Page 41 - Banking Finance April 2022

ARTICLE

STRESS

TESTING :

NEED AND

IMPORTANCE

S tress Testing is described as the evaluation of a Stress testing forms an integral part of the internal capital

bank's financial position, under a severe but plausible
adequacy assessment process (ICAAP), which requires banks
scenario to assist in decision making within the bank.
to undertake rigorous, forward looking stress testing that
It enables a bank in forward looking assessment of
risks, which overcomes the limitations of statistical risk identifies severe events or changes in market conditions that
could adversely impact the bank. The main objectives of
measures or models based on historical data and assumptions. stress testing includes assistance in risk identification and
It helps the senior management in understanding the control, complementing other risk management tools,
condition of the bank in the stressed time. improving capital and liquidity planning, and thereby
facilitating the business decision-making. Stress tests plays
Stress testing outputs are used by a bank in decision making an important role in the communication of risk within the
process in terms of potential actions like risk mitigation bank and external communication with supervisors to
techniques, contingency plans, capital and liquidity provide support for internal and regulatory capital adequacy
management in stressed conditions, etc. It focuses on the assessments .Indian Banks perform the stress tests at least
impact of credit risk, liquidity risk, market risk etc. in adverse at half yearly intervals.
situations both at the bank level and at the systemic level.
Stress tests measure the resilience of the individual financial As per RBI guidelines, The responsibility for stress testing
institutions as well as the financial systems as a whole programme in a bank rests with the board of directors of
against possible extreme volatilities in the macro economic the bank and with the Chief Executive Officer in the case of
parameters in any country's financial system. the foreign banks with branch presence in India. To promote
risk identification and control, stress testing is included in
About the author risk management activities of a bank at various levels . It is
used to address existing or potential firm-wide risk exposures
Ravi Mishra and concentrations. In Banks stress testing programme is
Chief Manager Faculty governed by internal policies and procedures and they
Union Bank of India document the underlying assumptions and fundamental
Staff Training Centre, Gurugram elements for each stress testing exercise. For this banks have

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