1. Stress testing is a key risk management tool within financial institutions. The Capital Requirement Directive (CRD), and, in particular, supervisory review under Pillar 2 requires institutions to take a forward-looking view in their risk management, strategic planning and capital planning [Please refer to ICAAP 8 of the CEBS Guidelines on the Application of the Supervisory Review Process under Pillar 2 (GL03) published on 25 January 2006. (see: http://www.cebs.org/getdoc/5b3ff026-4232-4644-b593-d652fa6ed1ec/GL10.aspx)]. One of the tools institutions can use to facilitate this forward-looking perspective in risk management is stress testing. CEBS has addressed stress testing in its Guidelines on technical aspects of stress testing under the supervisory review process that were published on 14 December 2006 [Please see http://www.c-ebs.org/getdoc/e68d361e-eb02-4e28-baf80e77efe5728e/GL03stresstesting.aspx] and which are being replaced by the current revision.

2. Since that time there have been a number of developments in stress testing with regard to its methodologies and usage. In particular, the financial crisis of 2008-2009 highlighted significant lessons in relation to stress testing practices. In many instances supervisors observed that stress testing did not appear to be sufficiently integrated into institutions' risk management frameworks or senior management decision-making. In general, where it was used, scenarios were not sufficiently severe nor was there appropriate consideration given to the potential crystallisation of confluences of events. In other instances, supervisors observed that risk concentrations and feedback effects were not considered in a meaningful fashion.