Sound stress testing principles issued by Basel Committee

The Basel Committee on Banking Supervision today issued Principles for sound stress testing practices and supervision. The paper sets out a comprehensive set of principles for the sound governance, design and implementation of stress testing programmes at banks. The principles address the weaknesses in banks’ stress tests that were highlighted by the financial crisis.

Stress testing is a critical tool used by banks as part of their internal risk management and capital planning. It is also a key component of the supervisory assessment process to identify vulnerabilities and assess the capital adequacy of banks. The principles establish expectations for the role and responsibilities of supervisors when evaluating banks’ stress testing practices.

“The current crisis underscores the importance of stress testing as an essential risk management and capital planning tool”, noted Mr Nout Wellink, Chairman of the Basel Committee on Banking Supervision and President of the Netherlands Bank. He added that “stress testing programmes should be fully integrated in banks’ governance frameworks, and the Basel Committee will follow up to ensure that these principles are implemented.”

Mr Klaas Knot, Chairman of the Basel Committee's Risk Management and Modelling Group and Division Director of Supervision Policy at the Netherlands Bank, said: "Stress testing plays an important role in strengthening not only bank corporate governance but also the resilience of individual banks and the financial system". He explained that "the Basel Committee’s principles were developed with the long-term objective of deepening and strengthening banks’ stress testing practices and supervisory assessment of those practices.”

In developing the principles, the Basel Committee reviewed industry stress testing practices before and during the crisis. In January 2009, the Basel Committee published for public comment a consultative version of the sound stress testing paper. The comments received during that process helped inform the final version of the paper.