecidetousedifferenttemplates. 19

20 METHODOLOGYEUWIDESTRESSTEST2014 3. Quantificationofdifferentrisktypes 3.1 Creditrisk 3.1.1 Overview 46.Banks are required to translate the macroeconomic scenarios provided into the corresponding credit risk impact on both the capital available and the regulatory capital requirements(RWA). The methodology for estimating future credit risk impairments and thus the P&L impact on capitalisdescribedinsubsection3.1.7. The methodology for estimating future capital requirements, including the regulatory parametersforthenecessaryRWAcalculations,isdescribedinsubsection3.1.8. These projections will be based on default and loss parameters (both pointintime and regulatory) that will depend on the banks business model, asset portfolios and internal models. 47.The scope of this subsection covers all counterparties (e.g. sovereigns, institutions, financial andnonfinancialfirmsandhouseholds)andallpositionsexposedtorisksstemmingfromthe defaultofacounterparty(loanportfoliopositions,heldtomaturitysecuritiespositionsand whereapplicablepositionsintheavailableforsaleanddesignatedatfairvaluethoughprofit andloss).Thisincludesbydefinitionallassetsinthebankingbookwhichareexposedtocredit risk including counterparty credit risk and follows the CRR/CRD IV definition of credit risk (including on and offbalance positions). Specific requirements for securitisation position are separately covered in section 3.3. Moreover, banks are required to distinguish between STA and IRB portfolios.6The methodology described in this subsection also applies to the capital chargeforincrementaldefaultandmigrationrisk(see3.2.8). 48.In addition to the risk of default covered in this subsection, all assets subject to markto market valuation (either through the P&L or directly through capital) are subject to price effects(i.e.achangeincreditspreads)underthemarketriskmethodology(seesection3.2). 49.Banks are required to assess the impact of given macroeconomic scenarios (baseline and adverse)ontheirfuturecreditrisklossesandcreditquality.Thisrequirestheuseofstatistical methods (satellite models) that estimate the relationship between macroeconomic and bankingvariables.Thiswillincludethefollowingmainsteps:(1)estimatingvaluesfordefault and loss rates under the predefined scenarios on the basis of internal models or, if not 6 IRBportfoliosarefurtherdifferentiated,wherenecessary,accordingtothefoundation(FIRB)oradvanced(AIRB) approach. 20

21 METHODOLOGYEUWIDESTRESSTEST2014 available, on the basis of benchmark parameters, (2) computing default flows based on the defaultrates,(3)computingimpairmentflowsasthebasisforprovisionsthateffecttheP&L under the scenarios, and (4) calculating the impact on capital requirements. The different stepsandtheuseoftheresultsaresummarisedinthefigurebelow. Figure1:Summaryofcreditriskmethodology Startingvalues (see3.1.5Startingvaluesforriskparameters) Applicationofthemacroeconomicscenarios (seeand3.1.6Riskparameterandexposureevolution) Calculationofdefaultandimpairmentflows (see3.1.7Calculationofdefaultedassets,impairmentsandassociatedbenchmarks) Impairments Ratingmigration Furtherimpact (see3.1.7Calculationof (see3.1.8ImpactonCredit (see3.1.9RWAfordefaulted defaultedassets, RWAandassociated assetsandIRBexcessor impairmentsandassociated benchmarks) shortfall) benchmarks) 50.Fortheestimationofimpairments,banksarerequiredtofollowthedetailedmethodology.For theestimationofcapitalrequirements,banksshouldadheretoregulatoryrequirementsbased onstressedregulatoryriskparameters. 51.As the translation of the scenarios into changes in risk parameters nevertheless includes a suitablelevelofdiscretion,participatingbanksareencouragedtomakeuseofhistoricaldata and multiple benchmarks provided by the EBA and ECB to ensure adequate consistency between historic observations, model output and the results under the scenarios of the exercise. The following subsections cover each part of the credit risk methodology in more detail.Thenamingconventionsfortherelevantvariables(includingexposures,collateraland risk parameters) are defined at the start. It is essential that all participating banks strictly adheretotheseconventions. 21

22 METHODOLOGYEUWIDESTRESSTEST2014 3.1.2 Highlevelassumptionsandconstraints 52.For reasons of transparency and comparability, the credit risk framework assumes that the balancesheetisheldstaticasofend2013. 53.Consistent with the static balance sheet assumption, banks are not allowed to replace defaulted assets. Defaulted assets are moved into the defaulted assets stock, reducing non defaulted assets and keeping total exposure constant. Furthermore, for the purpose of calculating exposures, it is assumed that no chargeoffs or writeoffs take place within the threeyearhorizonoftheexercise.7 54.Within the credit risk framework, the initial residual maturity is kept constant for all assets. Thismeansthatassetsdonotmature.Forexample,a10yearbondwithresidualmaturityof5 yearsattheonsetoftheexerciseissupposedtokeepthesameresidualmaturityof5years throughouttheexercise.Note,thattheconstantresidualmaturityappliesinparticulartothe calculation of credit risk RWA (especially the maturity factor used in AIRB but also to some provisionsinSTAwhichallowfavourableriskweightsforshorttermexposures). 3.1.3 Exposureclassesandassetclasses 55.Forthepurposeofthisstresstest,banksarerequiredtoreporttheirexposureusingtheasset classes specified below which are based on the IRB exposure classes. Exposures in the STA needtobemappedintotheseclasses. 56.Asageneralprinciple,banksarerequiredtofollowandsubmitthedatatotheEBAinthegiven templatesandinaccordancewiththeCRR/CRDIV.Moreover,basedthereon,CAscanrequire participatingbankstoreportadditionalbreakdownsforexposureswheretheyseesignificant risks. 57.The original exposure at the start for each of the defined asset classes should match the exposurereportedforeachcorrespondingCOREPexposureclass. 58.Where exposures are transferred to other classes through credit risk mitigation techniques (substitutionapproach)thistransferhastobeperformedinlinewiththefollowingassetclass definitions. 59.ThefollowingtablecontainsanoverviewoftheCOREPIRBexposureclasses(seeCRRArt.147) andmappedSTAexposureclasses(seeCRRArt.112)8: 7 ThisisnottobeconfusedwiththeinclusionofwriteoffsinthegenerationofLGDparameterswhichareimplicitly assumedwhereapplicable. 8 Defaultedassets,includedpastdueitems,aretobereportedaccordingtothenatureofthecounterparty. 22

23 METHODOLOGYEUWIDESTRESSTEST2014 Table3:OverviewoftheIRBandSTAexposureclasses IRBexposureclass MappedSTAexposureclass Centralgovernmentsorcentralbanks+regional Centralgovernmentsorcentralbanks governmentsorlocalauthorities Publicsectorentities+MultilateralDevelopment Institutions Banks+InternationalOrganisations+institutions+ coveredbonds Corporates+securedbymortgagesonimmovable property(Corporateshare)+itemsassociatedwith Corporates particularlyhighrisk,claimsoninstitutionsand corporateswithashorttermcreditassessment+ CollectiveInvestmentsUndertakings(CIU) ofwhich:SpecialisedLending Corporates(SpecializedLendingshare) ofwhich:SME Corporates ofwhich:SME Retail+securedbymortgagesonimmovable Retail property(Retailshare) Securedbymortgagesonimmovableproperty Securedbyrealestateproperty (Retailshare) Securedbymortgagesonimmovableproperty SME (RetailSMEshare) Securedbymortgagesonimmovableproperty NonSME (RetailNonSMEshare) QualifyingRevolving Retail(qualifyingrevolvingshare) OtherRetail Retail(nonqualifyingrevolvingshare) SME Retail ofwhich:SME Retail(nonSME,nonqualifyingrevolving NonSME share) Equity Equityexposures Securitisation Securitisationpositions Othernoncreditobligationassets Otherexposures 60.Thefollowingtablecontainsanoverviewofmoredetailedassetclassesthatbanksmightbe askedtoprovideintheadditionaldatatemplatesdependingondatarequirementsspecified bytherelevantCA: Table4:Overviewofdetailedassetclasses IRBexposureclass Centralgovernmentsorcentralbanks Institutions Corporates ofwhich:SpecialisedLending ofwhichrealestaterelated ofwhich:SME ofwhichrealestaterelated ofwhich:OtherCorporate ofwhichrealestaterelated Retail Securedbyrealestateproperty SME NonSME ofwhich:OwnerOccupier ofwhich:Buytolet 23

24 METHODOLOGYEUWIDESTRESSTEST2014 IRBexposureclass ofwhich:Othersecuredbyrealestate QualifyingRevolving OtherRetail SME NonSME Equity Securitisation Othernoncreditobligationassets 61.Withinthecorporateassetclass: Real estate related exposures are those relating to the sales and/or letting of residential or commercialproperty; OthercorporatereferstoexposuresintheCOREPclassCorporatewhichareneitherSMEnor SpecialisedLending. 62.Withintheretailexposureclasssecuredbyrealestateproperty: OwnerOccupierreferstoloanssecuredonresidentialrealestateoccupiedbytheowner; Buytoletreferstoloanssecuredonresidentialrealestaterentedfromtheownerbyathird party. 3.1.4 Definitions 63.Historical data and projections under the scenarios: In addition to the exposure class mapping,banksarerequiredtoapplyconsistentdefinitionsforthefollowingitems: BookValue,accordingtoIFRS(orlocalGAAPifapplicable). Original Exposure,asdefinedinCOREP:Thisexposurefigureispreconversionfactors(CCF) and pre credit risk mitigation techniques and before any deduction of provisions. (STA:Column1OriginalExposurePreConversionFactorsinCOREPtemplateReportingon ownfundsandownfundsrequirements,Sheet:CRSA,IRB:Column2OriginalExposurePre Conversion Factors in template Reporting on own funds and own funds requirements, sheetCRIRB). Collateral with substitution effects, as defined in COREP (STA: Sum of columns 5 to 8 Unfunded Credit Protection: Adjusted Values (Ga) and Other Funded Credit Protection, in thesameSTAtemplateasabove,IRB:SumofColumns4to6UnfundedCreditProtectionand OtherFundedCreditProtectioninthesameIRBtemplateasmentionedabove). Exposure (Exp) is the nondefaulted exposure after substitution effects and post CCF. Defaultedassetshavetoberemovedfromthisfigureandarereportedinaseparatecolumn. Expisthestartingpointfortheimpairmentcalculation. 24

25 METHODOLOGYEUWIDESTRESSTEST2014 ForIRBportfolios,banksshouldusethedefinitionofColumn11(ExposureValue)inthe CRIRBtemplateasastartingpointandremovedefaultedassets. For STA portfolios, banks need to calculate a post CCF equivalent of Column 11 (net exposure after CRM substitution effects pre conversion factors) in the CR SA template. Provisionshavealreadybeendeducted(Column3inCRSA)atthispointandneedtobe added to exposure. Defaulted assets must not be shown in this figure but also in the respectivecolumns. Value adjustments and provisions should be computed in accordance with the accounting frameworktowhichthereportingentityissubjectandtoArt.34andArt.110oftheCRR. Funded Collateral (available) including real estate collateral deviates from the COREP definition.ItcoversallfundedcollateralthatisavailabletocovertheexposureExp(defined above).OnlyCRR/CRDIVeligiblecollateralistobereported,noregulatoryhaircutsshouldbe applied. Funded Collateral (capped) follows the definition of the available funded collateral (above) but collateral has to be capped at the exposure level. This means that at the deal level, collateralcannotbehigherthantherespectiveexposure. The definition of stock of defaulted assets (Def Stock) has to be based on the banks regulatory default recognition procedures in place, which will generally involve payments beingoverdueorthecustomerbeingunlikelytopay. Stockofprovisions(ProvStock)isastockvariableanddefinedasallowancesforindividually andcollectivelyassessedfinancialassets(asinFINREP,table7,columns8,9). Thedefaultflow(DefFlow)measurestheamountofassetsthatdefaultedduringagivenyear (DefFlowyeartodate,e.g.forthestartingvalueassetsthathavenewlydefaultedin2013). As Def Flow is used to calculate the default rate (which is a PD proxy), it must include all defaulteventsthatoccurduringayear.Thedefaultflow(DefFlow)shouldalsoincludeassets thatwerereclassifiedtoe.g.(distress)restructuringportfoliosorsimilarconstructionsduring theobservationperiod. Impairmentloss(ImpFlowNew)isaflowvariableanddefinedonthebasisofimpairmenton (non)financial assets (FINREP, table 16.7, column 010; reported yeartodate, i.e. for the startingvalueprovisionsthathavebeensetasidein2013).However,therearetwoimportant adjustmentstotheFINREPfigure:(i)theflowshouldbereportedfornewlydefaultedassets only, (ii) the flow figures should also include direct writeoffs / chargeoffs of securities or otherassetswhosebookvalueisreducedwithoutcreatingaprovision.Theguidingprinciple forthisfigureisabesteffortpointintimeimpairmentflow,capturingallcreditriskrelated adjustments,regardlessifthosetaketheformofprovisionsornot.Inlinewithpara.53,write offscanbeonlytakenintoaccountforhistoricaldata. 25

