The Basel Committee on Banking Supervision (BCBS) has issued ‘Principles for sound stress testing practices and supervision’. The paper sets out a comprehensive set of principles for the sound governance, design and implementation of stress testing programmes at banks. The principles address the weaknesses in banks’ stress tests that were highlighted by the financial crisis.
Stress testing is a critical tool used by banks as part of their internal risk management and capital planning. It is also a key component of the supervisory assessment process to identify vulnerabilities and assess the capital adequacy of banks. The principles establish expectations for the role and responsibilities of supervisors when evaluating banks’ stress testing practices.
“The current crisis underscores the importance of stress testing as an essential risk management and capital planning tool”, said Nout Wellink, chairman of the BCBS and president of the Netherlands Bank. “Stress testing programmes should be fully integrated in banks’ governance frameworks, and the Basel Committee will follow up to ensure that these principles are implemented.”
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