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Stresstestingnbfi - 120712 NBFI PDF
Stresstestingnbfi - 120712 NBFI PDF
JUNE, 2012
BANGLADESH BANK
Members of the Committee for Revising
the Stress Testing Guidelines for NBFIs
WAR and WIR of the particular FI will be used to determine its adequate capital
requirement in Basel Accord and will be impacted on the CAMELS rating conducted by
the central bank.
All the NBFIs are expected to carry out stress testing on quarterly basis i.e. on March 31,
June 30, September 30 and December 31 with their first stress testing using the revised
guidelines based on 30 June 2012. A training program will be initiated shortly for the
relevant staff to ensure smooth implementation of the revised guidelines.
I would like to appreciate the role of those officers who were involved in this exercise. I
also express my gratitude to the honorable Governor and Deputy Governor for their
valuable guidance and support in this regard.
1. Introduction 1
2. Principles for sound Stress Testing practices 2
3. Scope of Stress Testing 4
4. Framework for Stress Testing 4
5. Methodology and Calibration of Shocks 5
5.1. Interest Rate Risk 5
5.2. Credit Risk 5
5.3. Equity Price Risk 6
5.4. Liquidity Risk 7
5.5. Combined Shock 7
6. Insolvency Ratio (IR) 7
7. Resilience of the FI 8
8. Stress Test Rating 8
9. Recommended Action Plan 10
10. Interest Rate Stress Test 11
11. Duration GAP & Price Sensitivity 12
12. Value at Risk (VaR) 14
13. Reporting 15
14. Standard formats for stress testing 15
14.1. Reporting cover letter 19
14.2. Credit Input 20
14.3. Liquidity Input 21
14.4. Recommended Action Plans 22
14.5. Decision Model Rules 23
14.6. Test of Resilience 24
14.7. Summary Sheet 25
14.8. Interest Rate Output 29
14.9. Credit Risk Output 30
14.10. Liquidity Output 37
14.11. Insolvency Output 38
15. References 39
Stress testing is an important risk management tool that is used by the Financial
Institutions as part of their internal risk management and, through the Basel II capital
adequacy framework, is promoted by supervisors. Stress testing alerts FI management to
adverse unexpected outcomes related to a variety of risks and provides an indication of
how much capital might be needed to absorb losses should large shocks occur. Stress
testing supplements other risk management approaches and measures playing
particularly important role in:
These guidelines have been issued by Bangladesh Bank (BB) to provide a structured way
of assessing the vulnerability of financial institutions to extreme but plausible market
conditions. These guidelines enable institutions to accurately assess risk and define the
"risk appetite" of the organization and also provide critical information to senior
management for decisions around capital allocation and contingency planning.
The following recommendations are formulated with a view to apply by the NBFIs to the
extent they commensurate with the size and complexity of an FI's business and the
overall level of risk that it accepts. NBFIs are therefore encouraged to apply these
recommendations of Stress Testing.
1. Stress testing should form an integral part of the overall governance and risk
management culture of the FIs. Stress testing should be actionable, with the
results from stress testing analyses impacting decision making at the appropriate
management level, including strategic business decisions of the board and senior
management. Board and senior management involvement in the stress testing
program is essential for its effective operation.
3. Stress testing programs should take account of views from across the organization
and should cover a range of perspectives and techniques.
4. An FI should have written policies and procedures governing the stress testing
program. The operation of the program should be appropriately documented.
6. An FI should regularly maintain and update its stress testing framework. The
effectiveness of the stress testing program, as well as the robustness of major
individual components, should be assessed regularly and independently.
7. Stress tests should cover a range of risks and business areas, including at the
firm-wide level. An FI should be able to integrate effectively, in a meaningful
fashion, across the range of its stress testing activities to deliver a complete
picture of firm-wide risk.
10. As part of an overall stress testing program, an FI should aim to take account of
simultaneous pressures in funding and asset markets, and the impact of a
reduction in market liquidity on exposure valuation.
12. The stress testing program should explicitly cover complex and bespoke products
such as securitized exposures. Stress tests for securitized assets should consider
the underlying assets, their exposure to systematic market factors, relevant
contractual arrangements and embedded triggers, and the impact of leverage,
particularly as it relates to the subordination level in the issue structure.
13. The stress testing program should cover pipeline and warehousing risks. An FI
should include such exposures in its stress tests regardless of their probability of
being securitized.
