Stress testing mandatory for B, C class financial institutions
The central bank has asked the class B and C financial institutions also to conduct stress testing from this quarter end.
Earlier, a year ago, the central bank made it mandatory for the class A commercial banks to start stress testing that could ensure in reducing one of the risk indicators.
The stress tests determine the robustness of a financial institution by figuring out whether it will be able to withstand unfavourable economic scenarios. The same guidelines that dictate stress testing module for commercial banks will be applied for development banks and finance companies.
A risk management tool that evaluates the potential impact on a firm of a specific event and movement components like earning, liquidity and capital is said stress test. The measure is applied to find out risks and possible risks an organisation has to face in the future. Depending on the results, institutions are to correct their weak aspects.
“The stress test should be conducted based on the financial statement of the first quarter, and its result should be discussed with the board of directors and top level management,” the central bank said in its directive.
The financial institutions have also to submit the results within a month to the supervision division.
The central bank has also directed the financial institutions to file a precaution plan and policy too for future after acknowledging its status to the board of directors.
Stress testing by the development banks and finance companies will ensure they are timely aware about the complexity they are facing and take appropriate action after consulting with the board.
The stress test helps financial institutions prepare for the worst case in huge withdrawal. It can detect weak spots in their system at an early stage, so that they could also take preventive actions.
Likewise, the central bank has also asked national level financial institutions to report the results to the central bank's offsite division — Bank Supervisions Department — within a month of every quarter-end. The directive also stated that financial institutions will have to discuss the results of stress tests with the board and at senior management level.
The central bank had prepared a standard module to carry out stress test of banks based on the framework of IMF and Basel Committee on Banking Supervision. Banks need to assess their soundness in case of key risks — credit, market and liquidity risks.