Recommendations from the European Systemic Risk Board (ESRB) for improved stress testing of non-bank entities reference the “common methodology” EIOPA developed for its stress tests of occupational pension funds, according to a spokesperson at the latter.

The ESRB recently said regulatory stress tests for pension funds, asset managers, central counterparties and other non-bank entities “need to be developed further and carried out in a more holistic fashion, modelling the transmission of shocks across sectors”.

It made the comments in a strategy paper setting out its vision for improving macroprudential policy addressing financial stability risks that originate “beyond banks”.

The paper sets out short-term policy options and a long-term agenda.

Mario Draghi, president of the European Central Bank and chair of the ESRB, said: “In recent years, financial sector growth has primarily occurred outside the banking system. 

“This development is expected to continue, supported by the move to a European Capital Markets Union. The growth of finance beyond banking reflects new opportunities but may also bring financial stability risks.”

The European Insurance and Occupational Pensions Authority (EIOPA) carried out its first EU-wide stress tests of occupational pension funds last year, having already done such exercises for insurers; the results were announced in January 2016.

A spokesperson at EIOPA told IPE the authority developed its “common methodology” to be able to take a more holistic view of potential deficits in pension funds across Europe, with direct comparisons made difficult by “the diverse and fragmented regulatory system in Europe”.

“This methodology,” the spokesperson added, “is also referenced in the ESRB report as the preferred way forward for future stress tests – as opposed to running exercises based on the national regimes.”

As part of the European System for Financial Stability (ESFS), EIOPA cooperates closely with the ESRB, which contributed to the development of EIOPA’s pension fund stress tests.

EIOPA had input into the ESRB’s strategy paper, and the spokesperson said EIOPA “welcomes the macroprudential discussion beyond banking and, in particular, for the insurance and occupational pensions sectors”.

“These two sectors represent significant differences when compared with banking,” added the spokesperson, “both on the systemic relevance and on the transmission channels of potential risks to the system but also on the possible macroprudential approach to deal with them.”

Many in the pensions industry were critical of the so-called common methodology, seeing it as a re-named version of the Holistic Balance Sheet and linked to since-abandoned plans to introduce harmonised solvency rules.

EIOPA is planning to carry out further stress tests of occupational pension funds in 2017.

In February, the ESRB suggested future stress tests should incorporate carbon asset risk.

The ESRB’s recent strategy paper also states that the monitoring of systemic risk would benefit from aggregate and sector-specific indicators, which could enable policymakers to focus on sectors that contribute most to systemic risk.

“In addition to banking,” it says, “it is likely that market-based finance (including open-ended investment funds), insurers, pension funds and financial market infrastructures such as CCPs will make a relevant contribution to overall systemic risk.

“Such an approach could allow monitoring of risk shifting to or from different sectors – for example, as the size of a sector grows.

“Such risk indicators could be complemented with sector-based indicators of resilience, which could be linked to a resilience standard.”

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