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Banks are required to take appropriate remedial action(s) to address potential risks and vulnerabilities identified by the stress testing results. They should lay down well-defined procedures to determine the nature and timing of the possible remedial actions. Furthermore, they should take into account the following factors in devising their remedial action plans:
i.
The remedial actions identified to mitigate the adverse effects of stress tests should be realistic and implementable within the defined timeline. All relevant factors which may affect the usefulness of identified actions should be taken into account and, if needed, back-up plans are prepared to counter their adverse effects;
ii.
The adequacy of existing capital buffers and possible sources of raising capital, if needed, should be assessed. This should be compared with any additional capital requirements under stressed conditions;
iii.
The practicality of remedial actions under stressed conditions should be evaluated.This should be done carefully as some of the actions available in normal situations may not be workable in a period of stress;
iv.
The possible remedial actions to be taken may vary depending on the nature and significance of the identified risks/vulnerabilities. These may include, for example, tightening of credit policy to reduce credit risk, revisiting of business growth plans or growth plans in a particular business area, raising additional capital to absorb potential losses, identifying alternate funding sources to mitigate potential liquidity risk, etc.;
v.
The decision to take or not to take a remedial action should be duly justified and the mechanism adopted to arrive at such decision be properly documented;
vi.
Banks should estimate the impact of identified actions on their profitability and solvency as well as on the overall financial condition to understand the implications of such actions. In case of significant divergence from the planned results, they may resort to alternate options to achieve the desired results;
vii.
The results of stress tests should be reflected in the policies and risk tolerance limits set by the management;
viii.
Banks may also set out the minimum thresholds or triggers (e.g. the impact on profitability or capital) for initiating the identified remedial actions. The process to be adopted and the level of authority for taking such actions should also be clearly defined;
All the identified risks and vulnerabilities may not necessarily require a remedial action particularly if the impact thereof on the bank is not significant. If the bank decides not to take an immediate action to address a potential risk, it should closely monitor the position and the post stress tests developments to ensure that the emerging position would not adversely affect its business. Furthermore, banks should have contingency plans in place to cope with any unexpected developments.
