A new paper from the Basel Committee on Banking Supervision sets out principles for sound stress testing practices and bank supervision.

Wednesday’s paper sets out a comprehensive set of principles for the sound governance, design and implementation of stress testing programs at banks, and the committee says the principles address the weaknesses in banks’ stress tests that were highlighted by the financial crisis.

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

It notes that stress testing is a critical tool for banks internal risk management and capital planning, and for banking regulators looking to identify vulnerabilities and assess the capital adequacy of banks. The principles also establish expectations for the responsibilities of supervisors when evaluating banks’ stress testing practices. In developing the principles, the Basel Committee reviewed industry stress testing practices before and during the crisis. In January, it published for public comment a consultative version of the paper, which helped inform the final version of the paper released today.

IE