Regulatory Alerts2023-08-17
Added · Updated
Stress Tests Required from Banks Based on End of 2022 Data
Banks operating in Jordan are required to conduct sensitivity analysis and scenario stress tests based on their financial data as of December 31, 2022, with results due by the end of April 2023. Sensitivity tests, covering credit, credit concentration, market, liquidity, climate change, geopolitical tensions, and operational risks, must be applied at the branch level in Jordan and on consolidated financial statements. Scenario tests, focusing on macroeconomic variables like economic growth, unemployment, inflation, and interest rates, are to be applied only at the branch level in Jordan. These tests involve specific thresholds such as 50-150% increases in non-performing loans, 15-25% exchange rate fluctuations, 100-200 basis point interest rate changes, and various deposit withdrawal and facility default percentages.
In the name of God, the Most Gracious, the Most Merciful
[Central Bank of Jordan Logo]
Number: 2/23/5904 Date: 17 / 8 / 2023 AD Corresponding to: 1 / 2 / 1444 AH
Circular to Banks Operating in the Kingdom
Greetings,
Based on the instructions for stress tests for banks operating in Jordan No. (2016/1) dated 2016/12/6, enclosed herewith are the sensitivity analysis tests and scenario tests that banks must conduct based on data as of 2022/12/31. Sensitivity tests, including tests for the impact of geopolitical tensions worldwide and climate change risk tests, shall be applied at the level of the bank's branches in Jordan and at the consolidated financial statements level. Scenario tests, however, shall be applied only at the level of the bank's branches in Jordan. The results of the required tests, filled according to the attached forms, must reach us in hard copy and electronically by the end of April/2023 at the latest. An electronic (Excel) version of these forms 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.
Please accept our highest regards,
Governor Dr. Adel Al-Sharkas
CENTRAL BANK OF JORDAN
Stress Tests Required from Banks Based on End of 2022 Data
First: Sensitivity Tests A- Credit Risk Tests: Banks must conduct the following tests related to increased credit risk, calculating the impact on non-performing loans, provisions, profits, regulatory capital adequacy ratio¹ and Tier 1 capital¹:
Test One: Increase in direct non-performing facilities for all economic sectors.
| Assumption | Increase Percentage |
|---|---|
| Least Severe (Moderate) | 50% |
| Medium Severity (Medium) | 100% |
| Most Severe (Severe) | 150% |
Test Two: Default of a portion of direct performing facilities for the five largest economic sectors by classifying these facilities as non-performing.
| Assumption | Default Percentage |
|---|---|
| Least Severe (Moderate) | 5% |
| Medium Severity (Medium) | 10% |
| Most Severe (Severe) | 15% |
Test Three: Default of a portion of direct performing facilities granted to the real estate sector by classifying these facilities as non-performing.
| Assumption | Default Percentage |
|---|---|
| Least Severe (Moderate) | 5% |
| Medium Severity (Medium) | 10% |
| Most Severe (Severe) | 15% |
¹ According to the regulatory capital instructions in accordance with the effective Basel III standard.
CENTRAL BANK OF JORDAN
Test Four: Default of a portion of direct performing facilities granted to the retail sector by classifying these facilities as non-performing.
| Assumption | Default Percentage |
|---|---|
| Least Severe (Moderate) | 5% |
| Medium Severity (Medium) | 10% |
| Most Severe (Severe) | 15% |
Test Five: Default of a portion of personal loans granted by the bank by classifying these facilities as non-performing.
| Assumption | Default Percentage |
|---|---|
| Least Severe (Moderate) | 5% |
| Medium Severity (Medium) | 10% |
| Most Severe (Severe) | 15% |
Test Six: Default of a portion of direct performing facilities granted to the large non-financial corporate sector (Large Corporate) by classifying these facilities as non-performing.
| Assumption | Default Percentage |
|---|---|
| Least Severe (Moderate) | 5% |
| Medium Severity (Medium) | 10% |
| Most Severe (Severe) | 15% |
Test Seven: Default of a portion of direct performing facilities granted to micro, small, and medium-sized enterprises by classifying these facilities as non-performing.
| Assumption | Default Percentage |
|---|---|
| Least Severe (Moderate) | 5% |
| Medium Severity (Medium) | 10% |
| Most Severe (Severe) | 15% |
Note: Banks must fill out Appendix No. (3), which relates to non-performing loan data by borrower.
