BANCO NACIONAL DE ANGOLA

Governor's Office

INSTRUCTION NO. 02/17

of January 30

SUBJECT: STRESS TESTS

Given the need to regulate the implementation of stress tests, in accordance with guidelines issued by international reference bodies, in order to support effective and efficient risk management, as well as to safeguard the solvency and liquidity of Financial Institutions operating within the Angolan Financial System, under the provisions of item c) of paragraph 3 of Article 10 of Notice No. 02/2013, of April 19, on Internal Control System, and of paragraph 10 of Article 7 of Notice No. 07/2016, of June 22, on Risk Governance;

Under the combined provisions of items d) and f) of Article 21 and item d) of paragraph 1 of Article 51, both of Law No. 16/10, of July 15, Law of the Bank of Angola, and of Article 90 of Law No. 12/15, of June 17 – Law of the Basics of Financial Institutions.

I DETERMINE:

1. Object

This Instruction establishes the obligation to conduct stress tests, namely the risks to be considered, the typology and periodicity, the methodologies, and the reporting of information.

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2. Scope

This Instruction applies to Banking Financial Institutions, under the supervision of the Bank of Angola, under the terms and conditions provided for in the Law of the Basics of Financial Institutions, hereinafter abbreviated as Institutions.

3. Definitions

Without prejudice to the definitions established in the Law of the Basics of Financial Institutions, for the purposes of this Instruction, the following are understood:

3.1 Scenario Analysis:

evaluations of the joint impact of various risk factors that affect the financial conditions of the institution.

3.2 Sensitivity Analysis:

evaluations of the impact resulting from the variation of a single risk factor on the financial conditions of the institution.

3.3 Parent Company:

a legal entity that exercises a relationship of control over another legal entity, designated as a subsidiary, when one of the following situations occurs:

a) Institutions authorized by the Bank of Angola;

b) Shareholding management companies subject to the supervision of the Bank of Angola under the provisions of the Law of the Basics of Financial Institutions.

3.4 Risk Factor:

an aspect or characteristic, notably of financial products and markets, of the participants in the business relationship, and of the processes in force within institutions, which influence risk.

3.5 Interaction and Second-Order Effects of the System (Feedback Effects):

effects stemming from the propagation of risk, notably the propagation from one bank to another, within the same financial system and from the financial system to the real economy.

3.6 Subsidiary:

a legal entity over which another legal entity, designated as a parent company, is in a relationship of control, considering that the subsidiary of a subsidiary is also a subsidiary of the parent company from which both depend.

3.7 Financial Group:

a set of resident and non-resident companies possessing the nature of Banking and Non-Banking Financial Institutions, with the exception of financial institutions linked to insurance and social security activities, in which there is a relationship of control by a parent company supervised by the Bank of Angola over the other companies comprising it.

3.8 Administrative Body:

a person or group of people, elected by partners or shareholders, tasked with representing the company, deliberating on all matters, and performing all acts for the realization of its corporate object. It includes, notably, the managers of limited liability companies and the members of the board of directors provided for in the Commercial Companies Law.

3.9 Risk:

the possibility of a future event occurring with a negative impact on the net worth of Institutions, considering, notably, the following categories:

a) Credit Risk: stemming from the default of financial commitments contractually established, by a borrower or a counterparty in operations;

b) Liquidity Risk: stemming from the institution's inability to meet its responsibilities when they become due;

c) Market Risk: stemming from movements in the prices of bonds, shares, or commodities and exchange rate and interest rate risks:

i. Exchange Rate Risk: stemming from movements in exchange rates resulting from exchange positions originated by the existence of financial instruments denominated in different currencies;

ii. Interest Rate Risk: stemming from movements in interest rates resulting from mismatches in amount, maturities, or interest rate reset periods observed in financial instruments with interest to be received and paid;

d) Operational Risk: stemming from the inadequacy of internal processes, people, or systems, the possibility of occurrence of internal and external fraud, as well as external events. It includes information systems and compliance risk:

i. Compliance Risk: stemming from violations or non-compliance with laws, rules, regulations, contracts, prescribed practices, or ethical standards;

ii. Information Systems Risk: stemming from the inadequacy of information technologies in terms of processing, integrity, control, availability, and continuity, resulting from inadequate strategies or uses;

e) Reputational Risk: stemming from the adverse perception of the image of Financial Institutions by clients, counterparties, shareholders, investors, supervisors, and the general public.

3.10 Specific Risk:

risk of a variation in the price of the instrument due to factors associated with its issuer.

3.11 General Risk:

risk of a variation in the price of the instrument due to a global movement in the market.

3.12 Stress Tests:

a risk management technique aimed at evaluating the potential effects on the financial conditions of an institution, resulting from changes in risk factors or stress scenarios based on exceptional, more plausible events.

3.13 Reverse Stress Test:

a technique consisting of identifying critical points in the financial situation of the institution that compromise the viability or sustainability of its business model, and subsequently evaluating the severity level of the scenario and/or shocks on risk factors that lead to reaching said critical points.

