PART 2 EBA 2027 Stress Test: Experience is the key to success
This is Part 2 of our EBA 2027 Stress Test series where we will take a closer look at the practical challenges that may determine the success of the exercise from data quality and resource constraints to the ability to explain and defend methodological choices.
Three challenges that will determine success throughout the stress test exercise
- Data quality and traceability
The quality of the stress-test output depends on the quality of the underlying data and on the bank’s ability to demonstrate how that data has been sourced, transformed and used. This becomes particularly important when stress-test data needs to be reconciled with regulatory reporting or other internal sources. Any unexplained difference can quickly become a supervisory question.
- Resources as the stress test is a bank-wide exercise
An EBA stress test cannot be managed by a single risk function. Credit risk, market risk, finance, treasury, capital management, modelling, regulatory reporting, data, and IT all play important roles. The challenge is not only having sufficient resources but coordinating the right expertise at the right time.
The workload also extends well beyond the initial submission. Banks must manage quality assurance, supervisory questions, and requests for clarification, often within tight deadlines and across multiple functions. Effective resource planning therefore needs to cover the entire exercise, including the subsequent supervisory dialogue.
- Methodology and explainability
The third challenge might be the most important one.
A stress test is ultimately about numbers. But from a supervisory perspective, the numbers are only the starting point. During the exercise, supervisors may challenge modelling approaches, assumptions, parameter developments, portfolio behavior, data choices or methodological deviations. The bank needs to be able to explain not only what the result is, but why it is the result. This is where experience becomes particularly valuable.
Even the most sophisticated models and strongest technical capabilities will not guarantee success if a bank cannot clearly articulate and justify its methodological choices. Exercise requires more than technical modelling expertise. It calls for a combination of strong business understanding, regulatory knowledge and the ability to communicate clearly and convincingly with supervisors.
The hidden key: explanatory note
This is why we consider an explanatory note one of the most important elements of the stress-test process. It is tempting to see an explanatory note as just another documentation that is produced alongside the templates, however, a strong explanatory note provides a bridge between the bank’s numbers and the supervisor’s understanding of how those numbers were produced.
It should explain material methodological choices, assumptions, deviations and developments in a way that allows the supervisor to understand the result without having to reconstruct the bank’s reasoning independently. The quality of this documentation can materially influence how efficiently the supervisory dialogue develops. A good explanatory note answers the supervisor’s question before it is asked, and it should be part of the stress-test strategy from the beginning.
Experience is the key to success
The 2027 EBA Stress Test will undoubtedly bring new challenges. Climate risk will require new data, new analytical capabilities and new ways of assessing the impact of transition and physical risks. The reduction in data requirements will change how banks organize their stress-test processes. And the closer integration with supervisory reporting will place continued emphasis on data quality and consistency.
But the fundamental challenge remains familiar. Banks need to be able to produce robust results, within very tight timelines, and explain and defend the assumptions and methodologies behind them. The ability to respond quickly, consistently, and convincingly to supervisory questions can be just as important as the quality of the initial submission.
This is where experience matters.