KARACHI, Oct 27: The State Bank has designed stress-testing framework for all banks and DFIs to improve risk management capacity to ensure the financial health of these institutions.

The SBP on Thursday issued a set of guidelines for banks and DFIs for the strengthening of risk management skills. The circular said that the financial institutions all over the world were increasingly employing sophisticated techniques for managing risks. Stress-testing is one of such techniques, which 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 the time undergo further refinement,” said the circular.

All banks and DFIs have been advised to carry out the stress test, as per the guidelines provided by the SBP, from the year ending December 31, 2005.

Banks and DFIs will also submit a report within 45 days of the close of year ending December 31, 2005.

Subsequently, the stress test will be carried out semi-annually i.e. on June 30, and December 31 of each year and results will be submitted to the BSD within 45 days of the close of each half year.