Central Bank of Jordan Circular on 2024 Stress Testing

CENTRAL BANK OF JORDAN البنك المركزي الأردني

Ref: 4709/2/23 Date: 11 Ramadan, 1446 AH Corresponding to: 11 March, 2025 AD

Circular to Banks Operating in the Kingdom

Greetings,

Based on the Instructions for Stress Testing of Banks Operating in Jordan No. (2016/1) dated (2016/12/6), attached are the sensitivity tests and scenario tests that banks must perform based on data as of 31/12/2024. Sensitivity tests, including geopolitical stress tests and climate-related risk tests, shall be applied at the level of the bank's branches in Jordan and at the consolidated financial statement level. Scenario tests shall be applied at the level of the bank's branches in Jordan only. The results of the tests must be submitted to us, filled according to the attached templates, in both hard copy and electronic format, no later than the end of April 2025. Please note that an electronic (Excel) version of these templates has been published on the Central Bank's website. The Central Bank will continue to provide banks with the required tests annually, taking into account risk developments at the local, regional, and international levels.

Accept our highest respect,

Governor Dr. Adel Al-Sharkas

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CENTRAL BANK OF JORDAN البنك المركزي الأردني

Required Stress Tests for Banks Based on End-of-Year 2024 Data

First: Sensitivity Tests A. Credit Risk Tests: Banks must perform the following tests concerning an increase in credit risk, calculating the impact on non-performing loans (NPLs), provisions, profits, regulatory capital adequacy ratio¹, and core capital:

Test One: Increase in NPLs for direct facilities across all economic sectors.

Assumption	Increase Percentage
Moderate	50%
Medium	100%
Severe	150%

Test Two: Default of a portion of performing direct facilities granted to the top five economic sectors, reclassifying these facilities as non-performing.

Assumption	Default Percentage
Moderate	5%
Medium	10%
Severe	15%

Test Three: Default of a portion of performing direct facilities granted to the real estate sector, reclassifying these facilities as non-performing.

Assumption	Default Percentage
Moderate	5%
Medium	10%
Severe	15%

¹ According to the Regulatory Capital Instructions under the effective Basel III standard.

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CENTRAL BANK OF JORDAN البنك المركزي الأردني

Test Four: Default of a portion of performing direct facilities granted to the individuals sector, reclassifying these facilities as non-performing.

Assumption	Default Percentage
Moderate	5%
Medium	10%
Severe	15%

Test Five: Default of a portion of personal facilities granted by the bank, reclassifying these facilities as non-performing.

Assumption	Default Percentage
Moderate	5%
Medium	10%
Severe	15%

Test Six: Default of a portion of performing direct facilities granted to the non-financial large corporates sector, reclassifying these facilities as non-performing.

Assumption	Default Percentage
Moderate	5%
Medium	10%
Severe	15%

Test Seven: Default of a portion of performing facilities granted to micro, small, and medium-sized enterprises (MSMEs), reclassifying these facilities as non-performing.

Assumption	Default Percentage
Moderate	5%
Medium	10%
Severe	15%

Note: Banks must fill out Annex No. (3), which relates to NPL data by borrower entity.

Test Eight: Default of a portion of performing direct facilities granted to the tourism, hotels, and restaurants sector, reclassifying these facilities as non-performing.

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CENTRAL BANK OF JORDAN البنك المركزي الأردني

Assumption	Default Percentage
Moderate	10%
Medium	15%
Severe	25%

Test Nine: Default of a portion of performing direct facilities granted to the transport sector, reclassifying these facilities as non-performing.

Assumption	Default Percentage
Moderate	10%
Medium	15%
Severe	25%

B. Credit Concentration Risk Tests:

Test One: Default of the bank's largest borrowers (excluding Jordanian Government facilities and facilities guaranteed by the Government), reclassifying facilities granted to them as non-performing, as follows:

Assumption	Default
Moderate	Default of the largest borrower
Medium	Default of the top 3 borrowers
Severe	Default of the top 6 borrowers

Note: Banks must attach a statement of the names and values of facilities granted to the top six borrowers (excluding Jordanian Government facilities and facilities guaranteed by the Government) used in applying the above tests.

