Palestine Monetary Authority

PALESTINE MONETARY AUTHORITY

Instructions No. (10) of 2014

Regarding Stress Testing

Pursuant to the provisions of Legislative Decree No. (9) of 2010 concerning Banks, particularly Articles (51), (53), and (72) thereof, and in light of the requirements of public interest, and the powers delegated to us, we have issued the following Instructions:

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Article (1)

Definitions

• Authority: Palestine Monetary Authority.
• Bank: As defined in Legislative Decree No. (9) of 2010 concerning Banks and its amendments.
• Exposure: As defined in Legislative Decree No. (9) of 2010 concerning Banks and its amendments.
• Portfolio: The credit or investment portfolio held by the Bank.
• Stress Testing: Technical methods used to identify vulnerabilities and assess the Bank's ability to withstand exposure to severe and rare hypothetical shocks.
• Special Provisions: Loan impairment provisions.
• Basis Point: One part out of ten thousand parts (0.0001).
• Liquid Assets: Cash balances held by the Bank, the Bank's balances with the Authority and other banks, and securities easily and quickly convertible to cash without significant losses.
• Short-term Liabilities: Liabilities maturing within one month.
• Net Portfolio: Total portfolio minus accrued interest and existing provisions.
• Financial Year: A fixed period starting on January 1st and ending on December 31st of each year.

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Article (2)

Scope of Application

The provisions of these Instructions shall apply to all banks licensed to operate by the Authority.

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Article (3)

Objective

The provisions of these Instructions aim to enhance the stability of the banking system by mitigating the effects of potential risks.

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Article (4)

Bank Obligations

The Bank shall undertake the following:

1. Establish clear and comprehensive operating procedures and policies ensuring the execution, documentation, monitoring, and remediation of stress testing results.
2. Provide the necessary infrastructure to conduct stress testing, taking into account the diversity of different scenarios.
3. Periodically and systematically evaluate and update the stress testing program, taking into account the scale of operations and risks.
4. Ensure that stress testing covers all risks associated with the Bank's various business areas, whether inside or outside the financial center, including operational risks.
5. Take all necessary measures to mitigate and address risks in accordance with stress testing results.
6. The Board of Directors of local banks, and the General Management of foreign banks, shall review stress testing results and approve necessary policies and procedures to address risks based on these test results.
7. Conduct any additional stress tests as requested by the Authority.

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Article (5)

Types of Stress Testing

Stress testing shall be divided into the following:

1. Single-variable stress test every half financial year as stipulated in Annex (1), with results submitted to the Authority within a maximum of (30) thirty days from the date of the test.
2. Multi-variable stress test every half financial year as stipulated in Annex (1), with results submitted to the Authority within a maximum of (30) thirty days from the date of the test.

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Article (6)

Stress Testing Conditions

The following conditions shall apply to stress testing:

1. The test shall cover a future period as stipulated in Annex (1).
2. Test data regarding the balance sheet shall remain fixed as of the date of the test.
3. All collateral, including cash collateral securing facilities, shall be excluded, and increases in special provisions shall be calculated based on the net portfolio.
4. Tests shall include on-balance sheet and off-balance sheet items, with off-balance sheet item values multiplied by the appropriate conversion factor as stipulated in Annex (2).

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Article (7)

Stress Testing Shocks

1. When conducting a single-variable stress test, the Bank shall consider the following shocks as stipulated in Annex (1):

   a. Increase special provisions to cover 100% of classified debts.

   b. Increase special provisions by 25% and 35% of the value of government-based credit.

   c. Increase special provisions by 25% and 35% of the net credit based on public sector employees.

   d. Decrease in stock prices invested in by the Bank by 15% and 30%, regardless of investment location.

   e. Decrease in prices of bonds and treasury instruments issued by foreign governments and central banks by 10%, regardless of issuance currency.

   f. Decrease in non-government bond prices by 15% and 30%, regardless of investment location.

   g. Impairment of a financial institution holding balances with the Bank exceeding 10% of its total deployed balances outside Palestine.

   h. Decrease or increase in the US dollar exchange rate against other currencies by 15%.

   i. Change in the interest rate on the dollar currency by 200 basis points decrease or increase.

   j. Increase special provisions by 100% of the net value of credit based on the largest three and five borrowers, excluding government facilities.

   k. Increase special provisions by 25% and 50% of the net value of credit specific to the housing and mortgage sector, trade sector, services sector, and consumer loans sector.

2. The Bank shall state the impact of the shocks stipulated in paragraph (1) of this Article on each of the following:

   a. Profits or losses.

   b. The ratio of Tier 1 capital to risk-weighted assets.

3. The Bank shall determine the impact of each of the following hypothetical shocks on its ability to meet its short-term liabilities at maturity:

   a. Customers withdrawing 20% of their deposits during June and December of each financial year.

   b. Decrease in liquid assets by 25%.

   c. Withdrawal of deposits by the largest three depositors, and five depositors, including government deposits.

4. When conducting a multi-variable stress test, the Bank shall consider the following shocks as stipulated in Annex (1), and demonstrate the scenarios listed below on the Tier 1 capital to risk-weighted assets ratio as stipulated in Article (5/7) paragraph (3) of Instructions (2009/7) regarding minimum licensed capital:

   a. Political shocks according to the following table:

   Scenario No.:	(2.a.4)	(1.a.4)	Scenario
   	20%	10%	Increase special provisions from the value of government-based credit.
   	15%	5%	Increase special provisions from the net credit based on public sector employees.
   	10%	5%	Increase special provisions from the net credit based on the private sector to float government projects and activities.
   	5%	3%	Increase special provisions from the net credit based on the private sector, excluding credit based on public sector employees and credit to the private sector to float government projects and activities.
   	25%	15%	Decrease in stock and bond prices issued in Palestine.

   b. Economic shocks according to the following table:

   Scenario No.:	(2.b.4)	(1.b.4)	Scenario
   	15%	5%	Increase special provisions from the net credit based on the private sector, excluding public sector employees.
   	5%	3%	Increase special provisions from the net credit based on public sector employees.
   	20%	10%	Decrease in stock and bond prices issued outside Palestine.
   	20%	10%	Decrease in stock and bond prices issued in Palestine.
   			Interest rates on the three major currencies: ILS, US$, JOD
   Basis Point	Basis Point
   50	25		Reduction in interest rate on advances and loans.
   50	25		Reduction in interest rate on current account debits.
   25	25		Increase in interest rate on savings accounts.
   25	25		Increase in interest rate on time deposits.

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Article (8)

Annual Data

The Bank shall provide the Authority with all data stipulated in Annex (3) within a maximum of (30) thirty days from the end of the financial year.

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Article (9)

Exchange of Results and Data

The Bank shall submit stress testing results and all data stipulated in these Instructions through the file exchange system approved by the Authority, after approval by the General Manager or Regional Director.

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Article (10)

Penalties

Any person violating the provisions of these Instructions shall be penalized in accordance with Article (54) paragraph (2) of Legislative Decree No. (9) of 2010 concerning Banks.

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Article (11)

Implementation and Enactment

The provisions of these Instructions shall apply as of the end of the financial year for 2014.

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Article (12)

Repeal

Instructions for Stress Test Examination No. (2011/05) issued on 07/09/2011 are hereby repealed.

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Issued in Ramallah on: 05/11/2014 AD
Corresponding to: 12 Muharram 1436 AH

Signature: Supervision and Inspection Department
Palestine Monetary Authority

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