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Effective from Nov 23 2011 - Nov 22 2011 To view other versions open the versions tab on the right
Banks should document the entire process of stress testing for the guidance of the concerned staff. This may become part of the bank’s policy on stress testing or included in its standard operating procedures. The process to be laid down by the banks should, inter alia, cover the following points:
i.
Assigning the responsibility for conducting stress tests. This responsibility may be assigned to the Chief Risk Officer who should be supported by a team (which may be an inter-departmental team or a dedicated unit created for this purpose);
ii.
Defining the responsibilities of the team members or individuals involved in stress testing;
iii.
Determining the frequency of regular stress tests in line with the regulatory requirements and also defining the parameters which should lead the bank to conduct ad-hoc stress tests;
iv.
Reviewing the composition and nature of the bank’s portfolio as well as the external factors affecting the quality of this portfolio in order to identify the major risks to which the bank is exposed to and which should be tested under its stress testing program;
v.
Reviewing the historical data to identify the past events relevant to the bank’s portfolio, which can be used in designing the appropriate stress tests. Banks are expected to compile a time series of relevant data covering at least one business cycle;
vi.
Determining the magnitude of shocks based on the identified historical events, future outlook and expert judgment;
vii.
Deciding on the type of stress tests to be conducted. This would involve a choice to either use a sensitivity analysis or a scenario analysis or a combination of both;
viii.
Listing the assumptions to be used in stress testing and articulating the basis of such assumptions;
ix.
Documenting the procedures for conducting stress tests and compiling the results thereof;
x.
Determining the procedure to be adopted for communicating results of stress tests to the board of directors, relevant board and management committees, senior management, relevant business areas and SAMA;
xi.
Determining the procedure to be adopted for taking remedial actions to mitigate the potential risks highlighted by the stress tests;
xii.
Laying down the criteria and factors which should lead the bank to review the effectiveness of its stress testing program. This may include, for instance, significant changes in bank’s activities or portfolio characteristics or operating environment.