26 METHODOLOGYEUWIDESTRESSTEST2014 Stock of provisions (Prov Stock) and loss (Imp Flow New)needtobereportedastotal per definedassetclassandbrokendowninspecificandgeneral. Regulatory risk parameters (PDreg and LGDreg) refer to those parameters used for the calculation of capital requirements as prescribed by the CRR/CRD IV and should also be appliedbybanksforthecalculationofRWAoverthestresstesthorizon. ELregistheexpectedlossbasedonregulatoryriskparametersfollowingtheprescriptionsof theCRR/CRDIVforIRBexposures. The LTV should be reported for information purposes for selected real estate related exposure classes (see template) based on the following concept: loan amount/value of collateral.Theloanamountherereferstothesumofloansgrantedagainstoneproperty. The HerfindahlHirschman Index (HHI) based on exposure values (the sum of squared exposuressharesacrossallobligorswheretheexposureshareisgivenaswholenumber,i.e. 50beingusedfor50%),andthetotalnumberofborrowers. 64.Historicaldata:Banksarerequiredtoprovidehistoricaldefaultratesandhistoricallossrates fortheyear2013intheprovidedtemplate.TheCAcanrequirelongertimeseries.Bankshave toprovidethesedataacrossthesamedimensions(assetclassesandcountries)asothercredit riskdata.Forthispurposebanksarerequiredtoapplythefollowingdefinitions: The historical default rate (Def Rate) is defined as the flow of newly defaulted assets (Def Flow) over total exposure at the beginning of the observation period. The default rate for 2013 would therefore be calculated as defaulted assets flow (in 2013) over performing exposure(end2012)foreachassetclass/region. Thehistoricallossrate(LossRate)isdefinedasimpairmentloss(ImpFlowNew)overnewly defaultedassets(DefFlow). 65.Projections under the scenarios: Tomakeexplicitthatprojecteddefaultratesandlossrates can not only be based on historical rates but also on existing pointintime parameters from internalmodelsthesearedefinedasfollows: Pointintime risk parameters (PDpit and LGDpit9)shouldbeforwardlookingprojectionsof default rates and loss rates and capture current trends in the business cycle. In contrast to throughthecycle parameters they should not be business cycle neutral. PDpit and LGDpit shouldbeusedforallcreditriskrelatedcalculationsexceptRWAunderboth,thebaselineand the adverse scenario. Contrary to regulatory parameters, thy are required for all portfolios, includingSTAandFIRB. 9 LGDpitistheexposureweightedLGDpitwhichtakesintoaccountfundedcollateral.Forpartiallycollateralized exposuresitisaweightedaverageoftheLGDpitfortheuncollateralizedpartandtheLGDpitforthecollateralizedpart oftheexposure. 26

27 METHODOLOGYEUWIDESTRESSTEST2014 3.1.5 Startingvaluesforriskparameters 66.As a general approach to pointintime parameters, banks are required to adhere to the followinghierarchy: ForIRBportfoliosbanksarerequiredtobasetheirestimationofpointintimevaluesontheir approvedinternalparameterestimationmodels. Thisappliesto PDpitforbothFIRBand A IRBportfoliosandtoLGDpitonlyforAIRBportfolios. For IRB banks which cannot extract pointintime parameter from their internal models and forportfolioswheretherearenoapprovedmodelsinplace10banksshouldusenonapproved models to extract pointintime parameters provided those models are regularly used in internalriskmanagementandstresstesting. For portfolios where no appropriate internal models are in use for estimating the PDpit or LGDpit, banks are expected to approximate PDpit via the Def Rate and LGDpit via the Loss Rate. 67.Irrespectiveofwhichapproachisfollowed,banksarerequiredtoprovideadescriptionofthe methodology employed for deriving pointintime parameters for all portfolios. Banks are requestedtosticktoEBAterminologyusedinthisnotewhereverapplicable. 10 PortfolioswheretherenoapprovedmodelsareinplaceincludeFIRBportfoliosw.r.tLGDpitandallSTAportfolios w.r.t.bothPDpitandLGDpit. 27

28 METHODOLOGYEUWIDESTRESSTEST2014 Figure2:IllustrationofstartingvalueapproachesfortheinferenceofPDpitandLGDpit Historical Projected Non PDpit PDpit Approved (beforeapplyingthe approved (applyingthescenario) pointin scenario) pointin time time modelsin LGDpit modelsin LGDpit place (beforeapplyingthe place (applyingthescenario) scenario) DefRate PDpit (beforeapplyingthe (applyingthescenario) scenario) Noappropriatepointin timemodelsinplace LossRate LGDpit (beforeapplyingthe (applyingthescenario) scenario) 68.Inanycase,theDefRateandtheLossRatebothbasedon2013observationandpotentially other recent observations will serve as important benchmark parameters to gauge internal PDpit and LGDpit parameter estimates. Moreover, banks will be subject to crosssectional comparisonspriortothekickoffoftheexerciseandmightbeaskedtoreviseestimatedpoint intimeriskparameters.Inaddition,PDpitandLGDpitofIRBportfolioswithinternalmodelsin usewillbebenchmarkedagainstthelevelofPDregandLGDreg. 3.1.6 Riskparameterandexposureevolution 69.This subsection covers the evolution of risk parameters in the baseline scenario and under stress,i.e.PDpitandLGDpit. 70.Therearealternativewaystoestimatetherelationshipbetweenpointintimeparametersand themacroeconomicscenario.Thefollowingparagraphsdescribeahierarchyofmethodsthat banksshouldadhereto.Asageneralprinciplebanksshoulduseinternalmodelsratherthan resorttousingbenchmarks. 28

29 METHODOLOGYEUWIDESTRESSTEST2014 In the case of estimating a relationship between pointintime parameters and the macro economicvariablesattheratingclassleveland,consequently,obtainingparametersforeach ratingclasswithinaportfolio,theaggregateparametersareobtaineddirectlyastheexposure weightedaverageoftherespectivebuckets.Theexposuredistributionamongbucketscould incorporateratingmigrationslinkedtothemacroeconomicscenarioandconsequentlywould inthiscaserequirethebankstocalculatepointintimemigrationmatrices.Thedistributionof exposuresacrossbuckets(thatisusedtocalculatethecorrespondingaggregateparameters) would be the result of multiplying the distribution of exposures at the end of the previous yearbythepointintimemigrationmatrix. If the estimation of the relationship between pointintime parameters and the macro economic variables is done at a portfolio level and, consequently, a single aggregate PDpit/LGDpit for each portfolio is obtained, the calculated defaulted asset flows should be distributed to different rating classes in order to avoid that defaults only affect the worst rating classes. This is consistent with the approach of approximating impairments by using expectedlosseswhichassumesthatassetsdefaultinallratingclasses. Whereappropriateforthestresstestingexercise,bankswhichhaveonlypartialcoveragein termsofmodelsthatallowestimatingarelationshipbetweenpointintimeparametersand the macroeconomic variables are encouraged to extend the application of the forecast regardingtheevolutionofthepointintimeparameterstosimilarportfolios(country/sector). Thisapproach,however,shouldbeclearlyidentifiedintheaccompanyingnotebasedonthe countryandsectorbreakdown.Theextendeduseofthosemodelsislimitedtocalculationof credit risk losses. As stated in subsection 3.1.8 (estimation of RWA impact), the rollout of nonapproved models during the stress horizon for the purpose of calculating RWA is not allowed. Bankswhichhavenointernalparameterestimationmodelsinplaceforsomeportfoliosand that are unable to estimate the evolution of pointintime parameters under scenario assumptions are asked, for those portfolios, to conduct their estimation of the PDpit and LGDpit as described in the previous subsection and base it on the benchmark parameters provided by the ECB (on ELlevel). Benchmark risk parameters are projected over the time horizon of 2014 to 2016, consistently with both the baseline and adverse macroeconomic scenarios. 71.Box1providesanexampleonhowtocalculatethedefaultflowfornondefaultedexposure, givenmultipleratingclasses. Box1:Defaultflowsandgranularity,anexample Defaultflowsandgranularity,anexample Wedefine: PDpit(t+1)=10% Exp(t)=100 29

30 METHODOLOGYEUWIDESTRESSTEST2014 Wheretheportfoliohastworatingclasses: Class1(CL1)withaPDpitCL1(t+1)of7.5%andanExpCL1(t)of80and Class2(CL2)withaPDpitCL2(t+1)of20%andanExpCL1(t)of20 Thentheflowofdefaultedassetsattheendofthefirstyear,DefFlow(t+1),willbeequalto10.Of the10totaldefaultedassetflow,6willbeassignedtoCL1(=80*7.5%)and4toCL2(=20*20%). Asresult,theaveragePDpit(t+2)oftheentireportfolio(beforetheapplicationoftheriskparameter shiftsduetothescenario)willbe9.72%andtheexposure,Exp(t+1),willbe90. 72.Inanycase,banksmusttakeintoconsiderationthepossibleimpactcausedbythedecreasein the fair value of credit risk mitigants (e.g. shock on real estate prices will impact real estate collateral). 73.Moreover, banks must take into account the portfolio characteristics of the forecasted exposuresindefault(includingtimesincedefault).Thegeneralprincipleisthatforanygiven defaultedassettherequiredprovisionsmayincreasethelongerthisassetisindefault,evenin a static macroeconomic environment. For example, the (conditional) life time cure rate naturallydecreaseswithtimeindefaultandthecostsassociatedwithliquidationofcollateral may also increase. To this end, banks are asked to use a scaling factor (Default Portfolio Characteristics, DPC) to reflect the distribution of exposures across default classes. The conceptofaDPCisfurtherillustratedinBox2. Box2:IllustrationDPC Illustrationofscalingfactor(DefaultPortfolioCharacteristics,DPC) Thescalingfactor,DPC,shouldreflecttheportfoliocharacteristicsoftheforecastedexposuresin default in terms of defaultclasses wherethe LGD forthe stock of defaulted assets is a weighted average of LGD parameters for distinct default classes. Consistent with the constraint that defaultedassetsdonotexplicitlycurewithinthestresstesthorizon,themodellingapproachcould includeatheoreticallycureddefaultclass. The scaling factor should be based on historic observations of impairments and any automatic increaseinimpairmentsdueto,forexample,provisioningrulesbasedonincreasedtimeindefault. The evolution of the scaling factor should itself take into account the economic scenario when consideringmigrationbetweendefaultclasses,againwithreferencetopastexperience. DependingontheLGDmodellingapproach,theuseofthescalingfactormaynotbematerial(i.e. DPC=1).Thismaybethecaseif(i)theLGDparametersconsistentlyincludeallassumedmigration between default categories (e.g. cure rate assumptions, provisioning rules, cost increases), and if (ii)therelativeevolutionofLGDparametersisthesamefornewandolddefaultedassets.Inany case,DPCshallnottakeavalue