14. An FI should enhance its stress testing methodologies to capture the effect of
reputational risk. The FI should integrate risks arising from off-balance sheet
vehicles and other related entities in its stress testing program.
15. An FI should enhance its stress testing approaches for highly leveraged
counterparties in considering its vulnerability to specific asset categories or
market movements and in assessing potential wrong-way risk related to risk
mitigating techniques.
I Defining the coverage and identifying the data required and available.
I Identifying, analyzing and proper recording of the assumptions used for stress
testing.
I Calibrating the scenarios or shocks applied to the data and interpreting the results.
I Ensuring a mechanism for an ongoing review of the results of the stress test exercise
and reflecting in the policies and limits set by management and board of directors.
I Taking this stress test as a starting point and developing in-house stress test model
to assess the FI's specific risks.
Levels of shocks to the individual risk components have been specified considering the
historical as well as hypothetical movements in the risk factors. These levels of shocks are
changeable by Bangladesh Bank from time to time as and when felt necessary. Three
different hypothetical shock scenarios in the stress testing are:
I Minor Level Shocks: These represent small shocks to the risk factors. The level
for different risk factors can, however, vary.
I Moderate Level Shocks: It envisages medium level of shocks and the level is
defined in each risk factor separately.
I Major Level Shocks: It involves big shocks to all the risk factors and is also
defined separately for each risk factor.
Interest rate risk is the potential adverse effect in the value of the on and off-balance
sheet positions of the FI with the change in the interest rates. The vulnerability of the
FI towards the adverse movements of the interest rate can be gauged by using simple
sensitivity analysis as well as duration GAP analysis. The standard scenarios of shock
levels are 2%, 4% and 6% increase in interest rate. For simplicity these shocks will be
stress in the cumulative GAP of Rate Sensitive Assets (RSA) and Rate Sensitive
Liabilities (RSL) up to one year and Duration GAP analysis only to the Bond portfolio of
the FI.
Stress test for credit risk assesses the impact of increase in the level of non-performing
loans (NPLs) of the FIs. This involves five individual shocking events. Each shocking
event contains Minor, Moderate and Major Levels of shock.
These scenarios assume negative shifts in all categories (both performing and non-
performing) take place resulting in more provision requirements. The standard
scenarios of shock (amount of loan shift from one category to another) levels are
5%, 10% and 15% downward shift in all categories. For example, for the first level
of shock, 5% of the standard downgraded to SMA, 5% of the SMA downgraded to
substandard, 5% of the substandard downgraded to doubtful and 5% of the
doubtful downgraded to bad/loss category.
These scenarios assume a sharp decrease in the value of VES creating shocking
events to the FI. The standard scenarios of shock levels are 10%, 25% and 50%.
This measures the concentration risk particularly in 2 sectors where the FI has the
highest investment or exposure. The standard scenarios of shock levels are 5%,
10% and 15% of standard loans of that 2 sectors directly downgraded to bad/loss
category.
These scenarios are constituted assuming a number of top borrowers of the FI may
become defaulter and create shocking events. The standard scenarios of shock
levels are: default of top 3(three), top 5(five) and top 10(ten) borrowers. In all cases
the standard loans of the respective borrowers are assumed to be directly
downgraded to bad/loss category creating a requirement of 100% provision.
The stress test for equity price risk assesses the impact of the fall in the stock market
index. Appropriate shocks will have to be absorbed to the respective securities if the
current market value of all the on balance sheet and off balance sheet securities listed
on the stock exchanges including shares, NIT units, mutual funds etc falls at the rate
of 10%, 25% and 50% respectively. The impact of resultant loss will be calibrated in the
CAR.
The stress test for liquidity risk evaluates the resilience of the FIs towards adverse shifts
in the cash inflow and outflow maturity buckets. Assumed shock scenarios include cash
inflow from assets in projected buckets are being deferred by a standard rates to the next
buckets but cash outflow claims for liabilities are coming much earlier showing claims
from all buckets shifting in the previous by the standard rates. Counter balancing
capacity of the FIs are also being stressed using the standard shocks assuming the
market getting a chronic downturn. For simple sensitivity analysis, counterbalancing
capacity of the FI is assumed to be 50% of its first line of defense (line of credit (SOD))
and 20% of its second line of defense (short-term loan, commercial paper, bill discounting
facility). The standard scenarios of shock levels are 5%, 7% and 10%.