Test Two: Default of the bank's largest borrowers (excluding Jordanian Government facilities and facilities guaranteed by the Government, the Jordanian Oil Refinery Company, and electricity companies), reclassifying facilities granted to them as non-performing, as follows:

Assumption	Default
Moderate	Default of the largest borrower
Medium	Default of the top 3 borrowers
Severe	Default of the top 6 borrowers

Note: Banks must attach a statement of the names and values of facilities granted to the top six borrowers (excluding Jordanian Government facilities and facilities guaranteed by the Government, the Jordanian Oil Refinery Company, and electricity companies) used in applying the above tests.

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CENTRAL BANK OF JORDAN البنك المركزي الأردني

C. Market Risk Tests: The primary objective of conducting market risk sensitivity analysis tests is to determine the impact of potential changes in market prices on profits and losses, and consequently on the bank's regulatory capital adequacy ratio and core capital. Banks must perform the following tests:

Shock One: Exchange Rate Risk:

• Decrease in the Dinar exchange rate:

Assumption	Decrease
Moderate	Decrease in Dinar exchange rate by 15% against other currencies
Medium	Decrease in Dinar exchange rate by 20% against other currencies
Severe	Decrease in Dinar exchange rate by 25% against other currencies

• Increase in the Dinar exchange rate:

Assumption	Increase
Moderate	Increase in Dinar exchange rate by 15% against other currencies
Medium	Increase in Dinar exchange rate by 20% against other currencies
Severe	Increase in Dinar exchange rate by 25% against other currencies

Shock Two: Interest Rate Risk: Changes in market interest rates can negatively affect the bank's financial position through direct impact on bank revenues (net interest income) and medium-to-long-term impact on the market value of the bank's assets and liabilities, which are affected by the interest rate. Sensitivity tests regarding interest rates are applied to all instruments carrying variable or fixed interest rates, whether classified in the banking book or trading book. Gap analysis tests are conducted as follows:

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CENTRAL BANK OF JORDAN البنك المركزي الأردني

• Gap Analysis Tests²: These tests aim to determine the bank's position regarding the balance of assets and liabilities sensitive to interest rate risk. The following tests are conducted:

• Increase in interest rates:

Assumption	Increase in Interest Rates
Moderate	Increase in interest rates by 100 basis points
Medium	Increase in interest rates by 150 basis points
Severe	Increase in interest rates by 200 basis points

• Decrease in interest rates:

Assumption	Decrease in Interest Rates
Moderate	Decrease in interest rates by 100 basis points
Medium	Decrease in interest rates by 150 basis points
Severe	Decrease in interest rates by 200 basis points

Shock Three: Stock Price Decline Risk, where the following tests must be conducted:

Assumption	Decrease
Moderate	10% decrease in stock prices invested in by the bank
Medium	20% decrease in stock prices invested in by the bank
Severe	30% decrease in stock prices invested in by the bank

D. Liquidity Risk Tests: A bank's ability to maintain sufficient liquidity depends largely on its capacity to meet obligations during financial crises. In addition to the necessity of forecasting cash inflows and outflows to determine cash requirements under normal operating conditions, the bank must conduct

² Repricing risk is one of the most prominent interest rate risks, resulting from differences in maturity dates (for fixed interest rates) and repricing dates (for variable interest rates) of the bank's assets, liabilities, and off-balance sheet items. For example: If a bank finances a long-term loan with a fixed interest rate using a short-term deposit with a variable interest rate, the bank will face a decline in future income if interest rates rise. The cause of the decline is that cash flows from the loan are fixed throughout the loan term, while the interest paid on the deposit is variable. The test begins by determining a schedule for distributing interest rate-sensitive assets and liabilities within time periods according to maturity dates (for fixed interest rates) and repricing dates (for variable interest rates), then determining the impact of falling interest rates on the bank's profits and asset values.

