Maldives Monetary Authority Circular on Stress Testing Requirements for Banks

بسم الله الرحمن الرحيم

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MALDIVES MONETARY AUTHORITY

Circular No: CN/2022/2805

07th December 2022

To: All Banks,

Dear Sir,

Re: Stress testing

MMA has previously instructed banks to conduct stress testing following the COVID-19 pandemic which led to significant financial stress for borrowers and the banks. Stress testing or hypothetical analysis of unfavorable economic scenarios, such as financial crises, impact on tourism, inflation, internal and external factors should be an ongoing exercise to identify whether the bank has enough buffers to withstand these adverse economic developments or risks.

Each bank is required to develop and implement a stress testing framework that is commensurate with its operations and risk profile. Suggested risks to include in stress testing framework are credit risk, credit concentration risk, foreign currency risk, liquidity risk, operational risk, strategic risk, and macro-economic risk.

Banks may choose the various assumptions underlying the stress tests. The assumptions and the basis for the assumptions must be documented. The relevant parameters should be stressed at least at three levels of increasing adversity, i.e. minor, medium and major.

Suggested scenarios:

1. Credit Risk i) Movement in Non-Performing Loans (NPLs), taking into account:
a. increase in total NPLs (eg: by 15%, 20% 30% etc.) b. movement among NPL categories (eg: 30%, 50% or 75% of each of the categories into the next category)
c. default of large borrowers
d. increase in sectoral defaults for major sectors (e.g. various tourism sector default scenarios)

ii) Change in impairment, for the IFRS model used by the bank a. increased probability of defaults by borrowers or sector b. Loss given defaults for specific facility types
c. Change in expected cash flows

iii) Credit concentration to a:
a. Single borrower /group of borrowers b. Sector

iv) Economic factors a. Impact of changes in macro-economic variables, e.g., tourism sector performance, global/country specific events, etc.

2. Liquidity Risk - liquidity levels after accounting for known payments (such as repayments of borrowings and maturing fixed deposits not rolled over) should be stressed by the following scenarios. i) Impact on liquidity based on possible scenarios for withdrawals of large deposits ii) Impact on liquidity based on possible scenarios of deposit withdrawals (e.g. 10%, 20%, 50% deposits withdrawals) iii) Extreme liquidity conditions from the funding side

Testing Frequency and reporting: Banks are required to conduct stress testing on a quarterly basis. Each risk for which stress testing is conducted should include a short summary of the results, and how the bank plans to address the issues indicated by the stress test results to mitigate the impact of the risk.

Reporting The results of the stress tests together with key assumptions should be submitted to MMA by the 15th of the month following the end of calendar quarter, starting with the tests conducted for Q4-2022 to be submitted by 15th January 2023.

Yours sincerely,

[SIGNATURE]

Mariyam Shifa
Assistant Governor, Financial Stability

Phone: +960 3314940 / +960 3339880 | SWIFT: MMAUMVMV | Maldives Monetary Authority | Email: mail@mma.gov.mv | mma.gov.mv