31 METHODOLOGYEUWIDESTRESSTEST2014 75.Box 3 describes how to infer stressed pointintime parameters from ECB parameters (for bankswithoutappropriatepointintimemodels). Box3:InferringstressedpointintimeparametersfromECBbenchmarks InferringstressedpointintimeparametersfromECBELbenchmarks Wedefine: PDpitBank(0)andLGDpitBank(0)asthebanksstartingvalues ImpRateBank(0)asproductofPDpitBank(0)andLGDpitBank(0) ImpRateECB(0)astheECBsbenchmarkstartingvalue ImpRateECB(1..3)astheECBsbenchmarkvaluesundereachscenario ThenthePDpitBank(1..3)andLGDpitBank(1..3)canbeinferredfromtheincreaseintheECBbenchmark parameter. There is obviously no single best solution. Subject to the approval of the national supervisorbankscanapplytherelativeincreaseequallydistributedbetweenthetworiskparameters forexample: PDpitBank(t+1)=PDpitBank(t)*[ImpRateECB(t+1)/ImpRateECB(t)]^0.5and LGDpitBank(t+1)=LGDpitBank(t)*[ImpRateECB(t+1)/ImpRateECB(t)]^0.5 In any case, banks are expected to produce a conservative risk parameter evolution in line with historicobservationsthatholdsupwellinapeergroupanalysis. 76.The ECB benchmark parameters will serve as important benchmark to gauge internal PDpit andLGDpitparameterestimatesunderthebaselineaswellastheadversescenario.Moreover, banks will be subject to crosssectional comparisons after the submission of the results and mightbeaskedtoreviseinternalfiguresifdeemedoverlyoptimistic. 77.Consistentwiththestaticbalancesheetassumption(seeparagraph53)nondefaultedcredit exposure only changes due to the yearly default flows. Market value fluctuations have no impactonexposureandinparticularcannotdecreaseexposure.Theonlyexceptiontothisis thecalculationofstressedexposureforcounterpartycreditrisk.Here,banksarerequiredto stress exposure including netting sets based on the methodology described in section 3.2. Counterpartycreditriskexposurecannotdecreaseduetofairvaluefluctuations. 78.Banks should estimate the default flow to adjust exposure before the risk weighted assets calculationforcreditrisk. 3.1.7 Calculationofdefaultedassets,impairmentsandassociatedbenchmarks 79.This subsection covers the calculation of the impairment losses under the baseline and the adverse scenario and its relation to the flow of defaulted assets. The section covers the estimationof: Impairmentlossesonnewlydefaultedassets(ImpFlowNew); Impairmentlossesonolddefaultedassets(ImpFlowOld). 31

32 METHODOLOGYEUWIDESTRESSTEST2014 TheevolutionofthePDpitandLGDpitasdescribedintheprevioussubsectionmustbeapplied tothecomputationofthedefaultedassetflowandtheimpairmentflowondefaultedassets. Writeoffsandassumptionsregardingrecoveryflowsondefaultedassetsarenotpermitted(as describedinpara.53). Box4:Impairmentlossesonnewdefaultedassets Impairmentlossesonnewdefaultedassets Theflowofimpairmentsonnewdefaultedassetsattimet+1,isgivenby: ImpFlowNew(t+1)=MAX{0;ELpit(t+1)*ProvStocknondefaulted(t)} =MAX{0;Exp(t)*PDpit(t+1)*LGDpit(t+1)*ProvStocknondefaulted(t)} Where: indicatestheshareofinitiallynondefaultedassetsatt,whichenterintoadefaultstatus att+1(newdefaultedassets)andProvStocknondefaulted(t)isthestockofprovisionsagainst nondefaultedassetsatt. This implies that provisions for nondefaulted assets can be used for new defaults given a static balancesheet.PDpit(t+1)andLGDpit(t+1)bothrefertotheperiodfromttot+1(colloquiallyyeart+1) and both reflect the impact of the respective scenario (baseline or adverse) on the pointintime parametersaccordingtointernalmodelsand/orECBbenchmarkparameters. Thisestimationcannotleadtoadecreaseinthecoverageratiofornondefaultedassets. Thisthenleadstothefollowingnondefaultedexposureattimet+1: Exp(t+1)=Exp(t)[Exp(t)*PDpit(t+1)] 80.Box5describestheapproachtoderivetheimpairmentflowonolddefaultedassets. Box5:Impairmentlossesonolddefaultedassets Impairmentlossesonolddefaultedassets To take into account the deterioration of asset quality, particularly under the stress scenario, additionalimpairmentsmustbemadeonolddefaultedassets.Thisshould,however,gobeyondthe deterioration of the macroeconomic environment during stress and include default portfolio characteristics(DPC)likethetimeindefaultasdescribedabove. Theimpairmentlossonolddefaultedexposureisgivenby: ImpFlowOld(t+1)= ProvStockOld(t)*MAX{0;LGDpit(t+1)/LGDpit(t)*DPC(t+1)1} Where: ProvStockOld(t)isthestockofimpairmentsforolddefaultedassets LGDpit(t+1)istheLGDestimatedint+1forthestockofolddefaultedassets 32

33 METHODOLOGYEUWIDESTRESSTEST2014 DPC(t+1)isthechangeinportfoliocharacteristicbetweentand t+1 Toensureconsistency,impairmentsforolddefaultedassetsattheendofthestresstesttimehorizon shouldatleastcovertheestimated(stressed)pointintimeELattheendofthestresstesthorizon. Thiswillbeassessedbysupervisorsaspartofthequalityassuranceprocess. 81.The impairment losses for new and old defaulted assets computed as described above (see Box4andBox5respectively)areusedasaforecastforthespecificprovisions. 82.Impairments for assets that remain as nondefaulted at the end of the horizon should be recomputedaccordingtotheaccountingsystemsineachnationaljurisdiction. 83.Againstthisbackground,banksshalldemonstratetotherespectiveCAthat,inconsiderationof thedynamicsobservedandexpectedoverthecourseofagivenscenario,therearesufficient provisionsonnondefaultedassetssetaside. 84.Inanycase,eachexposureclasscoverageratio,i.e.theratiooftotalimpairmentprovisionsto exposurevalue,fornondefaultedassetscannotbelowerthanthestartinglevel.Additionally, banks final coverage ratios and their evolution will be assessed by employing sufficiently granularbenchmarkcoverageratios. 85.TheflowofimpairmentlosseswillgothroughtheP&Las(credit)riskcost. 3.1.8 ImpactonCreditRWAandassociatedbenchmarks 86.Banks are required to follow the regulatory framework for the calculation of stressed RWA, which means that regulatory risk parameters must be applied which will be different from pointintimeparameters.Therolloutofnewinternalmodelsduringthestresshorizonisnot tobeconsideredforcalculatingRWA.Both,STAandIRBportfoliosshouldbestressed. 87.Asageneralprinciple,itisexpectedthat,giventhemacroeconomicscenario,notonlypoint intimebutalsoregulatoryriskparametersworsen.Thisappliestoallapproachesandtoboth, exposuresandcreditriskmitigationtechniques(theuseofcollateral). 88.Forboth,STAandIRBportfolios,theendof2013levelofRWAservesasafloorfortheRWA calculatedusingstressedregulatoryriskparametersinthebaselineandtheadversescenario. This floor must be applied (i) separately for IRB and STA portfolios and (ii) within portfolios reportedinthecreditrisktemplate,attheassetclassandcountrylevel. 89.The only exemption is due to the likely completion of mandatory restructuring plans11that have been publicly announced before 31/12/2013. Any RWA reduction due to restructuring hastobeapprovedbythenationalsupervisorandissubjecttocrosschecksattheEuropean level.AnysuchRWAreductionmustbecalculatedatthemostgranularlevelforwhichdatais 11 TheserestructuringplansneedtobeformallyagreedwiththeEUcommission(DGComp). 33

34 METHODOLOGYEUWIDESTRESSTEST2014 reportedinthecreditrisktemplate,i.e.acrossassetclassesandcountries.Ifallassetswithin one asset class (or subclass) within one reported country are to be sold, the risk weighted assets for this asset class in this respective country can be set to zero. If there are assets remaining within this granular portfolio, RWA can be reduced in line with the agreed restructuringplaninawaythattheaverageriskweightthatprevailedinthisportfoliobefore therestructuringisatleastkeptconstant.Thisappliesalsoifassetsaresoldincountriesthat areonlyreportedasanaggregateinthecreditrisktemplate. 90.The RWA for standardised portfolios should be calculated following regulatory requirements basedonthescenariosandassumingratingmigrationasappropriate.Accordingly,exposures whicharedowngradedorwhicharedefaultedmustberiskweightedattheappropriaterisk weights(e.g.inthecaseofunsecureddefaultedexposureat100%or150%). 91.The RWA for all IRB portfolios over the scenario horizon must reflect the estimated yearly defaultflowandimpairmentlossesasdescribedabovewhichmeansthatriskparametersneed to be updated and applied in accordance to the regulatory framework. Depending on the ratingmodelsandmethodologyinplacethismightimplymigrationsofborrowersacrossrating classes and increases of rating classes regulatory PDs/LGDs. Given the adverse macro economic scenario it is expected, that not only pointintime but also regulatory risk parametersworsen. 92.Thepresenceofadequatestresstestingmethodologiesisarequirementfortheauthorisation of the use of internal rating systems for supervisory capital purposes. Banks shall therefore make use of their stress testing methodologies in place for simulating the impact caused on capital requirements for credit risk (due to evolution of regulatory PDs and LGDs) by the application of the EUwide stress test macroeconomic scenario (baseline and adverse). For consistency reasons (static balance sheet assumption) the exposure is considered constant over the time horizon of the exercise, as is the residual maturity. However, exposure composition w.r.t. to rating classes is expected to change due to defaulted asset flows (see alsopara.54and77). 93. In addition to a stress of the regulatory parameters based on the predefined scenarios, the rating migration caused by computed default flows has to be taken into account when calculatingthecapitalrequirementsafterapplicationofthescenarios.TheestimationofRWA impactisnotonlydonefortheperformingportfolio,butalsoforthedefaultedassets(seenext subsection). 3.1.9 RWAfordefaultedassetsandIRBexcessorshortfall 94.For AIRB banks, the RWA on new defaulted assets exposures (during the horizon) is calculatedasfollows: RWADefFlow(t)=MAX{0;[LGDreg(t)LGDpit(t)]*12.5*DefFlow} ItisassumedthatELBE(t)isequaltoLGDpit(t). 34

35 METHODOLOGYEUWIDESTRESSTEST2014 95.For old defaulted assets (i.e. defaults prior to the starting date of the exercise), RWA shall remainconstantduringstress. 96.IRBexcessorshortfallfordefaultedandnondefaultedassetsshallbecalculatedaccordingto the CRR/CRD IV, where provisions related to exposures shall be determined as described above. 3.2 Marketrisk 3.2.1 Overview 97.For the purposes of the market risk stress test, the bank sample is divided into banks with significanttradingactivitiesandbanksforwhichtradingrepresentsalesssignificantbusiness component. Banks with at least one VaR model in place, approved by the competent supervisoryauthorityundertheCRR,willbetreatedasbankswithsignificanttradingactivities (VaRbankshereafter).Otherbanks12,notfulfillingthiscriterion,mayoptinand,unlessthey electtobetreatedasVaRbanks,willbetreatedasbankswithlesssignificantbusiness(non VaRbankshereafter). 98.In accordance with this distinction, VaR banks must follow the approach described in subsection 3.2.3, hereafter described as the comprehensive approach. Banks that use approved VaR models only for a part of their portfolio are requested to apply the comprehensive approach also for the positions not capitalised under VaR models. NonVaR bankscanchoosetobesubjecttoasimplifiedapproachpresentedinsubsection3.2.2. 99.Firms that we designate to be VaR banks or that elect to be VaR banks must run both the simplified approach and the comprehensive approach. The overall negative P&L effect resulting from the application of risk factors for VaR banks (or nonVaR bank not using the simplified approach) should not be less than the prescribed reduction of trading income components for both baseline and adverse scenarios if the simplified market risk approach wasapplied(seepara.102). 100. The scope of the market risk stress is defined to cover all positions exposed to risks stemmingfromchangesofmarketprices(includinghedgeaccountingportfolios),i.e.positions held for trading, available for sale and at fair value through profit and loss. Securitisation positions held at fair value are subject to the market risk factors. In addition, banks are required to estimate impairments for securitisation exposures and stressed RWA in accordancewithsection3.3ofthismethodology. 101. Notwithstandingtheaforementioneddistinction,allbanksparticipatingintheexerciseare requiredtoapplystressedmarketriskfactorsandhaircutstoexposuresheldinavailablefor saleordesignatedatfairvaluethroughprofitandlossportfolios(fairvalueoption)including sovereignpositionsintheseaccountingcategories.Accordingly,sections3.2.3,3.2.4and3.2.6 12 Banksunderstandardisedapproachforallriskcategories. 35

