2. Stress-Testing Under Pillar 2
Under the Supervisory Review Process, SAMA will initially review the Pillar 1 stress-testing requirement for LCR and NSFR. SAMA will also assess stress-testing under Pillar 2 with specific reference to detailed Contingency Funding Plan (CFP). Some of the scenarios which can be used are:
i. Example of First Liquidity Stress
An unforeseen, name-specific, liquidity stress in which:
- Financial market participants and retail depositors consider that in the short-term the bank will be or is likely to be unable to meet its liabilities as they fall due.
- The bank's counterparties reduce the amount of intra-day credit which they are willing to extend to it.
- The bank ceases to have access to foreign currency spot and swap markets.
- Over the longer-term, the bank's obligations linked to its credit rating crystallize as a result of a reduction in that credit rating. For the purpose, a bank must assume that the initial, short-term, period of stress lasts for at least two weeks.
ii. Example of Second Liquidity Stress
An unforeseen, market-wide liquidity stress of three months duration. A bank must assume that the second liquidity stress is characterised by:
- Uncertainty as to the accuracy of the valuation attributed to that bank's assets and those of its counterparties.
- Inability to realise, or ability to realise only at excessive cost, particular classes of assets, including those which represent claims on other participants in the financial markets or which were originated by them.
- Uncertainty as to the ability of a significant number of banks to ensure that they can meet their liabilities as they fall due.
- Risk aversion among participants in the markets on which the bank relies for funding.