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CENTRAL BANK OF JORDAN البنك المركزي الأردني

stress tests by forecasting cash flows based on "What if" scenarios and measuring their impact on the bank's liquidity (statutory liquidity ratio and liquidity coverage ratio). In this regard, the bank must conduct the following tests:

Outflows Tests³:

• Withdrawal of a portion of stable individual deposits:

Assumption	Decrease
Moderate	Withdrawal of a portion of stable individual deposits by 5%
Medium	Withdrawal of a portion of stable individual deposits by 10%
Severe	Withdrawal of a portion of stable individual deposits by 20%

• Withdrawal of a portion of unstable individual deposits:

Assumption	Decrease
Moderate	Withdrawal of a portion of unstable individual deposits by 10%
Medium	Withdrawal of a portion of unstable individual deposits by 20%
Severe	Withdrawal of a portion of unstable individual deposits by 30%

• Withdrawal of a portion of stable corporate deposits:

Assumption	Decrease
Moderate	Withdrawal of a portion of stable corporate deposits by 5%
Medium	Withdrawal of a portion of stable corporate deposits by 10%
Severe	Withdrawal of a portion of stable corporate deposits by 20%

• Withdrawal of a portion of unstable corporate deposits:

Assumption	Decrease
Moderate	Withdrawal of a portion of unstable corporate deposits by 10%
Medium	Withdrawal of a portion of unstable corporate deposits by 20%
Severe	Withdrawal of a portion of unstable corporate deposits by 30%

³ The required deposit decrease percentages in these tests are applied after applying cash flow rates according to the Liquidity Coverage Ratio (LCR) Instructions dated 2020/6/22. Stable deposits are also defined according to these instructions.

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CENTRAL BANK OF JORDAN البنك المركزي الأردني

• Withdrawal of a portion of unused limits from individual and small corporate facilities:

Assumption	Decrease
Moderate	Withdrawal of a portion of unused limits from individual and small corporate facilities by 5%
Medium	Withdrawal of a portion of unused limits from individual and small corporate facilities by 10%
Severe	Withdrawal of a portion of unused limits from individual and small corporate facilities by 20%

• Withdrawal of a portion of unused limits from non-financial corporate facilities:

Assumption	Decrease
Moderate	Withdrawal of a portion of unused limits from non-financial corporate facilities by 10%
Medium	Withdrawal of a portion of unused limits from non-financial corporate facilities by 20%
Severe	Withdrawal of a portion of unused limits from non-financial corporate facilities by 40%

• Withdrawal of a portion of unused limits from financial corporate facilities:

Assumption	Decrease
Moderate	Withdrawal of a portion of unused limits from financial corporate facilities by 40%
Medium	Withdrawal of a portion of unused limits from financial corporate facilities by 80%
Severe	Withdrawal of a portion of unused limits from financial corporate facilities by 100%

• Withdrawal of the largest customer deposits:

Assumption	Decrease
Moderate	Withdrawal of the largest deposit
Medium	Withdrawal of the top three deposits
Severe	Withdrawal of the top five deposits

Note: Banks must attach a statement of the names and values of the top five customer deposits at the bank along with the results of applying the withdrawal of the largest customer deposits test.

• Decrease in liquid assets:

Assumption	Decrease
Moderate	5% decrease in the bank's liquid assets
Medium	10% decrease in the bank's liquid assets
Severe	20% decrease in the bank's liquid assets

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CENTRAL BANK OF JORDAN البنك المركزي الأردني

The following liquidity risk tests are applied to the Net Stable Funding Ratio (NSFR)⁴:

• Reduction of the weighting factor for liabilities related to stable funding sources (95%):

Assumption	Decrease
Moderate	Reduction of the weighting factor by 5 percentage points to become 90%
Medium	Reduction of the weighting factor by 10 percentage points to become 85%

• Increase of the weighting factor for assets given a required stable funding factor (85%):

Assumption	Increase
Moderate	Increase of the weighting factor by 5 percentage points to become 90%
Medium	Increase of the weighting factor by 10 percentage points to become 95%

E. Climate-Related Risk Tests: Climate change is one of the most important risks and challenges facing various countries globally due to its wide-ranging impacts on various economic sectors borrowing from banks, increasing the likelihood of rising credit risks. Banks must conduct the following tests related to two types of financial climate risks:

1. Physical Risks These are economic and financial losses resulting from the direct impact of climate-related events, such as unusual weather conditions and their impact on assets, operations, and supply chains. Banks must conduct the following tests concerning the occurrence of unusual climate phenomena on the following economic sectors:

Test One: Default of a portion of facilities granted to the industrial sector due to an increase in physical climate-related risk events, reclassifying facilities granted to the sector as non-performing, as follows:

Assumption	Default Percentage
Medium	10%
Severe	20%

⁴ According to the Net Stable Funding Ratio (NSFR) Instructions No. (2024/10).

