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  • ST-1.2 ST-1.2 Developing an Appropriate Stress Testing Framework

    • General Requirements

      • ST-1.2.1

        Islamic bank licensees must establish a rigorous and forward looking (i.e. considers a minimum of 3-years projections) stress testing programme that is commensurate with the nature, size and complexity of its business operations, markets it operates in and its risk profile.

        July 2018

      • ST-1.2.2

        The coverage of the stress testing programme must be comprehensive and include on- and off-balance sheet exposures, commitments, guarantees and contingent liabilities. Islamic bank licensees must factor in existing material risks and emerging risks relevant to its business and operating environment.

        July 2018

      • ST-1.2.3

        Stress testing must form an integral part of an Islamic bank licensee's internal capital adequacy assessment and risk management process. Banks must be able to demonstrate the robustness of the stress testing methodologies used, the quality and comprehensiveness of the data underpinning the stress testing, involvement of relevant stakeholders across Board, senior management, business line, risk and finance control and oversight functions in the design and implementation of the stress test programme, and the use of stress test results by risk management.

        July 2018

      • ST-1.2.4

        Stress testing must also feed into the Islamic bank licensee's strategic and business plan.

        July 2018

    • The Board of Directors and Senior Management Oversight

      • ST-1.2.5

        The Board and senior management must ensure that a strong risk culture and governance policy underpins the effective use of stress testing.

        July 2018

      • ST-1.2.6

        Responsibilities of the Board include:

        (a) Approving the policies and procedures governing the stress testing programme, and ensuring sufficient resources and expertise to effectively implement the programme;
        (b) Ensuring that the design of the stress testing programme is consistent with the bank's risk appetite and is appropriate to the nature, scale, complexity of its risk-taking activities and overall business strategy;
        (c) Ensuring that views and inputs from relevant functions and departments are considered in the stress testing programme;
        (d) Providing constructive challenge on the results of stress tests, scenarios, key assumptions and methodologies used in the stress tests;
        (e) Reviewing the appropriateness of management actions proposed by senior management to mitigate potential vulnerabilities, taking into consideration the factors set out in Section ST-1.6;
        (f) Approve management actions;
        (g) Board level committee must be responsible for reviewing and challenging the scenarios for Shari'a products; and
        (h) Commissioning regular stress testing programme in accordance with Section ST-1.7.
        July 2018

    • Senior Management

      • ST-1.2.7

        Responsibilities of the senior management must include:

        (a) Ensuring implementation and monitoring of the stress testing programme;
        (b) Developing stress testing policies and procedures in accordance with Section ST-1.4;
        (c) Participating in the review and identification of appropriate stressed scenarios;
        (d) Ensuring that scenarios are coherent with the risk profile of the bank's business and the market it operates in;
        (e) Ensuring that stress testing methodology is proportional to the scale and complexity of the bank;
        (f) Providing the Board and where relevant, Shari'a Supervisory Board with key information which has a bearing on stress testing exercise. This includes information on assumptions, extent of judgement used and limitations of the stress tests including the quantitative models used;
        (g) Communicating the stress test results in a clear, concise and comprehensive manner for the Board to consider the impact on the bank's strategy, performance and financial condition;
        (h) Developing and recommending appropriate management action plans to the Board to address potential vulnerabilities identified during the stress test exercise; and
        (i) Ensuring there is timely and effective implementation of Board-approved management action plans.
        July 2018

      • ST-1.2.8

        For branches of foreign bank licensees, where no local board of directors exists, all references in this Module to the board of directors should be interpreted as the authorized person(s) at the Head Office/ Regional Office.

        July 2018