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  • ST-1.6 ST-1.6 Stress Testing Results and Management Actions

    • ST-1.6.1

      Islamic bank licensees must evaluate the impact of stress tests against accounting profit and loss, impairment provisions, risk weighted assets ('RWA'), regulatory capital, liquidity and funding gaps.

      July 2018

    • ST-1.6.2

      Islamic bank licensees may also use other measures to gauge the impact of stress tests depending on the purpose of the stress test as well as the risks and portfolios being analysed including:

      (a) Asset values;
      (b) Economic or risk-adjusted profit and loss; and
      (c) Economic capital requirements.
      July 2018

    • ST-1.6.3

      In response to the stress tests results, Islamic bank licensees must formulate realistic management actions considering:

      (a) Type of actions and specific circumstances, including external conditions, under which the management actions are unlikely to be feasible. This includes a consideration of factors listed in Paragraph ST-1.6.6;
      (b) Whether the actions would be consistent with the risk appetite or tolerance level set by the Board;
      (c) Whether the bank has adequate financial resources and operational capabilities to undertake such management actions; and
      (d) Constraints by supervisory or regulatory requirements, or market restrictions.
      July 2018

    • ST-1.6.4

      Management actions should be based on careful analysis and deliberation by the Board and senior management. The range of management actions may vary depending on the magnitude of impact and likelihood of stressed scenarios. Actions pursued should be proportionate to the severity of the impact of the stress tests and may include:

      (a) Reviewing the risk appetite or limits and business strategies;
      (b) Restructuring, liquidating, unwinding or hedging (using shari'a compliant methods) exposures;
      (c) Seeking additional collateral or reducing risk exposures to specific sectors, countries and regions;
      (d) Tightening underwriting standards;
      (e) Adjusting the asset and liability composition;
      (f) Building additional capital or liquidity buffers;
      (g) Implementing recovery or contingency plans; and
      (h) Recourse to central bank funding facilities.
      July 2018

    • ST-1.6.5

      Management actions must be approved by the Board and senior management and clearly documented. Senior management must ensure effective monitoring mechanisms are in place to promptly activate management actions based on established triggers. Clear roles and responsibilities must be assigned to ensure prompt escalation to the Board and senior management upon the occurrence of any trigger event. Reviews must be periodically conducted to ensure that such management actions are executed in a timely and orderly manner.

      July 2018

    • ST-1.6.6

      The following are examples of factors that may be considered in formulating the management actions during stressed conditions:

      (a) Time required for full implementation, considering expected time for the management action to take effect such as improvement of asset quality due to tightening of underwriting standards;
      (b) Legal restrictions and impediments that may affect financial resources to be relied upon such as cross border transfers of capital to entities within the group;
      (c) Elevated cost associated with additional borrowings and risk of undersubscription when issuing debt or raising capital;
      (d) Limited access to funding markets and reduced market liquidity for assets to be disposed of as well as increased volatility which may further depress the price of these assets;
      (e) Loss of revenue and market share arising from any proposed reduction in lending activities;
      (f) Reputational risk and potential negative market reaction caused by ceasing discretionary coupons or exercising convertibility provisions of capital instruments; and
      (g) The potential response of other banks and market participants to a given scenario and the consequential impact on asset and funding markets.
      July 2018