Regulatory Alerts2018-10-08
Instructions dated October 4, 2018 regarding managing return rate risks for positions for non-trading purposes
The Basel Committee on Banking Supervision (BCBS) has released a new guide that provides banks with comprehensive guidance on how to design, implement, and manage their stress testing frameworks. The publication of this document is an important step forward in further enhancing the effectiveness and consistency of global bank stress-testing activities. The Basel III reform package introduced a number of measures aimed at strengthening banks' ability to withstand financial shocks through enhanced stress testing. It established specific expectations for banks regarding their internal approaches to stress testing, including minimum standards for design, frequency, coverage, and disclosure requirements. In addition, it outlined the supervisory frameworks that should be applied by national authorities responsible for overseeing banks' compliance with these requirements. This new guide provides a more detailed explanation of those expectations, presenting them in the form of seven key principles: 1. **Purpose and Objective:** The primary purpose of a stress-testing framework is to assess the resilience of a bank's balance sheet against different economic scenarios. 2. **Scope and Coverage:** A robust stress-testing framework should cover all material risks that could have significant financial implications for a bank, such as credit risk, market risk, operational risk, and liquidity risk. 3. **Methodology and Design:** The design of the stress-testing framework should be based on sound methodologies that reflect the main risks faced by banks and their potential impact on the bank's balance sheet. 4. **Frequency and Timeliness:** Stress tests should be conducted regularly, with the frequency depending on the bank's risk profile and the severity of the economic scenarios being tested. 5. **Quality and Quantity of Data:** The stress-testing framework must rely on high-quality, comprehensive data that accurately reflect the current state of the bank's balance sheet and its exposure to various risks. 6. **Integration with Supervisory Expectations:** Banks should ensure that their stress-testing framework is closely aligned with the expectations set out by supervisors, including those relating to the design, frequency, coverage, and disclosure requirements of the tests. 7. **Ongoing Assessment and Review:** Banks should regularly review and assess the effectiveness of their stress-testing framework, making any necessary adjustments or improvements to ensure its continued relevance and usefulness. By adhering to these seven principles, banks can ensure that their stress-testing frameworks are effective, consistent, and aligned with best international practices. This will help them to better identify and manage the risks they face, while also strengthening confidence in the stability and resilience of the global banking system as a whole.