• ST-1.7 ST-1.7 Interpretation and Communication of Stress Testing Results

    • ST-1.7.1

      Stress testing provides a more comprehensive view of risks and vulnerabilities that an Islamic bank licensee is exposed to. To ensure that the stakeholders within the bank and the CBB can interpret the results accurately, the bank should provide supporting information which includes scenario assumptions, model methodologies, model assumptions and limitations.

      July 2018

    • ST-1.7.2

      Stress-testing estimates the exposure to a specified stress event or scenario but does not give the probability of such an event or scenario occurring. Moreover, stress-testing is influenced by the judgement and experience of the experts designing the stress tests. The effectiveness of stress testing therefore depends in particular on whether the bank has chosen the 'right' scenarios for stress-testing, interpreted the results properly and taken the necessary steps to address the results.

      July 2018

    • ST-1.7.3

      Islamic bank licensees must be aware of the limitations when interpreting the results of stress tests.

      July 2018

    • ST-1.7.4

      Islamic bank licensees must submit the stress test results to the CBB biannually on 31st May and 30th November. The submission must include:

      (a) Description of the risks, exposures and entities covered;
      (b) Description of the scenarios and the rationale for it;
      (c) Prevailing and projected macro-economic conditions as well as justifications for assumptions used;
      (d) Description of the methodologies used including justifications for any material changes to the previous methodologies adopted;
      (e) Impact on the profitability, capital adequacy, and liquidity as well as on all material risk indicators; both absolute amounts and key financial ratios must be reported;
      (f) Description of management actions that have been considered and an assessment of their reasonableness;
      (g) Assessment on areas of vulnerability and the associated risk factors. The assessment must be at a sufficient level of granularity to provide a meaningful understanding of the vulnerable areas (for instance, business line, geographical sectors, economic sectors or sub-sectors, market segments, borrower groups) and the causes of stressed losses;
      (h) Extract of minutes of the Board and/or any other related subcommittee meetings on the deliberation on the stress tests and reverse stress test results; and
      (i) Assessment and results of independent reviews, where such review has been conducted.
      July 2018

    • ST-1.7.5

      The reporting of stress test results by Islamic bank licensees, must, at minimum, cover a 3-year horizon based on the following scenarios:

      (a) One market-wide (systemic) stress scenarios;
      (b) One bank-specific (idiosyncratic) stress scenarios; and
      (c) A combination of systemic and idiosyncratic stress scenarios.
      July 2018

    • ST-1.7.6

      In order to arrive at a comprehensive assessment of an Islamic bank licensee's stress testing programme, the CBB will, where necessary, engage in discussion with the Board or senior management on the programme, particularly in respect of the following:

      (a) Their views on major macroeconomic and financial market vulnerabilities and relevant threats specific to the bank's operation and business model; and
      (b) Their justifications for various aspects of the stress testing programme and the methodology employed, such as the key assumptions driving the stress-testing results, the scope and severity of the firm-wide scenarios used, and how the stress-testing results are in practice being used.
      July 2018

    • ST-1.7.7

      The CBB may also require the Islamic bank licensees to conduct additional sensitivity analysis in respect of specific business lines, portfolios or positions which pose significant risk to the bank. Furthermore, the banks may be required to evaluate scenarios under which their viability is compromised (e.g. reverse stress-testing scenarios), or to assess the plausibility of events that lead to significant strategic or reputational risk, particularly for significant business lines or products.

      July 2018

    • ST-1.7.8

      Islamic bank licensees must provide a detailed plan of corrective actions and follow-up on its implementation, in the event that the CBB assessment reveals material shortcomings in the bank's stress testing programme (or that the results generated from the programme are not adequately attended to or acted upon).

      July 2018