KARACHI, May 11: The State Bank of Pakistan (SBP) has revised the Stress Testing for financial institutions, aiming to further strengthen the risk management capacity of banks and development financial institutions (DFIs).

Interest in stress tests has further intensified after the global financial crisis of 2008 and particularly since the results of stress tests, conducted by USA in 2009 and by EU in 2010-11, have been made public, said the SBP on Friday.

The SBP said the financial institutions have undergone major changes in recent years in terms of financial engineering, technological innovation and growing consolidation. All this has a direct bearing on the level of operational risk the financial institutions face today, it added.

Weaknesses in internal controls and corporate governance are the key risk factors which can lead to operational losses, said the SBP.

“The revised guidelines are in conformity with international standards and improved capacity of banks and DFIs to perform such analysis. The sensitivity tests may include depreciation of domestic currency by 15 per cent and increase in consumer loan defaults by 30 per cent,” it further added.

According to State Bank, the Stress Testing is divided into three sections. The first section is the revised guidelines which prescribes standards for designing and implementing the stress-testing framework while section two delineates the mandatory set of stress tests for credit, market and liquidity risk factors using sensitivity analysis, and section three provides guidance on optional stress tests for operational risk, Islamic banking, and advanced approaches, including scenario analysis, and reverse stress tests.

All banks and DFIs were advised to submit the results of the stress tests as specified in Section 2 on the prescribed format of these guidelines to the Banking Surveillance Department of the State Bank on quarterly basis, starting from quarter ending June 30, 2012, within 30 days of the close of each quarter, a circular of the SBP stated.