CENTRAL BANK OF JORDAN
Test Eight: Default of a portion of direct performing facilities granted to the tourism, hotels, and restaurants sector by classifying these facilities as non-performing.
| Assumption | Default Percentage |
|---|---|
| Least Severe (Moderate) | 10% |
| Medium Severity (Medium) | 15% |
| Most Severe (Severe) | 25% |
Test Nine: Default of a portion of direct performing facilities granted to the transport sector by classifying these facilities as non-performing.
| Assumption | Default Percentage |
|---|---|
| Least Severe (Moderate) | 10% |
| Medium Severity (Medium) | 15% |
| Most Severe (Severe) | 25% |
B- Credit Concentration Risk: Test One: Default of the bank's largest borrowers (excluding facilities to the Jordanian government and those guaranteed by it) by classifying the credit granted to them as non-performing credit as follows:
| Assumption | Default |
|---|---|
| Least Severe (Moderate) | Default of the largest borrower |
| Medium Severity (Medium) | Default of the largest 3 borrowers |
| Most Severe (Severe) | Default of the largest 6 borrowers |
Note: Banks must attach a statement with the names and values of facilities granted to the six largest borrowers (excluding facilities to the Jordanian government and those guaranteed by it) used in applying the above tests.
Test Two: Default of the bank's largest borrowers (excluding facilities to the Jordanian government and those guaranteed by it, Jordan Petroleum Refinery Company, and electricity companies) by classifying the credit granted to them as non-performing credit as follows:
CENTRAL BANK OF JORDAN
| Assumption | Default |
|---|---|
| Least Severe (Moderate) | Default of the largest borrower |
| Medium Severity (Medium) | Default of the largest 3 borrowers |
| Most Severe (Severe) | Default of the largest 6 borrowers |
Note: Banks must attach a statement with the names and values of facilities granted to the six largest borrowers (excluding facilities to the Jordanian government and those guaranteed by it, Jordan Petroleum Refinery Company, and electricity companies) used in applying the above tests.
C - Market Risk Tests: The primary objective of conducting sensitivity analysis tests for market risks is to determine the impact of potential changes in market prices on profits and losses, and subsequently on the bank's regulatory capital adequacy ratio² and Tier 1 capital². The bank must conduct the following tests:
Shock One: Exchange Rate Risk:
- Decrease in Dinar exchange rate:
| Assumption | Decrease |
|---|---|
| Least Severe (Moderate) | Decrease in the Jordanian Dinar exchange rate by 15% against other currencies |
| Medium Severity (Medium) | Decrease in the Jordanian Dinar exchange rate by 20% against other currencies |
| Most Severe (Severe) | Decrease in the Jordanian Dinar exchange rate by 25% against other currencies |
- Increase in Dinar exchange rate:
| Assumption | Increase |
|---|---|
| Least Severe (Moderate) | Increase in the Jordanian Dinar exchange rate by 15% against other currencies |
| Medium Severity (Medium) | Increase in the Jordanian Dinar exchange rate by 20% against other currencies |
| Most Severe (Severe) | Increase in the Jordanian 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 a direct impact on the bank's revenues (net interest income) as well as a medium to long-term impact on the market value of the bank's assets and liabilities, whose values are affected by the interest rate.
² According to the regulatory capital instructions in accordance with the effective Basel III standard.
CENTRAL BANK OF JORDAN
Sensitivity tests related to interest rates are applied to both variable and fixed interest rate instruments, whether classified in the banking book or the trading book. Gap analysis tests are conducted as follows:
- Gap analysis tests³: These tests aim to determine the bank's position regarding the balance of assets and liabilities sensitive to interest rate risks. Within these tests, the following are conducted:
| Assumption | Increase/Decrease |
|---|---|
| Least Severe (Moderate) | Interest rates increase by 100 basis points |
| Medium Severity (Medium) | Interest rates increase by 150 basis points |
| Most Severe (Severe) | Interest rates increase by 200 basis points |
Shock Three: Stock Price Decrease Risk, where the following tests must be conducted:
| Assumption | Decrease |
|---|---|
| Least Severe (Moderate) | Decrease in stock prices invested by the bank by 10% |
| Medium Severity (Medium) | Decrease in stock prices invested by the bank by 20% |
| Most Severe (Severe) | Decrease in stock prices invested by the bank by 30% |
D- Liquidity Risk Tests: The availability of sufficient liquidity for a bank largely depends on its ability to meet its obligations during financial crises. In addition to the necessity for the bank to conduct forecasts of incoming and outgoing cash flows to determine cash requirements under normal operating conditions, the bank must conduct stress tests by performing cash flow forecasts 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 Tests⁴:
³ Repricing risk is one of the most prominent interest rate risks, arising from differences in maturity dates (for fixed interest rates) and repricing dates (for variable interest rates