The banks shall observe the following parameters in the context of doing stress testing:
i.
Stress tests should be designed in such a way that banks should be able to identify potential risks in their portfolios by application of exceptional but plausible shocks;
ii.
Stress tests should not be treated as substitutes of statistical models rather they complement them in identification and measurement of business risks. Thus the use of statistical models such as value-at-risk models may be continued to predict the maximum loss in normal business conditions;
iii.
The stress testing methodology should be comprehensive enough to cover all material risks faced by the bank. It should also provide flexibility to capture new risks emanating from diversification in business activities and changing operating environment;
iv.
The use of stress testing is also encouraged for assessing risks in portfolios that lack historical data. The lack of sufficient data may hinder the development of statistical models for such portfolios or the insufficient information / data may compromise the robustness of such models even if developed. Thus the stress testing of such portfolios may provide useful information to the management;
v.
Stress tests should enable the bank to better understand its risk profile, evaluate major risks (both internal and external) and take proactive measures to mitigate those risks. They should also enable the bank to assess the adequacy of its capital;
