The State Bank of Pakistan (SBP) has designed a stress-testing framework for banks and DFIs to proactively manage risks. For this purpose, and to ensure consistency, a set of guidelines for banks and DFIs have been prepared by the central bank.
Measuring, monitoring and controlling various types of risks is vital for ensuring the financial health of a financial institution as well as the entire system.
For this purpose, financial institutions around the globe are increasingly employing sophisticated techniques for managing risks. Stress-testing is one such technique that has been used to assess risk exposures across the institution and to estimate the changes in the value of the portfolio, if exposed to various risk factors.
Keeping in view the divergence of skill level and available resources among banks and DFIs, the model, initially focuses on "Simple Sensitivity Analysis". However, with the increasing know-how and availability of more data the model will over time undergo further refinement.
All banks and DFIs have been advised to carry out the stress test, as per the attached guidelines, from the year ending December 31, 2005.
They would have to submit a report within 45 days of the close of year ending December 31, 2005, along with a soft copy to the Banking Supervision Department (BSD). Subsequently, the stress test will be carried out semi-annually ie on June 30, and December 31 of each year and results would be submitted to the BSD within 45 days of the close of each half-year.
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