GuidelinesonStressTesting

May,2012

BankingSurveillanceDepartment
StateBankofPakistan

 TheTeam

InayatHussain
ExecutiveDirector

LubnaFarooqMalik
Director

MuhammadZakiAwan
Sr.JointDirector

NizamuddinArshad
Sr.JointDirector

RizwanaRifat
JointDirector

TahirNaeem
DeputyDirector

Forqueriespleasecontact: [email protected]

 Contents

Introduction 1

1. SECTION1.StressTestingFramework
1.1. StressTesting 2
1.2. StressTestingMethodologies 2
1.3. KeyElementsofStressTestingFramework 3
2. SECTION2.MandatoryStressTests
2.1. CreditRiskScenarios 6
2.2. MarketRiskScenarios 9
2.3. LiquidityRiskScenarios 12
3. SECTION3.GuidanceforOptionalStressTests
3.1. ScenarioAnalysis 14
3.2. ReverseStressTests 15
3.3. StressTestsforOperationalRisk 16
3.4. StressTestsforIslamicBankingInstitutions 17
Annexures
AnnexureACalculationofDefaultRate 20
AnnexureBChangeinNIIusingRepricingGap 22
AnnexureCReportingFormats 23

 Introduction
Stress Testing refers to a range of techniques used to assess the vulnerability of a financial
institutionortheentiresystemtoexceptionalbutplausibleevents.Whiletheconceptperseis
not new as it is just an evolution of more primitive what if analysis, both the usage and
sophisticationofstresstestingmethodologieshavegrownconsiderablyinrecentyears.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 201011, have been
madepublic.

Cognizantofthecriticalrolethatstresstestscanplayinhelpingbanks/DFIsindentifyingtheir
vulnerabilities at an early stage, State Bank of Pakistan (SBP) issued detailed Stress Testing
GuidelinesvideBSDCircular5of2005.Sincethen,theincreasingcomplexityandsophistication
inourfinancialsystemanddevelopmentsoninternationalfrontpromptedareviewandupdate
oftheexistinginstructionsonstresstestingwithanaimtomakethemrobustandsensitiveto
the changing business environment. This document consists of a revised suite of guidelines
which would help banks/DFIs in developing robust stress testing framework and effectively
conductmandatorystresstests.

These guidelines are divided into three sections. Section 1 contains a brief review of stress
testing concepts as well as some broad guidelines on establishing a robust stress testing
framework. Section 2 elaborates the mandatory set of predefined stress tests, based on
sensitivityanalysis,thatallbanks/DFIsarerequiredtoconductandreporttheirresultstoSBP
onquarterlybasis.Section3providessomeadditionalguidanceonnonmandatorystresstests
thatbanks/DFIsareencouragedtoconsiderfortheirinternalconsumption.

1
 Section1.StressTestingFramework

1.1StressTesting

StressTestingisariskmanagementtoolthathelpsidentifythepotentialimpactofextremeyet
plausibleeventsormovementsonthevalueofaportfolio.Here,exceptionalreferstoeventsof
highseverityandplausibleexcludesimprobablescenarios.

Whiletraditionalriskmeasuresprovidereasonableinformationonthebehaviorofriskfactors
and their impact on financial institutions in normal business conditions, risk managers need
additionaltoolstotest theresilienceoftheirinstitutionsduringtimesofturmoil. Stresstests
help identify and analyze the risks which might be latent under benign conditions but, if
triggered,couldhaveseriousimplicationsfortheveryexistenceofafinancialinstitution.

1.2StressTestingMethodologies
Intermofmethodologies,stresstestscanbebroadlyclassifiedintofollowingtwotypes:

1.2.1SensitivityAnalysis

SensitivityAnalysistypicallyexaminestheshorttermimpactofchangeinsomevariable(s)(eg.
interest rate, equity prices or a combination of both) on the value of a portfolio/financial
position.Forinstance,sensitivitytestsmayinclude(i)aparallelshiftintheyieldcurveby200
basispoints,(ii)depreciationofdomesticcurrencyby15%and(iii)increaseinconsumerloan
defaultsby30%.

While the simplicity of sensitivity analysis makes it easier to use and understand, at best, it
providesanapproximationoftheimpactofariskfactoronaportfolio.Suchananalysisdoes
not take into account the reason behind the movement of a selected risk factor or the
probabilityofoccurrenceofanysuchmovement.

Potentially,anumberofvariablescanbecollectivelystressedordifferentsensitivitytestscan
becombinedtoformamultifactorstresstest.Forinstance,theworstevermovementinequity
priceandinterestratesoverthepast10yearscanbecombinedtoformamultifactorshock.
However, this approach still ignores the correlation between risk factors and should be
interpreted accordingly. The time horizon for sensitivity analysis is often shorter, usually
instantaneous. These tests can be designed on the basis of historical or hypothetical
movementsinriskfactors.