36 METHODOLOGYEUWIDESTRESSTEST2014 applyalsotobanksusingthesimplifiedapproach,however,onlywithrespecttoassetsvalued atfairvalueotherthanheldfortrading. 102. Thethreeyearsimpleaverageofnettradingincome(NTI)definedincompliancewiththe FINREP definition (Gains or losseson financial assets and liabilities held for trading, net) is the starting point of the calculation for all banks in the sample (net trading income before stress).Tothisendandregardlessoftheapproach,allbankshavetoreporttheirnettrading income of the years 2009 till 2013 (see also section 3.2.2) and the latest 2014 yeartodate tradingP&Lavailableatthepointwhentheresultswillbecollected. 103. Thereferencedateforapplyingthesimplifiedandcomprehensiveapproachis31/12/2013. Overthetimehorizonoftheexercise,thenotionalvaluesofallassetsandliabilitiesunderthe marketriskscopeareexpectedtoremainconstant(staticbalancesheetassumption). 3.2.2 SimplifiedmarketriskstresstestapproachfornonVaRbanks 104. Banks without a VaR model in use can choose either to conduct the scenario analysis described in subsection 3.2.3 or to be subject to a simplified approach for the trading book. The reasoning of the simplified approach is to apply NTI volatility as a proxy of banks sensitivitywithrespecttoadversemarketriskconditions.Theapproachiscalibratedinsucha waythatahighervolatilityinbanksNTIresultsinhigherlossesunderstressedconditions. 105. Under the baseline scenario, the 1 times the standard deviation with respect to the previousthreeyears(20112013)representstheoverallbaselineloss13andis assumedto be thestressimpactontheP&Lforthetimehorizonofthestresstest.Forcomputingtheyearly NTIunderthebaselinescenario,inthethreeyearsoftheexercisehorizon,theaverageNTIis reducedby50%for2014,30%for2015and20%for2016oftheoverallbaselineloss(see Box 6 for an illustration). The overall baseline loss can be at most as high as the overall adverse. 106. Under the adverse scenario, 2 times the standard deviation with respect to the previous five years (20092013) represents the overall adverse loss and is assumed to be the overall stressimpactontheP&Lforthetimehorizonofthestresstest.ForcomputingtheyearlyNTI undertheadversescenario,inthethreeyearsoftheexercisetheaverageNTIisreducedby50 % for 2014, 30 % for 2015 and 20 % for 2016 of the overall adverse loss (see Box 6 for an illustration). 13 InthesimplifiedapproachtherepresentationoflossisbasedonbanksNTIvolatilitycharacteristics(averageand standarddeviations).Allcalculationareinabsoluteterms,regardlessofactualincurredlosses. 36

37 METHODOLOGYEUWIDESTRESSTEST2014 Box6:Formaliseddescriptionsimplifiedmarketriskstressapproach Theoveralllossisgivenby: Lossbaseline=1xSD(NTI20112013) (1) Lossadverse=2xSD(NTI20092013) (2) Where: Average(NTI)20112013isthesimpleaverageNTIover20112013; SD(NTI)isthestandarddeviationofnettrading over20112013(baseline)or2009 2013(adverse) YearlyNTIisthengivenby NTI2014(baseline,adverse)=Average(NTI)20112013 0.5 xLoss(baseline,adverse) (3) NTI2015(baseline,adverse)=Average(NTI)20112013 0.3xLoss(baseline,adverse) (4) NTI2016(baseline,adverse)=Average(NTI)20112013 0.2xLoss(baseline,adverse) (5) Where: NTIyear(baseline,adverse)isthenettradingincomeperyearofexercise andscenario; Loss(baseline,adverse)istheoveralllossasgivenbyequations(1)and(2) perscenario 107. Thecalculationshallbeconductedinabsoluteterms,i.e.incurrencyunits,andnotinterms ofanyNTIratio. 108. By definition, under both scenarios the change in NTI cannot be larger than zero. This implies that banks cannot have a larger NTI after stress than at the starting point (3 year average NTI). Moreover, the baseline NTI change represents the minimum change for the adverselevel.BankshavetoreporttheirendofyearNTI20092013accordingly. 3.2.3 ComprehensivemarketriskapproachforVaRbanks 109. For the computation of the impact from market risk shocks, the assumption will be that instantaneousshocks14areapplied topositionsheldfortrading,availableforsaleandatfair valuethroughprofitandloss(regardlessofbeingaccountedatfairvaluethroughprofitorloss (fairvalueoption)orheldfortrading)includinghedgeaccountingandsovereignpositionsin these accounting categories as of the reference date. Consistent with the constant balance sheet assumption and the application of an instantaneous shock, portfolio management actions in response to the stress scenarios, e.g. hedging or portfolio liquidation, are not permitted. 110. Banksmusttranslatethemacroeconomicscenariosprovidedintoanimpactoncapitalvia gainsandlossesforpositionsvaluedatfairvalue(includingpositionsheldfortrading,available forsaleandatfairvaluethroughprofitandloss(regardlessofdesignatedatfairvaluethrough profitandloss(fairvalueoption)orheldfortrading).Allofthesepositionsshouldbevalued using the internal pricing and risk management models which are employed for these purposes in the ordinary course of business of the bank. This is regardless of whether the effectisviaNTI,othercomprehensiveincomeorP&L. 14 Rolloversandexpiriesofthetradingassetsshouldbeexcludedfromtheanalysisbecausetheshockisapplied instantaneously. 37

38 METHODOLOGYEUWIDESTRESSTEST2014 111. Forpresentationpurposes,theimpactofthescenariowillbedistributedtothethreeyears oftheexercise(2014,2015and2016),where50%oflossisallocatedto2014,30%to2015and 20%to2016,respectively.Fairvaluechangesinheldfortradingpositionsshallaffectbanks NTI.Fairvaluechangesinavailableforsaleanddesignatedatfairvaluethroughprofitandloss (FVO) positions will be shown in accordance with their accounting treatment either in other comprehensive income (available for sale) or in the P&L (fair value option). In case of an impairmentestimateforpositionsasresultofthestresstestscenariosthisistobebookedin theP&L. 112. Forthetreatmentofgainsfollowingadeteriorationofowncreditworthinessseepara.114. 3.2.4 EstimationofimpactonNTI,othercomprehensiveincomeandP&L 113. Banks are requested to conduct full revaluations of their positions for each of the two macroeconomic scenarios and each of the four historical scenarios (details concerning scenarios are given in section 3.2.6). For the baseline case the overall impact will be representedbythesimpleaverageoftheimpactofthebaselineandfourhistoricscenarios.In the adverse case, the impact will be determined by the simple average of the two worst projections out of the adverse and four historic scenarios. For presentation purposes, the impactoftheresultingshockwillbedistributedasdefinedinparagraph111. 114. Banksarerequestedtoapplythelistofmarketriskparameterstoallassetsandliabilities sensitive to market risk in order to assess the scenario impact on unadjusted market prices (Level1),otherobservableinputs(Level2),andsignificantunobservableinputs(Level3). 115. Forthepurposofthestresstest,thebanksshallnottakeintoaccountpossiblevaluation adjustments on debt securities and gains resulting from credit spread widening of own liabilitiesunderanycircumstances.Hence,followingadeteriorationofowncreditworthiness, the bank is not allowed to book a gain on those debt securities (or any other fair valued liability)thatrepresentanetliabilitytothebank. 116. Unlessdifferentlyrequestedinthemethodology,bankswillusethemarketriskfactorsfor revaluating their assets in respect of IFRS rules and according to the pricing techniques and internalmodelsinuse. 117. Banksshouldmakeuse,asnecessary,ofahighergranularityofmarketriskfactorsintheir riskmanagement.Tothisend,riskfactorsprovidedinthescenarioshouldbemappedtothe additionalriskfactorsusedintheinternalsystemsiftheycannotbeobservedfortheperiod referencedbythescenarioinquestion(plainly,thisappliestothemacroeconomicscenarios). Banks should provide transparent documentation to the CA on the mapping applied, for instanceintheformofmappingtables(seealsopara.127andBox7:Treatmentofadditional riskfactors). 118. In the computation of the overall effect on NTI, other comprehensive income or P&L the gainsresultingfromachangeinariskfactorshouldbereducedby30%whilelossesshouldbe 38

39 METHODOLOGYEUWIDESTRESSTEST2014 accounted for in full, thus reflecting the general prior that risk diversification effects in portfolios become less effective in a stressed market environment which might not be fully capturedinthescenario. 3.2.5 Specificrequirementsforpositionsheldfortrading 119. Thestresstestimpactforpositionsheldfortradingshallbeshowninthecomprehensive marketrisktemplate. 120. Toallowacomparison,assessmentandmonitoringofthemagnitudeofchangesinmarket riskpositionsduetothestressedriskfactors,banksarerequiredtoreporttheirlongandshort positions and sensitivities (see template). These need to be allocated to the relevant risk factorsandthereforedonotnecessarilysumuptoalltradingexposures(whentwoormore riskfactorsarerelevantforanasset/liability).However,banksmustdisplaythepositionsin these risk factor categories such that the whole trading activity can be inferred from this representation and therefore monitored against banks individual (national) risk reporting, annualreportsandvaluationchangesexperiencedinthepast.Thecompetentauthoritieswill adopt rigorous approaches to control for the completeness of positions as well as the plausibilityofvaluationchanges. 121. Toallowanassessmentoftheunderlyingdiversificationassumptions,banksmustpresent the impact of each risk factor for the trading exposure and report it in the template. More precisely, banks are required to assess the P&L sensitivity to changes in each risk factor, independentofalloftheothermarketriskfactors,anddisplaytheresultsinthetemplate. 122. Gainsandlossesforheldfortradingpositionswillbecomputedbythecomparisonofthe assetsandliabilitiesatfairvaluebeforeandaftertheapplicationofalltheshocks.Banksshall provide a detailed breakdown of P&L effects by risk factor in the appropriate section of the template. In addition, banks should report marginal VaR contributions per major risk factor categorybeforethestressimpactandthemarginalVaRimpactpermajorriskfactorcategory aftertheimpactoftheworstofallsixscenarios. 123. When reporting results for the held for trading positions, nonlinear effects as well as scenario correlation assumptions deriving from the application of the market risk parameter shocksshall betakenintoaccountandcumulativelyshowninthetemplate,separatelyfrom theonefactorP&Leffects.Thetotallosses/profitsonthetradingportfolioderivedfromthe application of the shocks, for each of the two macroeconomic scenarios and four historical scenarios,willbethesumoflinearandnonlinearlosses/profitsderivedfromtheapplication ofthemarketriskparametershocksonalltheassetsallocatedinthetradingportfolio. 39

40 METHODOLOGYEUWIDESTRESSTEST2014 3.2.6 Descriptionofmarketriskscenario 124. The stressed market risk parameters have been estimated for the baseline and adverse scenario by the ESRB/ECB. In addition, banks are provided with four historical scenarios, i.e. based on past events which took place between the late 1980s until the sovereign crisis startingin2010.Scenarioshavebeendefinedintermsofshockstomarketriskfactors. 125. Theexerciseemploysadetailedandgranularsetofmarketriskfactors(seecomprehensive marketrisktemplate)inordertoprojectgainsandlossesonfairvaluepositions.Themarket riskparametersincludeinterestratesandvolatilitiesformajorcurrencies,exchangeratesand volatilitiesfortheaforementionedcurrencypairs,haircutsandchangesinvolatilityformajor equity commodity and debt instrument indices as well as credit valuation adjustments, changesincreditspreadsfordebtinstruments,parametersrelevantforthecorrelationtrading portfoliosandbid/askspreadstobeusedfortheassessmentoftheimpactonmarketliquidity. In addition, the set contains risk factors capturing basis risk and the specific risks of the correlationtradingportfolios. 126. As scenarios may not necessarily capture banks structural market risk, CAs can require bankstoreportasaseparateitemanymaterialriskfactorsthathavenotbeenspecifiedinthe scenario.Theseriskfactorsshouldbeincludedinthestresstestusingshocksthatarederived fromthemacroscenario. 127. Where a material part of a banks net trading income is generated under any of the scenariosbyriskfactorsotherthanthosespecifiedinthescenario,bankscanberequiredto identify these risk factors and specify corresponding moves per risk factor for each of the stress test scenarios. Specifically, banks need to account for 95% of the total P&L generated undereachscenariointermsoftheriskfactorsspecifiedtogetherwiththeotherriskfactors that provide the biggest contributions to P&L (whether profit or loss). The treatment of additional risk factors and optional additional information to be required by CAs is also specifiedinBox7. Box7:Treatmentofadditionalriskfactors Treatmentofadditionalriskfactors Perhistoricalscenario Where good quality data from the period referenced by the particular historical scenarioisavailable,thisshouldbeusedtocalibratetheshiftintheriskfactorandthe correspondingevidenceprovided.Forexample,ifabankhasmaterialexposuretothe FTSEindexandisstresstestingforthe2001Recessionscenario,thentheshiftinthe FTSE risk factor should reference the history of the FTSE index for the period August 2001 to September 2002. To be clear, where a bank has material exposure to a risk factor and where the history of that risk factor is readily available, this approach is expectedtobeapplied. 40

