Where stress tests or scenario analyses have been used to validate the results of modeling approaches, the following should be provided:
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information on the quantitative results of stress tests and scenario analyses the bank carried out and the confidence levels and key assumptions behind those analyses, including, the distribution of outcomes;
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information on the range of adverse scenarios which have been applied, how these were derived and the resulting capital requirements; and
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where applicable, details of any additional business-unit specific or business plan specific stress tests selected.
Details on Stress and Scenario Testing:
This section should explain how a bank would be affected by an economic recession or downswings in the business or market relevant to its activities. SAMA is interested in how a bank would manage its business and capital so as to survive for example a recession whilst meeting minimum regulatory standards. The analysis would include financial projections for two to three years based on business plans and solvency calculations.
The severity of recession may typically be one that occurs only once in a 15 year period. The time horizon would be from the present day to at least the deepest part of the recession.
Typical scenarios would include:
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how an economic downturn would affect
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the bank's capital resources and future earnings; and
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the bank's strategy takes into account future changes in its projected balance sheet, income statement, cash flow statement, impact on its financial assets, etc.
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In both cases, it would be helpful if these projections showed separately the effects of management actions to changes in a bank's business strategy and the implementation of any contingency plans.
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an assessment by the bank of any other capital planning actions to enable it to continue to meet its regulatory capital requirements through a recession. These actions may include new capital injections from related companies, new share issues through existing shareholders, IPO's, floatation of long term debt, Sukuks, etc.
