The purpose of scenario testing is to demonstrate the effectiveness of the recovery plan in a range of different types of stress. In particular, scenario testing should help evaluate the adequacy of arrangements in respect of recovery plan indicators, governance and recovery options.
8.2
The recovery plan must include at least:
8.2.1
An Idiosyncratic Stress Scenario;
8.2.2
A System-Wide Stress Scenario; and
8.2.3
A combined scenario, combining elements of an Idiosyncratic Stress Scenario with elements of a System-Wide Stress Scenario.
8.3
Financial Institutions must take into account how the scenario, including actions of other Financial Institutions within that scenario, may impact the effectiveness and feasibility of certain recovery options, and provide an adjusted estimate of the recovery option impact specific to the scenario, in addition to the non-adjusted impact referred to in Article 7.5.4 of this regulation.
8.4
Scenario testing for recovery planning should be aligned with other stress tests conducted by Financial Institutions as part of their capital and liquidity planning.
8.5
The recovery plan must identify a point of near failure for the Financial Institution and each scenario must be sufficiently severe to cause the Financial Institution to reach it. Financial Institutions are encouraged to use reverse stress testing as a starting point for the design of the recovery plan scenarios.
6-8
Each scenario must show the evolution of recovery indicators, including the points at which triggers are breached, across the whole scenario period, both in the absence of implementing the recovery plan and with the impact of implementing the chosen recovery options necessary to restore the Financial Institution’s financial position.
8.7
The scenario impact of the chosen recovery plan options must be set at a conservative point estimate instead of a range.
8.8
Each scenario must include an explanation of the choice of recovery plan options, sequencing and point of implementation during the recovery timeline.