41 METHODOLOGYEUWIDESTRESSTEST2014 Where good quality data from the period referenced by the particular historical scenarioisunavailable,thenoneofthefollowingapproachesshouldbeadopted: If good quality data from a historical scenario that is similar to the particular historicalscenarioisavailable,thisshouldbeusedtocalibratetheshiftintherisk factor, and corresponding evidence should be provided, including reasons for deemingthealternativehistoricalscenariotobesimilar. If good quality data is available in sufficient quantity to support a statistical relationship between the risk factor and one (or more) of the risk factors in the scenarioprovided,thisrelationshipshouldbeusedtocalibratetheriskfactor,and the statistical evidence to support this relationship should be provided (including evidence to indicate how this relationship holds up in stressed market conditions).Forexample,ifabankhasamaterialexposuretoSiemensAG,itcould estimatethebetaforSiemensAGandcalibratetheshiftinSiemensAGasitsbeta times the shift in the EuroStoxx50 index. In the specific case where a bank uses oneoftheriskfactorsinthescenarioprovidedasaproxyforanotherriskfactor(so that its relative shift is identical to that of the risk factor provided), evidence to support the use of such a proxy variable is required. For example, if a bank assumes that Siemens A G beta with the EuroStoxx50 index is 1 (so that the EuroStoxx50indexisaproxyforSiemensAG)thenevidencetosupportassigninga valueof1toSiemensAGbetaisrequired. Where good quality data is unavailable (for example, for a newly issued corporate bond) (so that the variable itself is unobservable and its relationship with other variables cannot be statistically determined), theoretical reasons to support the calibration of the risk factor shift should be provided. For example, there may be arbitragereasonstosupportthecalibration. The value of certain illiquid and / or complex trading book positions depends upon unobservable/difficulttoobserveparameters.Suchparameters(or,indeed,valuation methods) should be adjusted to reflect the severity of the market shock associated with the scenario. For example, if the severity of the market shock might lead to circumstances that would require a remark of the equity correlation book, correlations, illiquid parameters, associated basis factors and the valuation methodologyshouldbeadjustedaccordingly. Permacroeconomicscenario Becauseeachmacroeconomicscenarioishypothetical,historicaldataspecifictothe scenarioareunavailable. Wheregoodqualitydataisavailable,thenoneofthefollowingapproachesshouldbe adopted: 41

42 METHODOLOGYEUWIDESTRESSTEST2014 If good quality data from a historical scenario that is similar to the particular macroeconomicscenarioisavailable,thisshouldbeusedtocalibratetheshiftin the risk factor, and the corresponding evidence should be provided, including reasonsfordeemingthealternativehistoricalscenariotobesimilar. If good quality data is available in sufficient quantity to support a statistical relationshipbetweentheriskfactorandone(ormore)oftheriskfactorsprovided in the scenario, the treatment should be the same as in the case for historical scenarios. Where good quality data is unavailable, the treatment should be the same as in the caseforhistoricalscenarios. The value of certain illiquid & complex trading book positions depends upon unobservable / difficult to observe parameters. Here the treatment should be the sameasinthecaseforhistoricalscenarios. 3.2.7 AdditionalrequirementsforCVA,DVAandmarketliquidity 128. Inordertocalculateexpectedcreditvalueadjustments(CVA)lossesinthetradingbookthe banksshallapplyhaircutsprovidedtothemarktomarketvalues(aftertheapplicationofthe marketriskshocks)ofOTCderivatives.Incaseanettingagreementexists,thebankmaytake the net value of the derivatives under the netting agreement (netting set). If there is no nettingagreement,thebankshouldapplytheCVAhaircutstothegrossmarktomarketvalue ofthederivativesthathaveapositivereplacementvalue. 129. TheCVAstresswouldnotapplytoderivativescoveredbycollateralsupportannexes(CSAs) andtoderivativesthatareclearedthroughcentralcounterparties(CCPs). 130. Banks have to display the fair value of the derivative positions / netting sets before and afteri)theapplicationofcollateral,ii)marketriskshockstothereplacementvalueandiii)the CVAhaircut,withabreakdownbyrating.Banksarerequestedtodisplaythepresentvalueof thederivativepositions/nettingsetclearedthroughCCPsaswellasthoseunderCSAs. 131. For the purposes of the stress test, the banks shall not take into account possible debt valuation adjustments (DVA). Hence, following a deterioration of own creditworthiness, the bank is not allowed to book a P&L profit on those OTC derivatives (or any other fair valued liability)thatpresentanetliabilitytothebank. 132. Banks are not allowed to offset the simulated CVA fair value impact by any existing reserves. 133. VaRbanksshallcomputethemarketliquidityshockduetoanexogenouswideninginthe bidask spread by taking into account the impact caused on the market liquidity reserve 42

43 METHODOLOGYEUWIDESTRESSTEST2014 (valuationadjustment)assetoutintheeducationalguidanceontheapplicationoffairvalue measurementwhenmarketsbecomeinactivebytheIASBinOctober200815. 134. Banks holding a correlation trading portfolio in excess of 1% of total riskweighted assets aredeemedtoholdasignificantcorrelationtradingportfolio.Thesebanksshallcomputeand report the impact of the shock on the correlation trading portfolio separately. Other banks maydosoattheirdiscretion. 135. ForCVAandcreditexposuresinthetradingbook,banksarerequiredtoassumethatthe largestcounterpartyandname(forthecreditexposures)woulddefaultandreporttheimpact (both pre and post impact of stresses to market risk factors), as well as the gross and net exposure (net of CRM) to that counterparty and name. The reported loss should reflect the deteriorationoftheCRMprotectionresultingfromthemarketriskscenarios.Thelossshould be added to the total losses resulting from the market risk scenario. CCPs, other market infrastructures, central governments and central banks should not be included in the set of counterpartiesandnamestoidentifythelargestexposure. 3.2.8 RWAcalculationformarketrisk 136. For the purpose of this exercise, regulatory requirements for banks that can choose the simplified market risk approach (see para. 104) are assumed to remain constant at the level endof2013forboththebaselineandadversescenario. 137. RWA for securitisation positions are expected to change in accordance with the securitisationmethodology(seesection3.3)regardlessofthemarketriskapproachapplied. 138. MarketriskRWAaredefinedascapitalchargesresultingfromValueatRiskmodels(VaR) and thestressVaR (SVaR),incremental riskcharge (IRC), comprehensiverisk measure (CRM) andownfundsrequirementsforcreditvaluationadjustments(CVA). 139. Thestartingvaluesaretherespectivecapitalchargesreportedasendof2013. 140. The market risk RWA are recalculated as described in paragraphs 141ff. for each year of thestresstesthorizon. 141. VaR and SVaR are assumed to remain constant at the level of capital charge end2013 under the baseline scenario. Under the adverse scenario the VaR capital charge will be replaced by the SVaR capital charge as of end2013. In case of partial use, the adverse VaR capital charge (2xSVaR) is added to the scaled capital requirements under standardised approaches. The scaling factor is derived from the ratio of 2xSVaR over the sum of VaR and SVaR(allasofend2013). 15 http://www.ifrs.org/News/Press+Releases/IASB+publishes+educational+guidance+on+the+application+of+fair+value +measurement+when+markets+become.htm 43

44 METHODOLOGYEUWIDESTRESSTEST2014 142. Banks that are subject to a credit risk capital charge for CVA are required to calculate a stressedregulatorycapitalCVAchargeforbankingbookandtradingbookunderthebaseline andadversescenario.TodetermineadditionalCVAcapitalneeds,banksarerequestedtore calculate the CVA charge under stress conditions and based on their regulatory approach in use. To this end, banks should translate the macroeconomic scenarios into underlying risk parametersanddeterminerespectivestressedcapitalcharges.Overall,theincreaseintheCVA chargeforthebaselineandadversescenarioshouldbealignedwiththeaverageincrease16of RWAinSTAandIRBportfoliosinthebaselineandadversescenario,respectively. 143. Banksmodellingincrementalriskcharge(IRC)onexternalratingsmustestimatethestress impactofthescenariosinaccordancewithpara.90ofthismethodology.BanksmodellingIRC onthemigrationofinternalratingsmustestimatethestressimpactinaccordancewithpara. 91 of this methodology. Overall, the increase in the incremental risk charge for the baseline and adverse scenario should be aligned with the average increase17of RWA in STA and IRB portfoliosinthebaselineandadversescenario,respectively. 144. Forcorrelationtradingportfolio,thecomprehensiveriskmeasurewillbeassumedconstant inthebaselinescenario.Intheadversescenariothefollowingscalingisassumedtoderivethe stressedCRMcapitalcharge: i. 8%floorisnotbinding:1.5timestheCRMcapitalcharge ii. 8%floorisbinding:2timesthefloor 145. The capital chargesforcorrelationtradingpositions under thestandardisedapproachare assumedtoremainconstantatthelevelofend2013underbaselineandadversescenarios. 146. For banks using internal models to derive regulatory capital requirements for the trading book, the end of 2013 level of capital charges serve in general as a floor for the capital requirements. 147. Theonlyexemptionisduetothe likelycompletionofmandatoryrestructuringplansthat have been publicly announced before 31/12/13 18 . Any capital charge reduction due to restructuringhastobeapprovedbythenationalsupervisorandissubjecttocrosschecksat theEuropeanlevel. 3.3 Treatmentofsecuritisations 3.3.1 Scope 148. AllexposuressubjecttoCRRChapter5(traditionalandsynthetic,resecuritisations,aswell asliquiditylinesonsecuritisationtransactions)areincludedinthescopeoftheexercisewith theexceptionofABCP(incl.ABCPliquiditylines).ABCP(incl.ABCPliquiditylines)areexcluded 16 Inrelativeterms. 17 Inrelativeterms. 18 TheserestructuringplansneedtobeformallyagreedwiththeEUcommission(DGComp). 44

45 METHODOLOGYEUWIDESTRESSTEST2014 from the securitisation approach but subject to either the regular RWA treatment for those positionsstressingtheunderlyingparametersinaccordancetotheprovidedmacroeconomic parameters,ormarketriskmethodology(VaR)inaccordancetotheirregulatorytreatment. 149. Aspecificapproachisappliedintheexerciseonthesecuritisationexposuresinthebanking bookandtradingbook.Inaddition,securitisationexposuresunderfairvalue(regardlessofthe attributiontobankingortradingbook)aresubjecttoamarktomarkettreatmentunderthe market risk approach. Securitisation exposures held in the banking book are subject to estimatedimpairmentsunderthecreditriskapproachinlinewiththerelevanttreatmentfor theunderlyingexposures.Estimatedimpairmentsshouldtakeintoconsiderationtheimpactof creditenhancementandotherstructuralfeatureswhenapplyingthecreditrisk. 150. All exposures (traditional and synthetic, resecuritisations, as well as liquidity lines on securitisationtransactions)forwhichtherearesignificantrisktransfers(asinthemeaningof the CRR/CRD IV) are included in the scope of the exercise. Securitised exposures within correlation trading portfolios are covered by the market risk methodology and must be reported within the market risk template. Originator positions where no significant risk transferhasbeentakenplacearetobetreatedunderthecreditriskmethodologyandshould be reported accordingly in the credit risk templates. In particular, this holds for exposure to securitisationsissuedorguaranteedbyinternationalorganisations,multilateraldevelopment banks, governments, or government agencies, where firms are subject to the credit risk of theseinstitutionsratherthanthecreditriskoftheunderlyingexposures. 151. Forallexposures,banksarerequiredtouseastaticbalancesheetassumption.Thestatic balance sheet assumption should be applied by keeping the outstanding balance of all securitisationexposuresunchangedthroughoutthetimehorizonofthestresstest. 3.3.2 EstimationofimpactonNTI,othercomprehensiveincomeandP&L 152. Forsecuritisationexposurenotheldfortrading,banksarerequiredtoestimatetheamount ofimpairmentsattheendofeachperiodoverthehorizonofthestresstestexercise,taking intoaccountthefeaturesofthebaselineandadversemacroeconomicscenarios.Banksshould estimate the amount of impairments before the risk weighted assets calculation for securitisation positions. The forecasted impairments should take into consideration impairmentsalreadytakeninpriorperiodsandincrementalimpairmentsforeachperiodmust be added in the securitisation template. For each individual security, the underlying pools credit and prepayment models must be stressed under the different scenarios to produce consistentimpairmentestimates. 153. For securitisation exposures subject to marktomarket valuation, banks are required to estimate the marktomarket loss incurred in each year of the scenarios according to the market risk methodology and report the forecasted losses in the securitisation template as impairments. Banks should estimate fair value changes before the risk weighted assets calculationforsecuritisationpositions. 45