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4. Responsibilities of the Administrative Body

4.1

The administrative body is responsible for the definition, formalization, and implementation of stress tests in the institution's risk management, as provided for in the Notice on Risk Governance.

4.2

Without prejudice to the provisions of the previous point, the administrative body may delegate functional competencies, within the scope of stress tests, to organizational structures it deems relevant, under the provisions of Article 12 of Notice No. 01/2013, of April 19, on Corporate Governance.

For the purposes of the previous point, the type of stress tests performed, their respective hypotheses, criteria, assumptions, and results, the specific vulnerabilities detected, and the management actions recommended must be reported regularly to the administrative body.

5. Objectives

Institutions must conduct stress tests appropriate to their size, systemic importance, nature, and level of complexity of the activity developed, with the following objectives:

a) Identify specific vulnerabilities to which they are subject in their activity;

b) Establish a set of management actions based on the identified vulnerabilities, in accordance with the provisions of paragraph 10 of this Instruction;

c) Ensure that the level of own funds is sufficient relative to the risks to which the institution is exposed, considering credit, market, and operational risks, as provided for in the Notice on Regulatory Own Funds;

d) Support the process of capital and liquidity planning and management;

e) Provide support for the evaluation of strategic options.

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6. General Principles

6.1

In the definition and implementation of stress tests, the nature, size, and level of complexity of Institutions, the risks inherent to the activities they develop, and the risk management policy must be taken into consideration.

6.2

Stress tests must be conducted on a consolidated basis or on an individual basis in the case of Institutions not included in the consolidation perimeter of a financial group, for supervisory purposes, as provided for in Notice No. 03/2013, of April 22, on Consolidated Supervision.

6.3

All stress tests conducted must be documented appropriately and completely, including types of stress tests and their respective objectives, frequency of implementation, responsibility and reporting lines, methodological details, results, main vulnerabilities identified, and the set of management actions planned and their feasibility in stress situations.

6.4

In conducting stress tests, institutions must follow a multi-level approach:

a) of credit, trading, and other portfolios,

b) of specific risk types; and,

c) of the Institution as a whole, depending on its nature, size, and complexity.

6.5

Without prejudice to the provisions of this Instruction, the Bank of Angola may request the implementation of ad hoc stress tests, if it considers that economic conditions, or others, justify it.

6.6

The stress tests referred to in the previous point are only complementary to the regular stress test program of each Institution, and thus do not invalidate the execution of said program, in the periodicity and conditions established by the Institution.

6.7

Financial Institutions must have a flexible and adequate technological infrastructure and information and communication systems suitable for the complexity of the techniques used within the scope of implemented stress tests.

6.8

Institutions must ensure the quality, integrity, and representativeness of the data used in the stress tests conducted.

6.9

Institutions must regularly review the implemented stress tests, and this review must be executed by an area different from the one that performs them.

7. Material Risks

7.1

The stress tests to be conducted by Institutions must consider, at least, the following types of risks:

a) Credit Risk;

b) Market Risk;

c) Operational Risk;

d) Liquidity Risk.

7.2

Without prejudice to the provisions of the previous point, Institutions must conduct stress tests that allow assessing concentration risk and correlation risk in the material risks mentioned.

7.3

Institutions must consider all material risks in their stress tests, even those not identified in point 7.1 of this paragraph, such as strategic risk and reputational risk, among others.

7.4

Institutions may exclude some of the risks mentioned in point 7.1 of this paragraph, if they are not material, provided that the respective immateriality is justified to the Bank of Angola.

8. Typology of Stress Tests

8.1

In order to ensure that Institutions have an effective stress test policy, they must include in their risk management:

a) Sensitivity Analysis;

b) Reverse Stress Tests;

c) Scenario Analysis.

8.2

For the purposes of paragraph 2 of this Instruction, Non-Banking Financial Institutions that develop credit activity do not need to conduct scenario analysis.

8.3

The use of different types of tests by the Institution and the respective level of detail will depend on its nature, size, and complexity.

9. Methodology for Conducting Stress Tests

Institutions must define a methodology for the stress tests to be conducted, considering the following aspects:

a) Identify systemic risk factors;

b) Identify specific risk factors;

c) Simulate shocks on individual risk factors without relating them to an underlying event or a real result in the economy (sensitivity analysis);

d) Simulate shocks on multiple risk factors simultaneously (scenario analysis);

e) Define plausible scenarios based on the conclusions of the previous items;

f) Define the magnitude and direction of shocks, particularly regarding the considered relevant risk factors;

g) Scenario analysis must be projected with a minimum time horizon of 3 (three) years;

h) The time horizon of sensitivity analysis must be appropriate to each specific analysis;

i) Consider differentiated severity levels and include, at least, one scenario that reflects a strong economic downturn;

j) Develop scenarios starting from historical data, but taking into account future evolution perspectives, so that stress tests assume a prospective nature;

k) Have appropriate mechanisms to transform the macroeconomic variables considered in scenario analyses into internal risk factors;

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