FI will assess combined shock by aggregating the results of credit shock, equity shock and
interest rate shock. In case of credit shock, increase in NPLs, results of increase in NPLs
due to default of Top large borrowers, fall in the VES, negative shift in all the categories
and increase of NPLs in particular 2 sectors would have to be taken into account.
The NPL to Loan Ratio of an FI is said as the Infection Ratio. Infection Ratio which can
completely erode the regulatory capital of the FI to zero is the Critical Infection Ratio
(CIR). CIR implies Distance to Default or Insolvency. Computation of CIR assumes the
erosion of full regulatory capital due to increase in NPL in Bad/Loss Category ignoring the
Insolvency ratio is the ratio of Infection Ratio to the Critical Infection Ratio. IR implies the
percentage, an FI is, towards insolvency. Simplified formula to calculate IR is :
Where,
For Stress Testing, after shock IR is computed using the average revised NPL and Average
revised Regulatory Capital of standard shock scenarios in four Credit risk areas, namely:
increase in NPLs, Downward shift in all Categories, Increase in NPLs' under B/L category
in 2 sectors and Increase in NPLs' due to Top large borrowers.
7. Resilience of the FI
Resilience Level for Interest rate, Credit and Equity price shocks are set with the
Minimum Capital Adequacy Ratio (CAR). In the stress test it is checked whether an FI has
adequate capital base after the shock impact.
Resilience Level for Liquidity shocks are identified with the following three parameters :
After conducting the stress test, each FI will be categorized as of either Green or Yellow or
Red zone based on the Weighted Average Resilience (WAR) on the three levels of shock
scenarios. The FIs will first be scored in each level of scenario keeping a total point of 100
for each. When scoring for each level Interest Rate shock will have 10% weight, Credit
Risk 60%, Equity Price Risk 10% and Liquidity Risk 20% . The 60% weight for Credit risk
will be subdivided as 10% for increase in NPLs, 10% for Downward shift in all Categories,
5% for Fall in the VES, 15% for Increase in NPLs' under B/L category in 2 sectors and
20% for Increase in NPLs' due to Top large borrowers.
Insolvency ratio, percentage towards insolvency will also be scaled in 1 to 5 grades after
computing the Weighted Insolvency Ratio (WIR) from the three shock levels and set the
Green, Yellow or Red zone depending on the farness from insolvency. WIR ratings will be
assigned as under:
WAR-WIR Matrix
Overall financial strength and resilience of an NBFI will be identified plotting its achieved
ratings in the WAR-WIR Matrix. The overall zone setting of an FI will be determined with
80% weight of WAR and 20% weight of WIR as under:
WAR
Green Yellow Red
Green GG GY GR
WIR
Yellow YG YY YR
Red RG RY RR
Present level of score for zonal segregation and respective to-do list is as follows, as and
when applicable:
The FIs should follow the steps mentioned below in carrying out the interest rate stress
tests:
I Calculate all on-balance sheet Rate Sensitive Assets (RSA) and Rate Sensitive
Liabilities (RSL).
I Plot the RSA and RSL into different time buckets on the basis of maturity.
I Calculate maturity GAP by deducting RSL from RSA (GAP= RSA - RSL).
I Estimate the market value of all on-balance sheet rate sensitive assets and liabilities
of the FI to arrive at market value of equity.
I Calculate the durations of each class of asset and the liability of the on-balance
sheet portfolio and arrive at the aggregate weighted average duration of assets and
liabilities.
I Calculate the duration GAP by subtracting aggregate duration of liabilities from that
of assets.
I Estimate the changes in the economic value of equity due to change in interest rates
on on-balance sheet positions along the three interest rate changes.
I Estimate the impact of the net change (both for on-balance sheet and off-balance
sheet) in the market value of equity on the capital adequacy ratio (CAR).
Market value of the asset or liability shall be assessed by calculating its present value
discounted at the prevailing interest rate. The outstanding balances of the assets and
Liabilities should be taken along with their respective maturity or repricing period,
whichever is earlier.
FIs have to submit their reporting as per formats mentioned in the subsequent sections
along with the following cover letter as well as send an electronic report as per prescribed
format in a compact disc.
*SOLO/CONSOLIDATED
As on
* Delete which is not appropriate.
. ...
Chief Executive Officer Chief Financial Officer
.. ..
Name Name
.. ..