46 METHODOLOGYEUWIDESTRESSTEST2014 154. The forecast P&L charges will be reviewed and challenged and could be revised by competentauthorities. 3.3.3 Riskweightedassetscalculationforsecuritisations 155. The stress is applied to the securitisation positions (Standard and IRB portfolios) in the different credit quality steps as of end December 2013 by substitution of the original risk weightsbypredefinedincreasedones.TheincreasedriskweightsreflecttheeffectonRWA duetothepotentialratingmigrationofthepositions. 156. Forthispurpose,thesecuritisationpositionshavebeenallocatedtothreedifferentclasses ofsecuritisations,low,mediumandhighriskassets.Thedifferentiationisbasedonthecredit quality of the position, the structure or asset class of the transaction and regional differentiation.Theclassificationisbasedonananalysisofthehistoricalmigrationvolatilityof differentproductsandtheirorigin,whereahighermigrationprobabilityindicateshigherrisk. Inparticular: Riskbucket1(lowrisk):EMEARMBS,ABS(NorthAmericaandEMEA); Riskbucket2(mediumrisk):CMBS(NorthAmericaandEMEA),EMEACDO(structuredcredit); Risk bucket 3 (high risk): North America RMBS, North America CDO (structured credit), all otherpositionsincl.resecuritisations. 157. When external ratings are not available and the banks use internal methods (Supervisory Formula Approach and Internal Assessment Approach (SFA and IAA)), for RWAcalculation purposes, the banks shall apply the stress factors for unsecuritised corporate or retail exposurestotheriskcomponents(PD,LGD)oftheassetpoolintherespectiveexposureclass. Inthiscase,asaprecondition,theIRBbankswillhavetodemonstratetotherespectiveCAs thattheinternalmethodscanbeadjustedinawaythatisconsistentwiththescenarios. 158. BanksmightbeaskedtosupplyinformationontheIRBandSTAexposureinriskbucketsas defined above. For this purpose the securitisations should be reported in the securitisation templatesbycreditqualitystep,securitisationvs.resecuritisation,RWAcalculationapproach, seniority and granularity based on corresponding CRR definitions (e.g. CRR para. 251, 259, 261,262). 3.4 Costoffundingandinterestincome 3.4.1 Overview 159. Projectionsconditionalonthebaselineandadversescenario,respectively,fortheprices19 oftheinterestearningandinterestpayingportfolios20overthehorizonofthestresstestwill 19 Pricesmeansherethereturnsoftheseitems. 46

47 METHODOLOGYEUWIDESTRESSTEST2014 have to be provided. Moreover, a distinction shall be made between existing positions and new positions (i.e. the positions that will replace the maturing positions) in terms of the effective interest rates earned (or paid) for each of these two components. The projected interestrateswillreflectrepricingeffectsfornewbusinessandchangesinthereferencerates forthefloatingrateitems. 160. Definitionoftheeffectiveinterestrate:Effectiveinterestratemeans,inthiscontext,the ratewhichifmultipliedbythecorrespondingvolumeofanitemwillbeequaltotheinterest income contribution of this item during a specific time interval.21Specific assumptions with respecttothegranularityofthematurityprofileandthetimingforissuingnewcontractswill havetobemade.Therelevantdefinitionsandassumptionsforfillingthedatatemplateswill bepresentedbelow. 161. The projections of prices should be sufficient to calculate net interest income, given the static balance sheet assumption, since they would cover all interestearning and interest payingportfolios22. 162. Bankswillusetheirownmethodologytoprojectthefundingcostsandthepassthroughof thechangeinthecostoffundingtothelendingrates.Inparticular,banksneedtoassumean asymmetrical pass through of interest rate changes on the asset and liability side. The pass through to be applied by banks shall be calibrated in accordance with conservative assumptions.Banksapproachwillbesubjecttosupervisoryconstraintsandtheirprojections will be subject to a thorough quality assurance analysis, including a comparison against relevant benchmarks. This could lead to requests for revisions to banks projections in the context of quality assurance process. As part of the quality assurance process there may be exceptional cases of legally prescribed funding matches which would need to be taken into accountinthestresstestwhenconsideringthepassthroughassumption. 3.4.2 Projectionoflendingandfundingrates 163. Bankswillhavetousetheirownmethodologyinprojectinglendingandfundingratepaths, thereforeallowingfortheindividualbanksperspectiveoffundingsensitivityandpassthrough potential to lending rates conditional on the macroeconomic scenario. The difference in the pricesensitivitiesofdifferentfundingsourcesshouldbefactoredin.Itisrecommended that the price projections incorporate both exogenous factors and idiosyncratic features of the bank. Specifically, at least the effects of the following factors are expected to be taken into account: 20 Thesizeofportfolioswillremainstableoverthehorizonduetothestaticbalancesheetassumption,butinterest earnedorpaidcouldchangeaccordingtothescenarioandtherelatedbanksprojections. 21 Theeffectiveinterestrateonloansandreceivablesshouldfactorinthat,underIFRS,feesandcommissionslinkedto theloanarepartofinterestincome. 22 Giventhestaticbalancesheetassumption,theevolutionofaggregateinterestincomeonloansandreceivables shouldreflectthereductioninperformingloansasaresultofdefaultedassets(nosubstitutionassumption). 47

48 METHODOLOGYEUWIDESTRESSTEST2014 Macroeconomicenvironment(GDP,unemployment,houseprices,etc.); Evolutionofreferencerates(e.g.swapratecurve); Marketstructure(marketpowerpotentialtomarkupovermarginalcost); Creditriskanditseffectonsettingtheinterestrate; Supplyconstraints(capitalposition,liquidityposition). 164. Itisexpectedthatincreasedcostoffundingwouldfeatureundertheadversescenario.Two elements contribute to increasing banks funding costs under the adverse scenario and decreasingtheprojectednetinterestmarginthroughoutthestresstesthorizon: Increase in wholesale funding costs the cost of expiring wholesale funding increases reflectingadversemacroeconomicdevelopments,riskaversionandliquiditystrains; Increase in retail funding costs the cost of sight deposits and expiring term retail funding increasesreflectingincreasedcompetitioninthemarketforretailfunds. 165. Specifically,asregardswholesalefundingcosts,wherebybanksaretoalargerdegreeinthe position of price takers (rather than price setters), the evolution of credit spreads in accordance with the macroeconomic scenario should be taken into account. Projections of futureCDSspreads23andPDs,linkedtothemacroeconomicscenarioshouldbeusedasfactors affectingthebankswholesalefundingcost. 166. For floating rate wholesale liabilities there will be two drivers of stress for the cost of funding:i)thetimepathoftherelevantreferenceratesand;ii)thepremiumchargeddueto e.g.creditandliquidityrisk. 167. Fortheevolutionofyieldcurvesoftheirfixedincomeportfolio,banksareexpectedtotake into account the macroeconomic developments, projections about sovereigns creditworthiness and spillover effects, e.g. from weak sovereigns to other distressed economies. 168. ItisassumedthatLongTermRefinancingOperations(LTRO)canberolledoverintoMain Refinancing Operations (MRO) funding upon maturity; however, without an increase in the overall volume. While there is no explicit forecast of monetary policy in the stress test scenarios,banksareexpectedtofactortheprojectedchangesinshorttermmarketratesinto thecostsofcentralbankfunding. 23 WhereCDSspreadsarenotavailableornotrepresentativeduetoilliquidity,AssetSwap(ASW)spreadsforsenior unsecuredbondsmaturingaroundthe5yearsmaturitycouldbeused.TheASWspreadisdefinedastheratethat nullifiesthefairvalueofaninterestrateswap,wherebythefixedlegconsistsofthepaymentcashflowsofthe benchmarkbond(againstwhichthecreditspreadiscalculated)andthefloatinglegisindexedtoafloatinginterestrate (Xibor)definedforacertainmaturity,whenthebenchmarkbondisquotedatpar(orifitisnotquotedatpar,taking intoaccountthedifferencebetweenthequotedcleanpriceand100). 48

49 METHODOLOGYEUWIDESTRESSTEST2014 3.4.3 Additionalrequirements 169. Increased wholesale funding costs cannot result in an increase in interest income from wholesalelendingcomparedwiththebeginningoftheexercise. 170. Assumptions underlying the scenarios cannot lead to an increase in net interest income comparedwiththebeginningoftheexerciseunderthebaselineandadversescenario. 171. Underthebaselinescenario,banksarerequiredtoprojecttheinterestaccruedonNPLsin line with their standing accounting practice (e.g. no recognition of unpaid income i.e. only cash interest received is treated as income, or, full recognition of interest using the original interest rate on the unimpaired balance). Under the adverse scenario, income on defaulted assetsshouldnotberecognized. 172. Banksarerequestedtoprovideseparatelyinterestincomeandexpensesaccruingfromthe useofderivatives,brokendownintoderivativeswherethebankispayingafixedinterestrate and/orpayingafloatinginterestrateand/orreceivingafixedinterestrateand/orreceivinga floatinginterestrate.Theratesandnotionalvolumesofderivativesusedinhedgeaccounting aretobepresentedseparatelyofotherderivatives.Theeffectiveinterestratereportedshould reconcile to the net interest income on derivatives in line with paragraph 160. For nonEU countries,thebankswillhavetofillthetemplatesasforEUcountries,but,inaddition,acap basedonappropriatebenchmarksontheprojectedNetInterestIncomewillbeimposed. 3.4.4 Definitions 173. Wholesale funds are defined as those provided by wholesale investors other than non financial corporations. Wholesale funding is broken down into four main categories: i) interbank unsecured transactions; ii) interbank secured transactions (including repos traded withacentralcounterparty);iii)wholesaledebtissued,includingsubordinateddebtissuances and covered bonds; iv) other wholesale transactions, including operations in Commercial Paper and Certificate of Deposits. Banks are also requested to provide data on secured and unsecuredlendingtootherfinancialinstitutions. 174. Thedatasetofthetemplatecapturestheresidualmaturitydistributionofinterestpaying liabilities and interestearning assets. Figures have to be reported with regard to the contractualrepaymentvalues.Givenastaticbalancesheetapproach,assetsandliabilitiesthat mature within the time horizon of the exercise should be replaced with similar financial instrumentsintermsoftype,creditqualityatdateofmaturityandresidualmaturityasatthe startoftheexercise.Theinterestratefornewbusinesswhichreplacesthematuringoneswill reflectrepricingeffects. 49

50 METHODOLOGYEUWIDESTRESSTEST2014 175. Callable wholesale debt liabilities that are callable by the counterparty prior to their overallmaturityareexpectedtobeexercisedonthefirstpossiblecalldate.24 176. When providing information on the remaining maturity distribution for assets and liabilities,bankshavetoreportsightdepositsinthefirstmaturitybucketonly. 177. Banks are required to report information on fixed/floating rate composition. Banks are required to report information split by existing positions and replaced positions that mature duringthestressperiodinlinewiththeassumptionofastaticbalancesheet. 178. Box 8 gives detailed definitions for the maturing and replacement of positions as well as effectiveinterestratestobereported. Box8:Detaileddefinitionsregardingtheevolutionofportfolioandinterestincome Detaileddefinitionsregardingtheevolutionofportfolioandinterestincome This section will present the basic assumptions as regards the evolution of the portfolio and the resultinginterestincome.Thediscussionbelowispresentedforassetsbutitremainsvalidalsofor liabilities(ifincomeisreplacedbyexpenses).Thehorizonofthestresstestingexercisebeginsat t0 and ends at tN. Ayearly data frequencyis requestedand, therefore,each time interval [tn1, tn] representsoneyear. Aspecifictypeofassets,i,isconsidered(thesamedefinitionsholdforliabilitiesaswell).Duringthe horizonofthestresstest,thesizeofthisportfoliowillremainconstantasmaturingassetswillbe replacedbynewpositionsofthesametype,althoughatapossiblydifferentrate.Therefore,total positionsattn,denotedbyTn,canbewrittenas: Tn En N n , whereEnisexistingpositions(thosethatexistedalsoattn1,or,inotherwords,thepositionsfromtn 1thatdidnotmatureduringyearn)andNnthenewpositions(i.e.thosethatwerereplacedduring theyearn).25 Becauseofthestaticbalanceassumption,totalvolumeswillremainconstant,thereforeTn=T0,for alln>0. In implementing the static balance sheet assumption, both the asset structure and the funding structureofthebanksshouldnotchangeoverthetimehorizonoftheexercise.Maturingassetsand liabilitiesareexpectedtobesubstitutedwithassetsandliabilitieshavingthesameresidualmaturity astheassetsandliabilitiesdue.Forexample,ifabankhasanissuedbondwithanoriginalmaturity offiveyearsasof31December2013,butwitharesidualmaturityof1year,itisassumedthatthe bank shall replace the bond due at the beginning of 2015 with another bond having the residual maturity of one year. Therefore, the decomposition of total positions into new and existing positionswillarisenaturallyfromthesubstitutionofmaturingitems(seetemplate). 24 Forexample,abondwithacontractualmaturityof3yearsandacalloptionthatcanbeexercisedbytheinvestor after1yearhastobevaluedinthetemplatewitharesidualmaturityof1year. 25 Inthecaseofdefaultedloans,Nnwouldofcourserepresentnewlydefaultedloans.Banksarerequiredtoprojectthe interestaccruedonNPLsinlinewiththeirstandingpractice(e.g.norecognitionofunpaidincomei.e.onlycashinterest receivedistreatedasincome,or,fullrecognitionofunpaidinterestontheunimpairedbalance.) 50