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CENTRAL BANK OF JORDAN البنك المركزي الأردني

Test Two: Default of a portion of facilities granted to the agricultural sector due to an increase in physical climate-related risk events, reclassifying facilities granted to the sector as non-performing, as follows:

Assumption	Default Percentage
Medium	10%
Severe	20%

Test Three: Default of a portion of facilities granted to the tourism, hotels, and restaurants sector due to an increase in climate-related risk events, reclassifying facilities granted to the sector as non-performing, as follows:

Assumption	Default Percentage
Medium	10%
Severe	20%

Test Four: Default of a portion of facilities granted to the three sectors mentioned above (industry, agriculture, and tourism/hotels/restaurants) due to an increase in physical climate-related risk events, reclassifying facilities granted to the three sectors as non-performing, as follows:

Assumption	Default Percentage
Medium	10%
Severe	20%

2. Transition Risks These are financial risks arising from the transition to a low-carbon economy and their impact on high-carbon-emission economic sectors, including policy changes, technological progress, and market shifts. Banks must conduct the following test:

Default of a portion of facilities granted to companies with high carbon emissions, such as mining and petrochemical companies, reclassifying facilities granted to these companies as non-performing, as follows:

Assumption	Default Percentage
Medium	5%
Severe	10%

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CENTRAL BANK OF JORDAN البنك المركزي الأردني

F. Global Geopolitical Stress Tests Banks must conduct the following tests concerning the impact of global geopolitical stresses on banks, calculating the impact of the following scenarios (Multi-Factor Shock) on NPLs, provisions, profits, and capital adequacy ratios:

• Medium Severity Scenario:

1. Default of 15% of facilities granted to the tourism, transport, and wholesale importers of basic commodities sectors, reclassifying facilities granted to them as non-performing.
2. Default of 5% of facilities granted to individuals, reclassifying facilities granted to them as non-performing.
3. 20% decrease in stock prices invested in by the bank.
4. 20% decrease in profits of the bank's branches and subsidiaries abroad, for banks with foreign branches or subsidiaries.

• Severe Scenario:

1. Default of 30% of facilities granted to the tourism, transport, and wholesale importers of basic commodities sectors, reclassifying facilities granted to them as non-performing.
2. Default of 10% of facilities granted to individuals, reclassifying facilities granted to them as non-performing.
3. 40% decrease in stock prices invested in by the bank.
4. 40% decrease in profits of the bank's branches and subsidiaries abroad, for banks with foreign branches or subsidiaries.

G. Operational Risk Tests Regarding operational tests, the bank must set at least three assumptions for potential operational events and measure their impact on the bank's profitability, regulatory capital adequacy ratio, and core capital. These tests must include:

• A test on the likelihood of increased cyberattacks due to the rising cyber risks resulting from increased reliance on financial technology and the accelerated use of electronic payment methods by the coronavirus pandemic.

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CENTRAL BANK OF JORDAN البنك المركزي الأردني

• Two tests on the likelihood of armed robbery at one of the bank's branches, internal fraud, or breach of the bank's buildings, or the bank losing some lawsuits filed against it, or changes in correspondent bank behavior or supervisory actions affecting the bank's reputation, such as the imposition of a penalty on the bank by the supervisory authority in the home or host country due to the bank's fundamental violation of any laws, regulations, or instructions, or engaging in unsafe or unsound banking practices, etc.

H. Additional Stress Tests In addition to the specified tests above, the bank must conduct additional tests commensurate with the size and nature of the risks it faces, with no less than one additional test for each type of risk mentioned above.

