On 17 October 2018, the Basel Committee on Banking Supervision (Basel Committee) published stress testing principles that replace the 2009 Principles for sound stress testing practices and supervision.
The principles are guidelines that focus on the core elements of stress testing frameworks. These include the objectives, governance, policies, processes, methodology, resources and documentation that guide stress testing activities and facilitate the use, implementation and oversight of stress testing frameworks. Each principle is followed by a short description of considerations that are equally relevant for banks and authorities. This description is then followed by additional points applicable to either banks or authorities.
The principles are:
- stress testing frameworks should have clearly articulated and formally adopted objectives;
- stress testing frameworks should include an effective governance;
- stress testing should be used as a risk management tool and to inform business decisions;
- stress testing frameworks should capture material and relevant risks and apply stresses;
- resources and organisational structures should be adequate to meet the objectives of the stress testing framework;
- stress tests should be supported by accurate and sufficiently granular data and by robust IT systems;
- models and methodologies to assess the impacts of scenarios and sensitivities should be fit for purpose;
- stress testing models, results and frameworks should be subject to challenge and regular review; and
- stress testing practices and findings should be communicated within and across jurisdictions.
The principles are formulated with a view towards large, internationally active banks and to supervisory and other relevant financial authorities in Basel Committee member jurisdictions. However, smaller banks and authorities in all jurisdictions can benefit from considering in a structured way the potential impact of adverse scenarios on their business, even if they are not using a formal stress testing framework but are instead using simpler methods. These principles are therefore intended to be applied on a proportionate basis, depending on the size, complexity and risk profile of the bank or banking sector for which the authority is responsible.