51 METHODOLOGYEUWIDESTRESSTEST2014 In addition, it should be clarified that as regards the loans and receivables portfolio, the static balanceassumptionappliestotheportfolioasawholei.e.whenaddingtheperformingandnon performing part. It is expected that under stress the total volume of performing assets will be decreasingandsimultaneously,nonperformingassetswillbeincreasing. Theeffectiveinterestrateisaffectedbythedistributionintime(withinthetimeinterval[tn1,tn])of maturingandnewitems.26Thefollowingtimingassumptionsareused: Anitemfromtn1canhavematured,atthesoonest,attn;i.e.thereisnomaturityshorterthan1 year. Equivalently, En 1 n Tn1 , where is the percentage of T which matures in 1 n n1 year27.28 AllnewpositionsNn,arecontractedatthemidpointbetweentn1andtn. The interest income during year n consists of income earned from existing positions and income earned from the new positions. Consequently, two effective interest rates can be defined. Specifically: Incomeearnedonexistingpositions;i.e.incomeearnedbyTn1.Thiscomponentofincomecan be written as NII ex , n Tn 1 1 n rex , n Tn 1 n rex , n / 2 where rex,n is the effective interest rate for existing business29(as defined by the previous identity i.e. the rate which if multipliedbyTn1givestheinterestincomeearnedbythisportfolioofbusiness). NII ex , n here denotesthecontributionofthespecificitemtonetinterestincome,therefore,ifitisanassetit correspondstoincomewhileifitisaliabilityitemitcorrespondstoanexpense. Incomeearnedbynewpositions,whichis NII new, n N n rnew, n / 2 i.e.rnew,nisthenominalinterestrateofthenewbusiness.Thenominalinterestrateequals r /2 twotimestheeffectiveinterestratefornewbusinesswhichequals new,n (thisdefinition 30 waschosensothatrnew,niscomparablewithrex,n) ,duetotheassumptionofpositionsbeing replacedatthemidpointbetweentn1andtn. Bankswillneedtoreportvolumesandinterestratesseparatelyforthefloatingandthefixedrate portfolios.Therefore,itisusefultorewritetheequationsfortotalbusinessandNIIseparately,for thefloatingandfixedsegmentsoftheportfolio: 26 Forexample,ifthedistributionofmaturing/newitemsisskewedtowardstheendofthetimeinterval,thiswillresult inalowereffectiveinterestrate(allotherthingsbeingequal). 27 I.e. n Tn1 ; maturity 1 year / Tn1 . 28 Morespecifically,wehave:att=0: T0 E0 ;att=1: N1 T0 , E1 1 T0 , T1 E 1 N 1 ;att=2: N 2 T1 , E 2 1 T1 , T 2 E 2 N 2 etc. 29 Inthecaseofexistingbusiness,theeffectiveandthenominalinterestratecoincide. 30 These timing assumptions do not necessitate any specific tailoring of banks internal models to comply with the requirementsoftheexercise.Bankswilljusthavetoprovidetheamountsofexistingandnewbusinessforeachtime period,asprojectedbytheirinternalmodels,andsubsequentlytheywillhavetocalculatethecorrespondingeffective interest rates that together with the corresponding amounts would enable the calculation of the interest income of existingandnewbusinessrespectively.Theonlyadditionalnuancewouldbethatinordertocalculatetheincomefrom newbusinessitisrnew,n/2thatwillhavetobemultipliedbytheamountofnewbusiness,ratherthanrnew,n.Thisisjusta convention,forthepurposeofmakingtheinterestratesrex,nandrnew,ncomparable. 51

52 METHODOLOGYEUWIDESTRESSTEST2014 Tntype E ntype N ntype ntype Tntype 1 ; maturity 1 year / Tn 1 type Entype 1 ntype Tntype 1 N ntype ntypeTntype 1 , n Ti , n 1 rex,i , n N i , n rnew,i , n / 2 NIIitype type type type type where type float , fixed rextype ,n type rnew ,n Bankswillneedtoreporttheinterestrates and forbothtypesofportfolio(fixedrate andfloatingrate. Therefore,thecontributiontoNIIfromitemi(obviously,ifitemiisanassetitwillcontributeto interestincomeandifitisaliabilitytointerestexpenses),duringyearn,equals NII NII exfloat , i , n NII new , i , n NII ex , i , n NII new , i , n float fixed fixed i ,n floating portfolio contributi on fixed portfolio contributi on T 1 float n 1 r T r float ,n / 2 N i ,n float float r float n / 2 float float n 1 float ex n new, i , ex , n n floating portfolio contributi on T n fixed 1 1 fixed r fixed n ex ,n T fixed n1 fixed r fixed n ex ,n / 2 N i ,fixed n r fixed, i , n / 2 new , fixed portfolio contributi on andtotalNIIisthesumofallthesecomponents NII n NII i , n . i 3.5 Sovereignrisk 3.5.1 Overview 179. Sovereignriskpositionswillbetreatedinaccordancewiththemethodologyofrespective risktypes,i.e. Sovereign positions in the regulatory banking book: banks are requested to estimate impairments/losses for sovereign exposures in line with sovereign downgrades, consistent 52

53 METHODOLOGYEUWIDESTRESSTEST2014 with the adverse macroeconomic scenario provided by ESRB/ECB. In addition, banks are requestedtocompute(stressed)regulatoryRWAaccordinglyandaccordingtotheapplicable prudentialframework.Theimpactoftheeconomicscenarioondefaultandlossparameters for sovereign assets will be assessed through stressed default and loss parameters for corporate portfolios under specific assumptions on downwards ratings notching to be providedbytheECB/ESRB. Sovereign positions in AfS and designated at fair value through profit and loss (FVO): sovereignexposuresinthesecategoriesareinadditiontothecreditrisktreatmentabove subject to the market risk parameters (marktomarket) and haircuts as provided by the ESRB/ECB.Theapplicationofprovidedmarketriskparameterholdsforallbanksinthesample independently of section3.2.2. The use of prudential filters for sovereign exposures held in availableforsaleportfoliosistreatedaccordingtopara.32. SovereignpositionsinHfT:sovereignexposuresinthiscategoryaresubjecttothemarketrisk parameters (marktomarket) and haircuts as provided by the ESRB/ECB and RWA stress as describedinsection3.2.8. 180. Seealsosection1.11Overviewonstresstestingmethodologyaccordingtorisktype. 3.5.2 Definitions 181. Banks are required to report their sovereign exposure by country and residual maturity. Additional to the relevant accounting treatment, the following definitions apply (see template): Direct positions: Exposures to be reported include the positions towards sovereign counterparts. The exposures to be reported arise from immediate borrower basis (e.g. an exposureof100towardsCountryA,collateralisedwithbondsissuedbyCountryB,isreported onCountryAbutnotonCountryB)anddonotincludeexposurestoothercounterpartswith fullorpartialgovernmentguarantees. Indirectpositions:Exposurestobereportedincludethepositionstowardsothercounterparts (other than sovereign) with sovereign credit risk (i.e. CDS, financial guarantees) in all accounting portfolios (onoff balance sheet). Irrespective of the denomination and/or accounting classification of the positions. The economic substance over the form must be usedascriteriafortheidentificationoftheexposurestobeincludedinthiscolumn.Thisitem does not include exposures to counterparts (other than sovereign) with full or partial governmentguaranteesbycentral,regionalandlocalgovernments). Trading book: Banks should report exposures included in the "Financial assets held for trading"portfolioafteroffsettingthecashshortpositionshavingthesamematurities. 53

54 METHODOLOGYEUWIDESTRESSTEST2014 3.6 Noninterestincomeandexpenses 3.6.1 Overview 182. Theprojectionsofnoninterestincomeandexpensesascoveredinthissubsectionhaveto excludeanyP&Lpositionscoveredintheapproachesforcreditrisk,marketrisk,sovereignrisk, securitisationorcostoffunding.AllitemsfollowIFRSdefinitions.Inparticulartheprojection canonlycoverasubsetofitemsinnetfeeandcommissionincome,otheroperatingincome, administrativeandotherexpensesandotherincome(seetemplate). 183. Banks will have to use their own methodology in projecting noninterest income and expensepaths,i.e.providetheirownperspectiveonthesensitivityoftherespectiveP&Litems tothemacroeconomicscenario.Both,abaselineandanadversecasewillhavetobecovered. Itisrecommendedthattheprojectionsincorporatebothexogenousfactorsandbankspecific characteristics.Banksownprojectionsaresubjecttotherequirementsinsubsections3.6.2. 184. Theprojectionsofnoninterestincomeandexpensesshouldtakeintoaccountthespecific developmentsoftheoriginatingcountry.Givenpotentialdifferencesinthebusinesscycleof thesecountries,therespectiveincomeandexpensestreamsaccruedbythebankinquestion willbeaffected. 185. Projectednoninterestincomerelativetototalassetscannotbelargerthanthe2013value intheadversescenario. 186. Banks that are not able to provide their own projections should apply the following approachforwhichhistoricalaveragesneedtobeadjustedforoneoffeffects: For noninterest net income items apply the average of the respective ratio to total assets over the last three years under the baseline scenario and assume other absolute administrativeandotheroperatingexpensesremainattheir2013level. Fornoninterestnetincomeitemsundertheadversescenariousetheaverageoverthetwo yearswiththesmallestvaluesfortherespectiveratiostototalassetsthatoccurredoverthe lastfiveyearsandassumeotherabsoluteadministrativeandotheroperatingexpensesremain attheir2013level. 187. Banks projections will be subject to a thorough quality assurance analysis and will be judgedagainstrelevantbenchmarks. 3.6.2 Specificrequirementsregardingincomeorexpenseitems 188. Realised gains or losses: No realised gains or losses are expected from the sale financial assetsandliabilitiesnotmeasuredatfairvaluethroughprofitandloss. 54

55 METHODOLOGYEUWIDESTRESSTEST2014 189. Dividends: Dividends received from financial assets (participation and other equity positions,eitherinthetradingorinthebankingbook)shouldbebasedonlevelsasatendof 2013. 190. Exchangedifferencesfrombankingbook:TheeventualimpactintheP&Lduetoexchange rates(takingintoconsideration,whereappropriate,theeffectofhedgingstrategies)mustbe inlinewiththeexpectedevolutionoftheexchangerateinthemacroeconomicscenario. 191. Administrative and other operating expenses: Administrative and other operating expensescannotbelowerthantheir2013value. 192. Impairment on financial and nonfinancial assets Impairments on participations shall be computed in line with the result of the (IFRS) test of impairment. Impairment on residential and commercial real estate will be computed by the application of the same haircuts as appliedonrealestatefundsontheassets. 193. Other income disposals and discontinued operations: Disposals and discontinued operationsarenotexpectedfortheperiodof20142016(staticbalancesheetassumption) subjecttoexceptionsformandatoryrestructuringplansasspecifiedinpara.25. 194. Tax effect and evolution of deferred tax assets: The tax regimes will be treated like regulatory changes. That is, they are as in place at the reference date, with changes only, if agreedbylaw.Deferredtaxcredits,whereapplicable,mayberecognised. 3.7 Operationalrisk 195. Banks are invited to estimate their operational risk P&L impact in accordance with the macroeconomicscenariosandreducetheirprojectedincomerespectively. 196. Capital requirements for operational risk are taken into account in the exercise by computingaproxyofyearonyearchangesinoperatingprofitoftheparticipatinginstitutions (capitalchargeforoperationalriskinpreviousperiod+15%ofyearonyearabsolutechangein operatingprofit),withtheactualcapitalchargeasofyearendof2013actingasafloorshould thecalculationsdescribedaboveleadtoadecreasingcapitalcharge. 55

