| Recommendations to banks | | | | into account system-wide interactions and feedback |
| 1. Stress testing should form an integral part of the | | | | effects. |
| overall governance and risk management culture of | | | | 9. Tests should be geared towards the events |
| the bank. It should be actionable, with the results from | | | | capable of generating most damage whether through |
| analyses impacting decision making at the appropriate | | | | size of loss or through loss of reputation. |
| management level, including strategic business | | | | A programme should also determine what scenarios |
| decisions of the board and senior management. | | | | could challenge the viability of the bank (reverse stress |
| Board and senior management involvement is essential | | | | tests) and thereby uncover hidden risks and |
| for its effective operation. | | | | interactions among risks. |
| 2. A bank should operate a stress testing programme | | | | 10. As part of an overall programme, a bank should |
| that: promotes risk identification and control; provides a | | | | aim to take account of simultaneous pressures in |
| complementary risk perspective to other risk | | | | funding and asset markets, and the impact of a |
| management tools; improves capital and liquidity | | | | reduction in market liquidity on exposure valuation. |
| management; and enhances internal and external | | | | 11. The effectiveness of risk mitigation techniques |
| communication. | | | | should be systematically challenged. |
| 3. Stress testing programmes should take account of | | | | 12. The programme should explicitly cover complex |
| views from across the organisation and should cover | | | | and bespoke products such as securitised exposures. |
| a range of perspectives and techniques | | | | Tests for securitised assets should consider the |
| 4. A bank should have written policies and procedures | | | | underlying assets, their exposure to systematic market |
| governing the programme. The operation of the | | | | factors, relevant contractual arrangements and |
| programme should be appropriately documented. | | | | embedded triggers, and the impact of leverage, |
| 5. A bank should have a suitably robust infrastructure | | | | particularly as it relates to the subordination level in the |
| in place, which issufficiently flexible to accommodate | | | | issue structure. |
| different and possibly changing tests at an appropriate | | | | 13. The programme should cover pipeline and |
| level of granularity. | | | | warehousing risks. |
| 6. A bank should regularly maintain and update its | | | | A bank should include such exposures in its tests |
| framework. | | | | regardless of their probability of being securitised. |
| The effectiveness of the programme, as well as the | | | | 14. A bank should enhance its testing methodologies to |
| robustness of major individual components, should be | | | | capture the effect of reputational risk. |
| assessed regularly and independently. | | | | The bank should integrate risks arising from |
| 7. Stress tests should cover a range of risks and | | | | off-balance sheet vehicles and other related entities in |
| business areas, including at the firm-wide level. A bank | | | | its programme. |
| should be able to integrate effectively across the | | | | 15. A bank should enhance its testing approaches for |
| range of its testing activities to deliver a complete | | | | highly leveraged counterparties in considering its |
| picture of firm-wide risk. | | | | vulnerability to specific asset categories or market |
| 8. Programmes should cover a range of scenarios, | | | | movements and in assessing potential wrong-way risk |
| including forward-looking scenarios, and aim to take | | | | related to risk mitigating techniques. |