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October 17, 2018

BCBS issued the final, revised version of its stress testing principles for banks and supervisory and other relevant financial authorities in Basel Committee member jurisdictions. These principles have been finalized following a consultation in December 2017 and they replace the Principles for sound stress testing practices and supervision, which the Basel Committee had published in 2009.

The principles have been updated to reflect that stress testing is now both a critical element of risk management for banks and a core tool for banking supervisors and macro-prudential authorities. The updated principles are set at a high level so that they can be applied across banks and jurisdictions, remain relevant as stress testing practices evolve over time, and be used by jurisdictions to guide all elements of a sound stress testing framework. The principles are guidelines that cover the objectives, governance, policies, processes, methodology, resources, and documentation to guide stress testing activities and facilitate the use, implementation, and oversight of stress testing frameworks.

Each principle is followed by a short description of considerations that are equally relevant for banks and authorities. This description is followed by additional points applicable to either banks or authorities, as follows: 

  • Additional points for banks—points with relevance to (a) banks' own internal stress testing activities and (b) their participation in bank-run supervisory stress tests. 
  • Additional points for authorities—points with  relevance to (a) supervisor-run stress tests and (b) the authorities' role in bank-run supervisory stress tests. They also cover the role of authorities in their oversight of internal stress testing activities of banks. 

These principles have been formulated with a view toward application to large, internationally active banks and to supervisory and other relevant financial authorities in Basel Committee member jurisdictions; however, smaller banks and authorities in all jurisdictions can benefit from considering the potential impact of adverse scenarios on their business, even if they are not using a formal stress testing framework but are instead using simpler methods. These principles are, therefore, intended to be applied on a proportionate basis, depending on the size, complexity, and risk profile of the bank or banking sector for which an authority is responsible.

 

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Keywords: International, Banking, Stress Testing, Principles, Macro-prudential Framework, Systemic Risk, Proportionality, BCBS

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