Guidelines on Stress Testing

BANGLADESH BANK
HEAD OFFICE
POST BOX NO. 325
DHAKA‐1000
Department of
Off‐site Supervision
08 Bhoishak, 1417 DOS Circular No. 01 Date: ‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 21 April, 2010 Chief Executives All Scheduled Banks/Financial Institutions in Bangladesh. Dear Sir, Guidelines on Stress Testing You are aware that measuring, monitoring and controlling various types of risks is vital for ensuring the health of a financial institution as well as of the whole financial system. Financial institutions around the world are increasingly employing sophisticated techniques for managing risks. Stress Testing is one of such techniques that have been used to determine the reactions of different financial institutions under a set of exceptional, but plausible assumptions through a series of battery of tests. At institutional level, stress testing techniques provide a way to quantify the impact of changes in a number of risk factors on the assets and liabilities portfolio of the institution. In order to further strengthen the country’s financial system, Bangladesh Bank (BB) has also designed a stress testing framework for banks and FIs to proactively manage risks. For this purpose, and to ensure consistency, BB has prepared a Guideline for banks and FIs. This model guideline initially focuses on “Simple Sensitivity and Scenerio Analysis”. But with the increasing know‐how and availability of more data this model will undergo further refinement over time. All banks and FIs are advised to carry out the stress test, as per attached guidelines, from the half year ending June 2010. They shall also submit a report in the format attached as Annex‐II to the guidelines, within 45 days of the close of 30 June 2010, along with a soft copy. Banks shall submit their reports to the Department of Off‐site Supervision and the FIs shall submit their reports to the Department of Financial Instituions and Markets (DFI&M). Subsequently, the stress test shall be carried out on half yearly basis i.e. on June 30 and December 31 on each year and results shall be submitted to the DOS and DFI&M within 45 days of the close of each half year. Please acknowledge receipt. Enclosure: As Above. Sd/‐ (S.K. Sur Chowdhury) General Manager Phone: 7120376