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2023-07-07

Guidelines No. 4230/2023 on Stress Testing for Banks

The National Bank of Rwanda mandates a comprehensive stress testing framework for commercial banks, requiring them to assess credit, market, liquidity, concentration, and operational risks against defined minor, moderate, and major shock scenarios. Institutions must evaluate key performance metrics including expected credit losses, non-performing loans, liquidity coverage ratios, and counterparty defaults to determine capital adequacy under adverse economic conditions. The guidelines standardize risk assessment methodologies and provide concrete examples to ensure consistent, forward-looking vulnerability identification across the banking sector.

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BNR RESTRICTED Page 4 of 21 AMA Advanced Measurement and Approach BoD Board of Directors CCF Credit Conversion factor EAD Exposure at Default EL Expected Loss FSIs Financial Soundness Indicators GDP Gross Domestic Product GDP Gross Domestic product HHI Herfindahl-Hirschman Index ICAAP Internal Capital Adequacy Assessment Process ILAAP Internal Liquidity Adequacy Assessment Process LGD Loss Given default MST Macro Stress Testing NBR National Bank of Rwanda P&L Profit and Loss PD RBC Probability of default Risk Board Committee RMC Risk Management Committee RST Reverse Stress Test RWA Risk Weighted asset STF Stress Testing Framework

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BNR RESTRICTED Page 20 of 21 EXAMPLES OF FACTORS AND SCENARIOS FOR STRESS-TESTING (1) Credit risk a) Increase in ECL when there is a stress on PD, LGD and EAD Magnitude of Shock % (Minor) % (Moderate) % (Major) Expected Credit Loss Migration from low EL to higher EL bands b) increase in NPLs 2) Market risk a) Change (decrease or increase) in interest rate, 3) Liquidity risk Magnitude of Shock % (Minor) % (Moderate) % (Major) Total Loan portfolio Total Performing Loan book Total Non-Performing Loan Book (NPLs) NPLs to Total outstanding loans (%) Increase in RWA amounts due to migration of exposures in PL to NPLs Total restructured loans Total upgraded loan portfolio Migration from PL to NPL Net migration ratio (%) Exchange Rate Risk –Adverse Movement in Exchange Rate: Magnitude of Shock % (Minor) % (Moderate) % (Major) Net Exposure in FX Loss on Exchange Rate movement Magnitude of Shock % (Minor) % (Moderate) % (Major) Withdrawal of Top 10/20 largest single customers

BNR RESTRICTED Page 21 of 21 4) Concentration risk a) Assets concentration

  1. Operational risk Operational losses due to internal/external frauds, IT security breaches and cyber incidents including impact on Reputational risk as well as the litigation cost. Increase of withdrawal in foreign currency deposits Top10/20 customers Drop in value of High Quality Liquid Assets Increase in total net cash out flow Revised LCR (%) Available Amount of Stable Funding(Decrease/Increase) Required Amount of Stable Funding (Decrease/Increase) Revised Net Stable Funding Ratio (NSFR) (i) Default by largest single counterparty; (ii) Default by largest groups of connected counterparties; (iii)Default by Top (Ex: 5, 10, 20 & 50) largest borrowers; (iv) Default by Top sector of economic activities; and (v) Default by Top counterparty/ groups of connected counterparties by country. b) Deposits concentration (i) Change in the top (10, 20 etc..) of total deposits External fraud Internal fraud Employment practices & workplace safety Clients, products & business practice Damage to physical assets Business Disruptions and systems failure Execution, Delivery and process management Losses due to acts of fraud by a third party Losses due to acts of fraud by internal party Losses due to internal employees malpractices Losses due to failure of meeting client requirement Losses due to damage of physical assets Losses due to business/system failure (For e.g. IT, Cyber security incidents etc…) Losses due to failure in delivery/ process of transactions related to vendors & counterparty
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