56 METHODOLOGYEUWIDESTRESSTEST2014 4. Annex:Overviewoftemplate content Periodand Category Template Breakdown Keyinformation scenario COREPexposure Exposure classes RWA FIRB,AIRB,STA Valueadjustmentsand Creditrisk 2013 Nondefaulted, provisions Advancedata defaulted Defaultrates,lossrates, collection Country PD,LGD Highlevelonandoff 2012and BalanceSheet N/A balancesheetitems 2013 Selectedmemoitems COREPCRR/CRDIV capitalelements(full andtransitioned 2013 amounts) 20142016: Capital N/A Capitalratios baselineand EUwidehurdlerates adverse Memoitemconvertible instruments COREPexposure Exposure 2013 classes RWA 20142016: FIRB,AIRB,STA Valueadjustmentsand Creditrisk baselineand Nondefaulted, provisions adverse defaulted Impairmentrates, Country coverageratios Bankingbook EAD 20132016 Tradingbook Securitisation RWA Baseline, Correlationtrading Impairments adverse portfolio Debtinstruments FXproducts 2013 Transparencydata Marketrisk Equities Netfairvalue Worst Commodities scenario Other Residualmaturity Grossvalue 2013 Country Sovereign Netfairvalue After Accounting exposure Haircuts adverse portfolios Valuesafterhaircuts scenario Derivatives,other Creditrisk 2013 Securitisation 20142016: Marketrisk RWA RWA baselineand Operationalrisk adverse Transitionalfloors Other MainP&Lcomponents 2013 Memoinfo:funding, 20142016: EvolutionofP&L N/A hedging,definedbenefit baselineand pensionfunds adverse Restructuring CET1Impact 20132016 N/A scenarios RWAImpact 56

57 METHODOLOGYEUWIDESTRESSTEST2014 Periodand Category Template Breakdown Keyinformation scenario CET1 RWA N/A 3ycumulativelosses 2013 Summary EUwidehurdlerates and2016 Memoinfoabout convertibleinstruments COREPexposure classes Default 2013 FIRB,AIRB,STA Impairment 20142016: CreditRisk Nondefaulted, Provisions baselineand defaulted Coverage adverse Country AssetsbyCOREP exposureclasses Liabilitiesby financingsource Amounts Starting Fixed/floatingrate Yields values2013 Funding Remainingmaturity Effectiveinterestrates 20142016: baselineand Existing/new adverse business Country P&Lcomponents 2013 Memoitemsfunding, 20142016: EvolutionofP&L N/A hedging,definedbenefit baselineand pensionfunds adverse Creditrisk(per regulatory approach) 2013 Securitisation 20142016: RWAGeneral (banking/trading RWA baselineand Calculationsupport Evolution book) adverse andvalidationdata Tradingbook Operationalrisk Transitionalfloors 2013 COREPexposure 20142016: RWASTAFloor classes RWA baselineand CreditRisk adverse RWA 2013 COREPexposure 20142016: RWAIRBFloor classes baselineand CreditRisk RegulatoryEL adverse Provisions 2013 20142016: RWATrading RWAcomponents RWAbeforeandafter baselineand Book floor adverse Nettradingincome 20092013 MarketRisk N/A Lossescomparedto Baseline, simplified previousyears adverse Grossexposure Baseline, Detailedlistofrisk MarketRisk Fairvalue adverse+4 factors comprehensive P&Lsensitivity historical EstimatedP&L scenarios 57

58 METHODOLOGYEUWIDESTRESSTEST2014 Periodand Category Template Breakdown Keyinformation scenario Exposure Accountingportfolio RWA 20132016 Securitisation Regulatory Impairments Baseline, Summary approach Fairvaluechangesfor adverse AFSandFVOportfolios Residualmaturity Country Grossvalue 2013 Sovereign Accounting Netfairvalue After exposure portfoliossubjectto Haircuts adverse shocks Valuesafterhaircuts scenario Derivatives,other COREPCRR/CRDIV capitalelements(full andtransitioned 2013 amounts) 20142016: Capital N/A Capitalratios baselineand EUwidehurdlerates adverse Memoinfoabout convertibleinstruments Restructuring CET1Impact 20132016 N/A scenarios RWAImpact CreditRisk(6 Itemsneededto Starting COREPexposure templates:one sequentiallyestimate values2013 classes perprojected default,impairmentand 20142016: TOTAL,IRB,STA yearforeach RWAaccordingtothe baselineand Country scenario) methodology adverse Exposure 2013 Securitisation Riskprofile Impairmentandother 20142016: BankingBook (low/medium/high) adjustments baselineand STA Ratingcategory RWA adverse Exposure 2013 Securitisation Riskprofile Impairmentandother 20142016: TradingBook (low/medium/high) adjustments baselineand STA Ratingcategory RWA adverse Riskprofile Calculation Securitisation (low/medium/high) EAD 20132016 supportand BankingBook Ratingcategory RWA Baseline, validationdata IRB Granular/non Impairments adverse (additional) granular Riskprofile (low/medium/high) EAD 20132016 Securitisation Ratingcategory RWA Baseline, TradingBookIRB Granular/non Impairments adverse granular Allcounterparties Baseline, CentralBanksand adverse+4 MarketRiskCVA CCP FairValue historical UnderCSA scenarios Baseline, AFSand FairValue Accountingportfolio adverse+4 designatedat Estimatedprofit/losses Products historical fairvalueassets scenarios 58

59 METHODOLOGYEUWIDESTRESSTEST2014 5. Annex:EUwidestresstestsampleof banks Country BankName AT BAWAGP.S.K.BankfrArbeitundWirtschaftundsterreichischePostsparkasseAG AT ErsteGroupBankAG AT RaiffeisenlandesbankObersterreichAG AT RaiffeisenlandesbankNiedersterreichWienAG AT RaiffeisenZentralbanksterreichAG AT sterreichischeVolksbankenAGwithcreditinstitutionsaffiliatedaccordingtoArticle10oftheCRR BE AXABankEuropeSA BE BelfiusBanqueSA BE DexiaNV* BE Investar(HoldingofArgentaBankenVerzekeringsgroep) BE KBCGroupNV CY BankofCyprusPublicCompanyLtd CY CooperativeCentralBankLtd CY HellenicBankPublicCompanyLtd DE AarealBankAG DE BayerischeLandesbank DE CommerzbankAG DE DekaBankDeutscheGirozentrale DE DeutscheApothekerundrztebankeG DE DeutscheBankAG DE DZBankAGDeutscheZentralGenossenschaftsbank DE HASPAFinanzholding DE HSHNordbankAG DE HypoRealEstateHoldingAG DE IKBDeutscheIndustriebankAG DE KfWIPEXBankGmbH DE LandesbankBadenWrttemberg DE LandesbankBerlinHoldingAG DE LandesbankHessenThringenGirozentrale DE LandeskreditbankBadenWrttembergFrderbank DE LandwirtschaftlicheRentenbank DE MnchenerHypothekenbankeG DE NorddeutscheLandesbankGirozentrale DE NRW.Bank DE VolkswagenFinancialServicesAG DE WGZBankAGWestdeutscheGenossenschaftsZentralbank Wstenrot&WrttembergischeAG(W&WAG)(HoldingofWstenrotBankAGPfandbriefbankand DE WstenrotBausparkasseAG) 59

60 METHODOLOGYEUWIDESTRESSTEST2014 Country BankName DK DanskeBank DK Nykredit DK JyskeBank DK Sydbank ES BancoBilbaoVizcayaArgentaria,S.A. ES BancodeSabadell,S.A. ES BancoFinancieroydeAhorros,S.A. ES BancoMareNostrum,S.A. ES BancoPopularEspaol,S.A. ES BancoSantander,S.A. ES Bankinter,S.A. ES CajadeAhorrosyM.P.deZaragoza,AragnyRioja ES CajadeAhorrosyPensionesdeBarcelona ES CajaEspaadeInversiones,SalamancaySoria,CAMP ES CajasRuralesUnidas,SociedadCooperativadeCrdito ES CatalunyaBanc,S.A. ES Kutxabank,S.A. ES Liberbank,S.A. ES MPCARonda,Cdiz,Almera,Mlaga,AntequerayJan ES NCGBanco,S.A. FI OPPohjolaGroup FR BanquePSAFinance FR BNPParibas FR C.R.H.CaissedeRefinancementdelHabitat FR GroupeBPCE FR GroupeCrditAgricole FR GroupeCrditMutuel FR LaBanquePostale FR BPIFrance(BanquePubliquedInvestissement) FR RCIBanque FR SocitdeFinancementLocal FR SocitGnrale GR AlphaBank,S.A. GR EurobankErgasias,S.A. GR NationalBankofGreece,S.A. GR PiraeusBank,S.A. HU OTPBankLtd IE AlliedIrishBanksplc IE Permanenttsbplc. IE TheGovernorandCompanyoftheBankofIreland IT BancaCarigeS.P.A.CassadiRisparmiodiGenovaeImperia IT BancaMontedeiPaschidiSienaS.p.A. IT BancaPiccoloCreditoValtellinese,SocietCooperativa 60

61 METHODOLOGYEUWIDESTRESSTEST2014 Country BankName IT BancaPopolareDell'EmiliaRomagnaSocietCooperativa IT BancaPopolareDiMilanoSocietCooperativaAResponsabilitLimitata IT BancaPopolarediSondrio,SocietCooperativaperAzioni IT BancaPopolarediVicenzaSocietCooperativaperAzioni IT BancoPopolareSocietCooperativa IT CreditoEmilianoS.p.A. IT IccreaHoldingS.p.A IT IntesaSanpaoloS.p.A. IT MediobancaBancadiCreditoFinanziarioS.p.A. IT UniCreditS.p.A. IT UnioneDiBancheItalianeSocietCooperativaPerAzioni IT VenetoBancaS.C.P.A. LU BanqueetCaissed'Epargnedel'Etat,Luxembourg LU PrecisionCapitalS.A.(HoldingofBanqueInternationaleLuxembourgandKBLEuropeanPrivate BankersS.A.) LV ABLVBank,AS MT BankofVallettaplc NL ABNAMROBankN.V. NL BankNederlandseGemeentenN.V. NL CoperatieveCentraleRaiffeisenBoerenleenbankB.A. NL INGBankN.V. NL NederlandseWaterschapsbankN.V. NL SNSBankN.V. NO DNBBankASA PL POWSZECHNAKASAOSZCZEDNOSCIBANKPOLSKIS.A.(PKOBANKPOLSKI) PL BANKHANDLOWYWWARSZAWIESA PL BANKBPHSA PL BANKOCHRONYSRODOWISKASA PL GETINNOBLEBANKSA PL ALIORBANKSA PT BancoBPI,SA PT BancoComercialPortugus,SA PT CaixaGeraldeDepsitos,SA PT EspritoSantoFinancialGroup,SA SE NordeaBankAB(publ) SE SkandinaviskaEnskildaBankenAB(publ)(SEB) SE SvenskaHandelsbankenAB(publ) SE SwedbankAB(publ) SI NovaKreditnaBankaMaribord.d. SI NovaLjubljanskabankad.d. SI SIDSlovenskaizvoznainrazvojnabanka,d.d. UK Barclaysplc UK HSBCHoldingsplc UK LloydsBankingGroupplc 61

62 METHODOLOGYEUWIDESTRESSTEST2014 Country BankName UK RoyalBankofScotlandGroupplc *Theassessmentmethodologyforthisgroupwilldulytakeintoaccountitsspecificsituation,andin particularthefactthatanextensiveassessmentofitsfinancialpositionandriskprofilehasalreadybeen carriedoutintheframeworkoftheplaninitiatedinOctober2011andapprovedbytheEuropean Commissionon28December2012. 62

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