KARACHI: The State Bank of Pakistan (SBP), in pursuance of its goal to further strengthen the risk management capacity of banks, DFIs and MFBs, has revised the existing Guidelines on Stress Testing (ST) to align with the changing local dynamics and international best practices.
In terms of coverage, besides Banks/DFIs, Islamic Banks/ Islamic Banking Branches (IBs/IBBs) and Micro-Finance Banks (MFBs) are now being required to conduct Stress Testing exercise. The global financial crisis of 2008 brought many changes on the regulatory and supervisory landscape and further highlighted the need for stress testing. Accordingly, SBP published an enhanced set of guidelines in 2012.
In view of the recent developments as well as the insights gained from the application of existing framework, the SBP has prepared a revised suite of ST guidelines to strengthen the existing stress testing framework in line with new domestic and global developments.
The guidelines have been divided into five sections. Section 1 covers the scope and coverage of the ST framework; Section 2 details the elements of the ST framework. Section 3 contains the guidelines for Scenario Analysis, also known as Macro Stress Testing (MST), to be conducted by the sample of D-SIBs. Section 4 contains the minimum set of predefined shocks to be used for Sensitivity Analysis of banks, DFIs, IBs/IBBs and MFBs. Finally, Section 5 provides instructions on reporting requirements.
According to a SBP circular, the scope of revised Stress Testing guidelines has been broadened to incorporate guidance on Scenario Analysis, aka Macro-stress Testing (MST), and Reverse Stress Testing (RST) besides the Sensitivity Analysis (SA) with enhanced number of shock scenarios.
As per previous guidelines, the sample of Domestic Systemically Important Banks (D-SIBs) are required to conduct MST and RST and submit it as a part of their Internal Capital Adequacy Assessment Process (ICAAP) document. Moreover, the data submission requirements have been rationalized and financial institutions are now required to furnish data on a minimal number of variables.
Accordingly, the some revised reporting arrangements has been added into the guidelines. The sample of D-SIBs, will incorporate the MST and RST results based on data as of December 31 in the relevant section(s) of the ICAAP document and submit the document to SBP on annual basis by May 31 of the following year. The first report based on end-CY20 data, will, however, be submitted by June 30, 2021.
While Banks and DFIs will continue to conduct quarterly SA exercise on the shocks under revised guidelines, they will not be required to submit the quarterly results to SBP effective from fourth quarter of CY20.
As per revised guidelines, IBs/IBBs and MFBs are required to submit the results of quarterly SA exercise on the shocks under sections 4.2 and 4.3, respectively, of the guidelines, for four quarters.
The banks, DFIs and IBs/IBBs will be required to submit quarterly dataset for SBP's in-house stress testing as per revised templates. The results of quarterly SA exercise and the dataset will be submitted within 15 working days of the end of the quarter, with first such submission based on Q4CY20 statistics.
Entire information will be submitted through SBP's Data Acquisition Portal (DAP) as per the prescribed timelines.
The SBP, as a part of its supervisory process, will regularly conduct its own in-house ST exercises and, if required, may engage with banks/DFIs/IBs/MFBs for any risk mitigation measures/contingency plans based on the outcome of the exercises.
The SBP inspection teams may also review the process of stress testing on a test check basis.
Copyright Business Recorder, 2020
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