Applicable to all institutions

1. All institutions exposed to credit risk as a material risk are subject to credit risk stress testing. An important aspect of testing is the method applied for capital requirement calculations as there are specific requirements for IRB institutions [According to Annex XI, paragraph 1a of the CRD, results of the stress tests performed by the institutions applying IRB is one of particular focus for SREP. Annex VII Part 4 of the CRD, Section 1.8, paragraphs 40 to 42 and paragraph 114.]. Credit risk concentration and credit risk parameters are subject to stress testing. Credit risk concentration stress tests play an important role for Pillar 2 risk. For IRB institutions relevant parameters are PD for all IRB institutions and LGD and CF, if own estimates of LGD and CF are used for calculating the capital requirement.

2. Often institutions using the standardised method for calculation of credit risk capital requirements are exposed to credit risk as a material risk and the requirements for stress testing apply.

3. Stress tests may have to assess future credit losses and changes in capital requirements due to, for example, changes in credit quality and collateral values.

4. For credit losses, the estimation of future losses in stress tests may in some cases rely on institutions' credit risk parameters although these would not be applied in the calculation of capital requirements. Credit risk model approaches for losses and approaches which challenge historical relations and data are encouraged.