What are the regulatory requirements for stress testing in financial institutions?

What are the regulatory requirements for stress testing in financial institutions?

Regulatory requirements for stress testing vary by jurisdiction, but generally include guidelines from bodies like the Basel Committee.

Can you explain the Basel III framework related to stress testing?

Basel III emphasizes the need for banks to conduct regular stress tests to assess their capital adequacy under adverse conditions.

What types of stress tests are typically required?

Typically, institutions are required to perform both scenario analysis and sensitivity analysis as part of their stress testing.

How often should these stress tests be conducted?

Stress tests should be conducted at least annually, but more frequent testing may be required based on the institution's risk profile.

What happens if a bank fails a stress test?

If a bank fails a stress test, it may be required to take corrective actions, such as increasing capital reserves or improving risk management practices.