Name Telephone Number
Sl. Loans Loans Value of Loans Loans Value of Loans Loans Value of Loans Loans Value of Loans Loans Value of
No Particulars Total with without Eligible with without Eligible with without Eligible with without Eligible with without Eligible
ES ES Security ES ES Security ES ES Security ES ES Security ES ES Security
Name of the FI :
Reporting Base Date :
(Amount in crore)
Particulars 1 to 30/31 day Over 1 month to Over 2 months Over 3 months Over 6 months Over 1 year to Over 3 year to Over 5 years
(One month) 2 months to 3 months to 6 months to 1 year 3 years 5 years
Total
1 2 3 4 5 6 7 8 9 10
A. Outflows
1. Capital 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(a) Equity and perpetual preference shares 0.00
(b) Non-perpetual preference shares 0.00
2. Reserves and surplus 0.00
3. Notes, bonds & debentures 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(a) Plain vanilla bonds/debentures 0.00
(b) Bonds/debentures with embedded options 0.00
4. Deposits 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(a) Term deposits from public 0.00
(b) Term deposits from Banks/Fls 0.00
5. Bank borrowings 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(a) SOD 0.00
(b) Long term loans 0.00
6. Current liabilities and provisions 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(a) Short term loans 0.00
(b) Accounts payable 0.00
(c) Advance income received 0.00
(d) Interest payable on bonds/deposits 0.00
(e) Provisions 0.00
7. Contingent Liabilities 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(a) Letters of credit/guarantees 0.00
(b) Loan commitments, pending disbursal 0.00
(c) Lines of credit committed to other institutions 0.00
8. Others 0.00
A. TOTAL OUTFLOWS (A) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
B. INFLOWS 0.00
1. Cash 0.00
2. Remittance in transit 0.00
3. Balances with banks 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(a) Current account 0.00
(b) Deposit/Short-term deposits 0.00
(c) Money at call & short notice 0.00
4. Investments 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(a) Investments in Bonds & Securities 0.00
(b) Investments in Shares 0.00
5. lease Finance & Loans (performing) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(a) Lease finance 0.00
(b) Home Loan 0.00
(c) Term loan 0.00
(d) Corporate loans/short term loans 0.00
6. Non-performing loans 0.00
7. Fixed assets (excluding assets on lease) 0.00
8. Other Assets: 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(a) Intangible assets & other non-cash flow items 0.00
(b) Interest and other Income receivable 0.00
(c) Others 0.00
9. Others 0.00
B. TOTAL INFLOWS (B) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
C. MISMATCH (B-A) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
D. CUMULATIVE MISMATCH 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
E. C AS PERCENTAGE OF A 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Structure of the Bond Portfolio Face Value Present Value Settlement Maturity Coupon Yield Frequency Duration Remarks
WAR-WIR MATRIX
Rating Zone
Result of WAR MATRIX (Test-I) - - -
Result of WIR MATRIX (Test-II) - - -
WAR-WIR MATRIX - - -
WAR-WIR MATRIX
WAR
WAR-WIR Matrix
Green Yellow Red
Green - - -
WIR Yellow - - -
Red - - -
TEST-I : (WAR)
Downward shift in
10% - - - - - - -
all Categories
Increase in NPLs
under B/L category 15% - - - - - - -
in 2 sectors
Increase in NPLs
due to Top large 20% - - - - - - -
borrowers
3. Equity price Risk Fall
10% - - - - - - -
in Stock Prices
VWAR 100% - - - -
TEST-II : (WIR)
Current Scenario
Regulatory Capital (BDT in Crore ) -
Risk Weigheted Assets (RWA) (BDT in Crore) -
Capital Adequacy Ratio (CAR) -
(BDT in Crore)
CR-2: Credit Risk-Downward Shift in Loans (STD to SMA, SMA to SS, SS to DF & DF to BL)
Revised Capital - - -
Revised RWA - - -
Revised CAR - - -
(BDT in Crore)
CR-5: Credit Risk-Increase of NPLs Due to Top 10 Borrowers
Minor Moderate Major
Magnitude of Shock Top 3 Top 5 Top 10
Borrowers Borrowers Borrowers
Revised Capital - - -
Revised RWA - - -
Revised CAR - - -
Combined Shocks
Magnitude of Shock Minor Moderate Major
Revised Capital - - -
Revised RWA - - -
Revised CAR - - -
4. Liquidity Risk
Liquidity Risk
Minor Moderate Major
Magnitude of Shock
5% 7% 10%
Combined Shocks (Interest, Credit & Equity Price Shocks) (BDT in Crore)
Combined Shocks
Magnitude of Shock Minor Moderate Major
Revised Capital - - -
