U.S. banking regulators have issued final guidance for stress testing by big banks, which they see as a critical component of risk management.
The Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. Monday issued final supervisory guidance today regarding stress-testing practices at large banks (defined as banks with total consolidated assets of more than US$10 billion), which highlights the importance of stress testing as an ongoing risk management practice.
The regulators point out that stress testing supports forward-looking assessments of a bank’s risks, and better equips them to address a range of adverse outcomes.
The guidance outlines general principles for a satisfactory stress testing framework, describes various stress testing approaches, and how stress testing should be used at various levels within an organization, the regulators note. The guidance also discusses the importance of stress testing in capital and liquidity planning and the importance of strong internal governance and controls as part of an effective stress-testing framework.
The recent financial crisis underscored the need for banks to incorporate stress testing into their risk management practices, the regulators say, as it revealed that banks that are unprepared for particularly adverse events, “can suffer acute threats to their financial condition and viability”.