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CM-1.4.20

In undertaking credit risk stress tests, licensees should consider counterparty-based and credit facility-based risk factors and scenarios that help estimate credit losses after modelling a change in probability of default (‘PD’) and/or loss given default (‘LGD’) or exposure at default (‘EAD’). Stress testing programmes should consider:

(a) The inclusion of the licensee’s individual credit portfolio composition and compile a list of the credit products in use;
(b) Identify the decisive risk factors for each individual credit product and develop a basis for prioritising the factors by relevance and to group those risk factors which influence each other strongly under normal conditions or in crisis situations for the development of stress tests;
(c) Analyse the prevailing social, economic, and political conditions and filter as many potential crisis situations as possible and relevant;
(d) Use of in-house as well as external expertise, as appropriate, and ensure that the stress tests attain the necessary level acceptance.
Added: June 2022