The Bank of Mauritius (BOM) issued guidelines on stress testing and additional macro-prudential measures for the banking sector.
The revised guideline on additional macro-prudential measures for the banking sector addresses risk-weighted assets, additional general provisions, and loan-to-value ratio. The guideline aims to mitigate potential systemic risks to the Mauritian banking sector as a whole. The changes in comparison to the previous version of the guideline include revision to the definition of “self-employed individual” and an update to the loan-to-value ratio. The guideline stipulates that the maximum loan-to-value ratio for residential property loans shall be 80% of the value thereof for self-employed individuals & contractual employees and 100% of the value thereof for other individuals. As per the revised guideline, banks may, on a case-to-case basis and depending on their risk appetite, apply a loan-to-value ratio higher than 80% for a self-employed individual, provided they have conducted a robust credit risk assessment and are satisfied with the track record and repayment capacity of the self-employed individual and provided the gross monthly income of the self-employed individual has, at a minimum, been at least equal to MUR 100,000 over the last 12 months preceding the application for the residential property loan. The revised guideline also states that in case of joint loans, the loan-to-value ratio to be applied shall depend on the main borrower servicing the debt.
The guideline on stress testing sets out the high-level principles to be followed by banks for the implementation of a sound stress testing framework. This guideline shall come into effect on June 23, 2022 and will be applicable to all banks licensed by BOM. Banks shall ensure full compliance with this guideline by November 30, 2022. The principles in this guideline should be applied on a proportionate basis, depending on the size, complexity, and risk profile of the bank. Branches and subsidiaries of foreign banks may use the stress testing framework of their parent banks as long as it meets the requirements of this guideline. The high-level principles to be followed by banks are as follows:
- Stress testing frameworks should have clearly articulated and formally adopted objectives.
- Stress testing frameworks should include an effective governance structure that is clear, comprehensive and documented.
- Stress testing should be used as a risk management tool and for making business decisions.
- Stress testing frameworks should capture material and relevant risks, as determined by a sound risk identification process and apply stresses that are sufficiently severe.
- Resources and organizational structures should be adequate to meet the objectives of the stress testing framework.
- Stress tests should be supported by accurate and sufficiently granular data and by robust IT systems.
- Models and methodologies to assess the impacts of scenarios and sensitivities should be fit for purpose and intended use of the stress tests.
- Stress testing models, results and frameworks should be subject to challenge and regular review.
Keywords: Middle East and Africa, Mauritius, Banking, Macro-Prudential Policy, Risk-Weighted Assets, Systemic Risk, Stress Testing, Lending, Loan-to-Value Ratio, Basel, BOM
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