Effective from Nov 23 2011 - Nov 22 2011 To view other versions open the versions tab on the right
Equity price risk is the risk to the earnings or capital of the bank that results from adverse changes in the value of its equity related portfolios. The equity price risk may arise from changes in the value of a bank’s equity investment portfolio either due to the adverse movements in the overall level of equity prices/stock markets indices or as a result of the price volatility in shares forming part of the bank’s portfolio. Some plausible stress scenarios relating to equity price risk may include the following:
i.
Fall in stock market Indices: Banks may develop stress scenarios to assess the impact of certain assumed levels of decline in the stock market indices on their earnings and capital;
ii.
Drop in value of portfolio: If the bank holds an equity portfolio highly concentrated in few sectors or few companies, it may conduct stress tests based on the assumed changes in the related sectoral stock indices or prices of shares forming major part of its portfolio;
iii.
Drop in Collateral Coverage: Banks active in margin lending may conduct stress tests to assess the impact of decline in stock prices/indices on the collateral coverage level of their margin loans and the resulting impact on their earnings and capital.
While conducting stress tests for equity price risk, banks should cover both the on- balance sheet as well as off-balance sheet equity portfolios.
