|
On Tuesday, the Basel Committee on Banking Supervision issued a consultative paper on stress testing, “Principles for sound stress testing practices and supervision”, which aims to address the weaknesses in stress testing exposed by the financial crisis – including underestimation of the potential severity and duration of stress events and insufficient identification and aggregation of risks on a firm-wide basis. This consultation is in response to one of the actions that came out of the G20 meeting last November 15th.
The 24-page paper proposes principles for the sound governance, design and implementation of stress testing programmes at banks and also sets expectations for the role and responsibilities of supervisors in reviewing these stress testing practices.
Nout Wellink, Chairman of the Basel Committee on Banking Supervision said that "stress testing is an important risk management tool. It plays a critical role in strengthening not only bank corporate governance but also the resilience of individual banks and the financial system". He added that "the financial crisis has demonstrated the importance of stress testing as an integral part of any bank’s risk management, liquidity and capital planning process".
The paper identifies poor practices in four areas:
- use of stress testing and integration in risk governance;
- stress testing methodologies;
- scenario selection; and
- stress testing of specific risks and products.
It makes recommendations and gives guidance to supervisors on what they should be looking for - board and senior management involvement, forward-looking assessments of risk which complements the models and historical data used, and synergy with capital, liquidity and contingency planning. Comments on the paper should be in by March 13th.
The next G20 meeting is to be held in London on April 2nd. In a letter to the G20 finance ministers, reported by Reuters, Alastair Darling, the UK Chancellor, said “Given the ongoing turmoil in the world's financial markets and the related macroeconomic challenges that we now all face, I would particularly like to focus our efforts on reinforcing international cooperation in the areas of financial market regulation and supervision.” He went on to say that there had been failures of the regulated and of the regulations and called for tougher global financial regulation.
|
