Reverse Stress Testing
ST-1.5.13
Apart from assessing and being prepared to respond to stressed conditions,
Bahraini Islamic bank licensees must also be aware of the scenarios that can render its business non-viable, due to severe financial or reputational damage. Banks must, therefore, implement a reverse stress testing program to identify the scenarios or events that can threaten the viability or solvency of the bank.July 2018ST-1.5.14
Reverse stress tests start from a known stress testing outcome such as a breach of regulatory capital ratios, illiquidity, insolvency, or the cancellation of banking license and then work backwards to identify the events that could lead to such an outcome for the bank.
July 2018ST-1.5.15
Reverse stress testing must serve as a starting point for determining the scenarios for recovery planning. Given that stress testing helps in understanding the quantum and the direction of impact of various scenarios on the
Bahraini Islamic bank licensee's critical risk metrics, the process of defining the recovery triggers must also be informed by stress testing.July 2018