Second: Scenario Tests The medium and severe macro scenarios represent hypothetical cases designed to assess banks' ability to withstand shocks. Assuming an increase in the intensity of geopolitical stresses in the world and the region, and the challenges they pose to the national economy, most notably the war on the Gaza Strip, and the continuation of the negative repercussions of the Russian-Ukrainian crisis and its resulting rise in basic commodity prices, which may lead to a decline in economic growth rates and an increase in inflation rates compared to expectations, as well as rising unemployment and a decline in the financial market. To measure the impact of these assumptions on banks, the Gross Domestic Product (GDP) growth rate (economic growth rate) is typically used as one of the key economic variables affecting NPLs, and the impact is measured on the regulatory capital adequacy ratio and core capital. Economic research indicates that a decline in the economic growth rate leads to an increase in NPLs due to reduced economic activity and thus reduced customer ability to repay debts. Other variables such as the unemployment rate, inflation rate, and interest rates can also be used to predict NPLs. To predict the NPL ratio for the coming year, a Multiple Regression Analysis methodology is used according to the following model: NPL = β0 + β1NPL(-1) + β2X1 + β3X2 + ... + βnXn + e Where: NPL: Expected NPL ratio as of the end of 2025. β0: Constant.

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CENTRAL BANK OF JORDAN البنك المركزي الأردني

(1-NPL): NPL ratio for the previous year (as of the end of 2024). X1-Xn: Macroeconomic variables used to predict the NPL ratio (e.g., economic growth rate, unemployment rate, inflation rate, etc.). β1-βn: Regression Coefficients. In this regard, banks have relied on the forecasts of the Central Bank of Jordan and the International Monetary Fund, as shown in Annex No. (4).

a. Baseline Scenario: In this scenario, to determine the values of macroeconomic variables, reliance was placed on the forecasts of the Central Bank of Jordan and the International Monetary Fund, as shown in Annex No. (4). b. Medium Macro Stress Scenario: A decline in the economic growth rate in the Kingdom in 2025 to 0.1%, an increase in the unemployment rate to 25.1%, and an increase in the inflation rate to 5.0%. c. Severe Macro Stress Scenario: A decline in the economic growth rate in the Kingdom in 2025 to -2.3%, an increase in the unemployment rate to 28.7%, and an increase in the inflation rate to 7.9%.

Please note that the following methodology was used to arrive at the above percentages: Medium Macro Stress Scenario: The expected economic growth rate for 2025 minus one standard deviation of the economic growth rate data during the period (1994-2024), the 2024 unemployment rate plus one standard deviation of the unemployment rate data during the period (1994-2024), and the expected inflation rate for 2025 plus one standard deviation during the period (1994-2024). Severe Macro Stress Scenario: The expected economic growth rate for 2025 minus two standard deviations of the economic growth rate data during the period (1994-2024), the 2024 unemployment rate plus two standard deviations of the unemployment rate data during the period (1994-2024), and the expected inflation rate for 2025 plus two standard deviations of the inflation data during the period (1994-2024).

• Annexes

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Annex No. (1): Sensitivity Test Templates

Template No. 1: Credit Risk Tests

Shock Severity	Pre-Shock	Post-Shock	Additional Provisions Resulting from Applying the Shock	Impact on Profits / Losses	Capital Adequacy Ratio	Core Capital Adequacy Ratio
	Regulatory Capital	Core Capital	Profits / Losses	NPLs	Risk-Weighted Assets	Regulatory Capital
50 Moderate
100 Medium
150 Severe

(Note: The table above is abbreviated to represent the general structure of the templates attached in the original document)

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Annex No. (3): NPL Data by Borrower Entity as of 31/12/2024

(In thousands of JOD)

Borrower Entity	Principal of NPLs Granted to this Sector (excluding accrued interest)	Principal of Facilities Granted to this Sector (excluding accrued interest)	NPL Ratio for this Sector (Principal of NPLs / Principal of Facilities)	Impairment Provision for this Sector
Loans Granted to Individuals Sector
Loans Granted to Micro, Small, and Medium Enterprises (MSMEs)
Loans Granted to Large Non-Financial Corporates

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Annex No. (4): Macroeconomic Variables

Year	Real Economic Growth Rate	Unemployment Rate	Change in Consumer Prices (Inflation Rate)
1994	5.0	15.8	3.6
...	...	...	...
2024	**2.3	*21.5	**2.2
2025	**2.5		**2.2

• Percentage for the third quarter of 2024 ** According to forecasts by the Central Bank of Jordan and the International Monetary Fund.