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  • LM-9.2 LM-9.2 Scenarios and Assumptions

    • LM-9.2.1

      It is important for banks to construct sufficiently severe, but plausible stress scenarios and examine the resultant cash flow needs. While banks should aim to cover different stress events and levels of adversity, they must, at a minimum, include the following types of scenarios in their stress testing exercise:

      (a) An institution-specific stress scenario;
      (b) A general market stress scenario; and
      (c) A combination of both, including possible interaction with other risks.
      August 2018

    • LM-9.2.2

      A bank will need to assign the timing of cash flows for each type of asset and liability, as well as off-balance sheet and contingent items, by assessing the probability of the behaviour of those cash flows under the scenario being examined. The timing of cash inflows and outflows on the maturity ladder can vary among scenarios and the assumptions may differ quite sharply. In estimating liquidity needs, both contractual and non-contractual cash flows should be considered.

      August 2018

    • LM-9.2.3

      In designing stress scenarios, a bank must take into account, specific risks associated with its business activities, products or funding sources. These include, for example, heavy reliance on specific funding markets or significant exposures to complex financial instruments. The stress scenarios must be able to evaluate the potential adverse impact of these factors on the bank's liquidity position.

      August 2018

    • LM-9.2.4

      A bank should take a reasonably conservative approach when setting stress assumptions. There are a number of possible areas that the assumptions should cover. For illustrative purposes, these areas include, but are not limited to, the following:

      (a) The run-off for retail funding;
      (b) Asset market illiquidity and erosion in the value of liquid assets;
      (c) The loss or impairment of secured and unsecured wholesale funding sources;
      (d) The correlation between funding markets and effectiveness of diversification across available sources of funding;
      (e) The availability of contingent lines extended to the banks;
      (f) The availability of funding in different tenors;
      (g) Contingent claims, including potential draws on committed lines extended to third parties or the bank's connected parties (such as its overseas branches, associated entities in its consolidated group, controller or head office);
      (h) Liquidity drains associated with contractual obligations or non-contractual obligations involving off-balance sheet vehicles and activities, as well as complex products or transactions;
      (i) Additional margin calls and collateral requirements (e.g. in Shari'a-compliant hedging contract or other contracts with embedded trigger clauses);
      (j) Estimates of future balance sheet growth;
      (k) Currency convertibility and access to foreign exchange markets;
      (l) The transferability of liquidity across entities, sectors and jurisdictions, taking into account legal, regulatory, operational and time zone restrictions and constraints;
      (m) Access to the payment and settlement systems which are imperative to a bank.
      (n) The impact of credit rating triggers;
      (o) The access to central bank facilities;
      (p) The operational ability of the bank to monetise assets; and
      (q) The bank's remedial actions and the availability of the necessary documentation and operational expertise and experience to execute them, taking into account the potential reputational impact when executing these actions.
      August 2018

    • LM-9.2.5

      All stress scenarios and their underlying assumptions must be properly defined and documented in the bank's Liquidity Risk Management Policy statement.

      August 2018