Effective from Nov 23 2011 - Nov 22 2011 To view other versions open the versions tab on the right
As part of their stress testing process, banks should identify the potential risk factors that have implications for their business activities and can adversely affect the quality of their portfolios. After careful analysis and studying the inter-relationship of various risks to which their business is exposed to, banks are expected to draw a list of the major risk factors that need to be stressed. Few examples of the risk factors are listed below:
i.
Macro-economic factors such as changes in oil price, GDP growth, inflation rate, etc. which may adversely affect the bank’s business and the quality of its portfolio;
ii.
Concentration risk which may be due to the concentration of a bank’s exposure to few borrowers or a few groups of borrowers or to a particular industrial sector or to a geographic region or country, etc;
iii.
Counterparty credit risk which may be reflected in the relatively high Probability of Default(PD) or high Loss Given Default(LGD) of individual counterparties or of group of counterparties or at the overall bank level;
iv.
Equity price risk arising from volatility in stock market index or major movements in prices of shares to which the bank has significant exposure;
v.
Operational risk which may be due to the internal events such as the IT systems failure, internal frauds, disruption of services, etc. or due to the external events such as disruption of communication network, external frauds, etc;
vi.
Liquidity risk arising from narrow depositors base, adverse cash flows, negative market perceptions or major rating downgrades, etc.
The above examples are for illustration only and the banks are expected to develop their own list of risk factors taking into account the nature of their business activities, the characteristics of their portfolios and their overall risk profiles.
