RBI Updates Stress Testing Guidelines for Banks

RBI/2013-14/390 DBOD.BP.BC.No.75/21.04.103/2013-14 December 2, 2013 All Scheduled Commercial Banks (excluding RRBs) Dear Sir, Guidelines on Stress Testing Please refer to the guidelines on stress testing issued vide circular DBOD.No.BP.BC. 101/21.04.103/2006-07 dated June 26, 2007 . Banks were required to operationalise their formal stress testing framework in accordance with these guidelines from March 31, 2008. It was expected that the stress testing framework being set up would help banks in building a sound and forward looking risk management framework. 2. The depth and duration of the recent global financial crisis has led many banks and supervisory authorities across the world to question whether the existing stress testing practices were sufficient and robust to cope with rapidly changing circumstances. In particular,  the crisis was far more severe in many respects than was assumed by banks for their stress testing and consequently the weaknesses in stress testing practices impaired their resilience. Against this backdrop, the Basel Committee on Banking Supervision (BCBS) issued the Principles for Sound Stress Testing Practices and Supervision in May 2009. In tune with these principles, the extant guidelines on stress testing have been updated. Annex 1 contains guidelines on overall objectives, governance, design and implementation of stress testing programmes. 3. All banks are required to carry out the stress tests involving shocks prescribed in Annex 2 , at a minimum. Though a bank should assess its resilience to withstand shocks of all levels of severity indicated therein, the bank should be able to survive, at least the baseline shocks. 4. Further, RBI would expect the degree of sophistication adopted by banks in their stress testing programmes to be commensurate with the nature, scope, scale and the degree of complexity in the bank’s business operations and the risks associated with those operations. The broad approach which could be considered by banks in formulating their stress testing programmes is enumerated in Annex 3 which classifies banks into three groups based on the size. 5. Banks are expected to adopt these guidelines on stress testing from April 1, 2014. Yours faithfully, (Chandan Sinha) Principal Chief General Manager Encl: a/a

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2013-14/390 · issued 02 Dec 2013. The plain-English explanation above is BankPulse’s own independent summary.

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