Banks should compile and communicate the stress testing results in a clear and concise manner. The stress testing exercise should provide an estimate of the expected losses under defined scenarios by using the appropriate methodologies and techniques. The impact of the stress tests should be measured on the following indicators of the bank:
i.
assets quality - increase/decrease in classified assets particularly loans and the infection ratio thereof (i.e. classified assets to total assets and classified loans to total loans);
ii.
profitability - increase/decrease in the accounting profit/loss;
iii.
capital adequacy - measured in terms of the changes in total amount of capital and the Capital Adequacy Ratio (CAR);
iv.
liquidity position - measured in terms of changes in key liquidity indicators and any funding gaps.
Banks should communicate the results of stress tests to both internal stakeholders and SAMA. The internal stakeholders for this purpose should include, inter alia, the board of directors, relevant board and management committees, senior management, and relevant business areas. The communication of results to SAMA will be made as part of the regulatory reporting on stress testing as specified under Section 10 of these Rules.
While communicating the results of stress tests to the above internal stakeholders and SAMA, banks should clearly specify the following:
i.
The bank’s approach to stress testing;
ii.
Scenarios used;
iii.
Underlying assumptions;
iv.
Methodologies and techniques used;
v.
Any limitations of the stress testing process.
Banks should also exercise due care in interpreting the results of stress tests. They should be fully aware of the limitations of the stress testing exercise. The stress testing involves a significant amount of judgment and its effectiveness would largely depend on the expertise of the conductors of stress tests, the quality of data, and choice of right scenarios. Therefore, the designing of remedial actions for redressing the issues highlighted by the stress tests should take into account these factors.
Banks would also suitably reflect the results of stress tests conducted under these Rules in their Internal Capital Adequacy Assessment Plan (ICAAP) document to be submitted to SAMA on annual basis. This requirement would not be applicable to branches of foreign banks as they are not required to prepare ICAAP.