Revised RWA - - -
Revised CAR - - -
Over Over
1 to Over 1 2 3 Over
Particulars 30/31 month months months 6
day to 2 to 3 to 6 months
(One months months months to
month) 1 year
1 2 3 4 5 6
A. Total Rate Sensitive Liabilities (A) - - - - -
Revised CAR - - -
Credit Risk-Downward Shift in Loans (STD to SMA, SMA to SS, SS to DF & DF to BL)
Minor Moderate Major
Magnitude of Shock
5% 10% 15%
Extra Provisions for Loans without VES
- - -
(BDT in Crore)
Extra Provisions for Loans with VES
- - -
(BDT in Crore)
Increase in Provisions (BDT in Crore) - - -
Revised Capital (BDT in Crore) - - -
Revised CAR % - - -
Revised CAR % - - -
Revised CAR - - -
Required Information
Regulatory Capital (BDT in Crore ) -
Risk Weigheted Assets (RWA) (BDT in Crore) -
Capital Adequacy Ratio (CAR) -
Total Loan to Top 10 Borrowers (BDT in Crore) -
Total Loans for which Eligible Securities Held (BDT in Crore) -
Credit Risk-Increase of NPL Due to Top 10 Borrowers (Loans without Eligible Securities)
Minor Moderate Major
Magnitude of Shock Top 3 Top 5 Top 10
Borrowers Borrowers Borrowers
Total Loans Disbursed to (BDT in Crore) - - -
Increase in NPL (BDT in Crore) - - -
Increase in Provisions - - -
Credit Risk-Increase of NPL Due to Top 10 Borrowers (Loans with Eligible Securities)
Minor Moderate Major
Magnitude of Shock Top 3 Top 5 Top 10
Borrowers Borrowers Borrowers
COMBINED SHOCKS
Revised CAR - - -
COMBINED SHOCKS
Particulars 1 to 30/31 day Over 1 month Over 2 month Over 3 months Over 6 months Over 1 year to Over 3 years to Over 5 years Total
(One month) to 2 months to 3 months to 6 months to 1 year 3 years 5 years
1 2 3 4 5 6 7 8 9 10
A. TOTAL OUTFLOWS (A) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
B. TOTAL INFLOWS (B) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
C. MISMATCH 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
D. CUMULATIVE MISMATCH 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
E. MISMATCH (%) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
F. CUMULATIVE COUNTER BALANCING CAPACITY (AFTER MISMATCH) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
0.00%
Scenario 1
A. TOTAL OUTFLOWS (A) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
B. TOTAL INFLOWS (B) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
C. MISMATCH 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
D. CUMULATIVE MISMATCH 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
E. MISMATCH (%) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
F. CUMULATIVE COUNTER BALANCING CAPACITY (AFTER HAIRCUT & MISMATCH) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
0.00%
Scenario 2
A. TOTAL OUTFLOWS (A) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
B. TOTAL INFLOWS (B) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
C. MISMATCH 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
D. CUMULATIVE MISMATCH 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
E. MISMATCH (%) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
F. CUMULATIVE COUNTER BALANCING CAPACITY (AFTER HAIRCUT & MISMATCH) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
0.00%
Scenario 3
A. TOTAL OUTFLOWS (A) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
B. TOTAL INFLOWS (B) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
C. MISMATCH 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
D. CUMULATIVE MISMATCH 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
E. MISMATCH (%) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
F. CUMULATIVE COUNTER BALANCING CAPACITY (AFTER HAIRCUT & MISMATCH) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
0.00%
Basic Information
Regulatory Capital (BDT in Crore ) -
Total Loan (BDT in Crore) -
Total NPL (BDT in Crore) -
Total of NPL and Regulatory Capital -
Infection Ratio (NPL to Loans) -
Critical Infection Ratio (CIR) -
Insolvency Ratio -
Combined Shocks
Magnitude of Shock Minor Moderate Major
Increase of NPL after CR-1 - - -
Increase of NPL after CR-2 - - -
Increase of NPL after CR-4 - - -
Increase of NPL after CR-5 - - -
Increase of NPL - - -
Revised NPL - - -
Revised Regulatory Capital - - -
Total of NPL & Regulatory Capital - - -
3. Basel Committee on Banking Supervision (May 2009), Principles for sound stress
testing practices and supervision.
4. Christian Schmieder, Claus Puhr, and Maher Hasan (April 2011), Next
Generation Balance Sheet Stress Testing, IMF Working Paper.