2
1.2.2ScenarioAnalysis

Scenario Analysis assesses impact of extreme but plausible scenarios on a given portfolio/
financial position of an institution, using sophisticated modeling techniques and typically
incorporating macroeconomic variables. Scenarios could be historical (events experienced in
thepastlikestockmarketcrashes,currencydepreciationsornaturaldisasters)orhypothetical
(plausible events that are extreme but not improbable). At the supervisory level, scenario
analysis has been extended to contagion analysis with the objective of examining the
transmission of shocks from individual institutions to the system as a whole. Macro stress
testing in particular has become very popular among supervisors as a tool to assess
vulnerabilitiesoftheoverallfinancialsystem.Moreover,leadingfinancialinstitutionsusemacro
stresstestingmostlyinconjunctionwiththeirinternalriskmodelsofcreditrisk.

Scenario analysis takes into account correlations between risk factors, including
macroeconomic variables. Shocks assumed are closer to real life as other factors are not
supposed to be held constant a big assumption under simple sensitivity test. However, the
complexityofvarioustechniquesbasedonstatistical/macroeconomicmodelinghassomewhat
restricteditsusagetobankswithsophisticatedriskmanagementsystems.

1.3KeyElementsofStressTestingFramework

All banks/DFIs should develop an effective stress testing program and make stress testing a
regular feature of their periodic risk assessment and reporting framework. Following
paragraphsprovidebroadguidanceonthekeyaspectsofaneffectivestresstestingprogram1.
SBP requires the senior management in banks/DFIs to build a robust mechanism of stress
testingwhichiscommensuratewiththeirsize,complexityandriskprofile.

1.3.1StressTestingasaRiskManagementTool
StressTestingisanintegralpartofaninstitutionsriskmanagementframeworkandhelpsrisk
managersinvarietyofways.Specifically,stresstesting:
Providesausefulbaseforcommunicationofkeyrisksacrosstheorganization;
Supplementsotherriskmeasuresbyprovidingacomplementaryperspectiveonvarious
risks;
Indicates how much capital might be needed to absorb losses if worstcase scenarios
materialize;
Provides forward looking assessment of risks and facilitates capital allocation and
liquiditymanagement;

1
Fordetailedguidanceonestablishingarobuststresstestingframework,pleasesee:BaselCommitteeonBanking
Supervision(2009):PrinciplesforSoundStressTestingPractices&Supervision.BankforInternationalSettlements,Basel,
Switzerland.

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 Helps development of risk mitigation or contingency plans across a range of stress
conditions;
Enablesmanagementtosetlimitsforrisktoleranceandredesigntheirriskstrategiesif
required;
Adds value to the risk analysis when combined with other statistical measures like
valueatriskmodelsbyparticularlyfocusingontailevents;
Highlights the limitations of models and historical data by exhibiting the impact of
extremeyetplausibleshockswhichmodelsusingnormalconditionsfailtocapture;and
Helps in Internal Capital Adequacy Assessment Program (ICAAP), by providing
information on how much capital, in addition to the minimum capital requirement
underPillarIoftheBaselIIregime,isadequateforaninstitution.

1.3.2GovernanceofStressTestingFramework
International best practices entail risk management as an oversight duty of the Board of
Directorsofafinancialinstitution,whileimplementationoftheriskframeworkresideswiththe
senior management2. The Prudential Regulations for Corporate/Commercial Banking3 also
placesresponsibilityontheBoard,interalia,forapprovingtheriskmanagementpolicyandits
oversight. In terms of BIS principles for sound stress testing practices and supervision, stress
testingshouldformanintegralpartoftheoverallgovernanceandriskmanagementcultureofa
bank.Itis,therefore,vitalthattheBoardofDirectorsofbanks/DFIstakecompleteownershipof
their stress testing framework and fully embed it in their risk management framework and
strategicdecisionmaking.

Thegovernanceofstresstestingframeworkatbanks/DFIsshall,attheminimum,compriseof
thefollowing:

The Board shall take the responsibility of establishing a robust stress testing program,
whiletheseniormanagementshalldesignandimplementtheprogram;
The senior management shall actively engage in the entire stress testing process and
ensure appropriate designing, effective implementation, and its contribution into risk
mitigationstrategiesoftheinstitution;
Senior management should ensure the documentation of policies and procedures
governingthestresstestingframeworkanditsperiodicreviewtoensureitscontinuous
relevancefortheinstitution;
The stress testing program shall not only comply with regulatory stress testing
requirements but also be capable of conducting additional tests covering various risk
typesandseveritiesforinternalconsumption;
The banks/DFIs should establish an appropriate stress testing infrastructure with
adequateITsystemsandresourcesinplace,whichshouldbeperiodicallyupdatedforits
continuedeffectiveness;

2
OECDPrinciplesonCorporateGovernance
3
RegulationG1ofPrudentialRegulationsforCorporate/CommercialBanking;StateBankofPakistan.
http://www.sbp.org.pk/publications/prudential/PRsCorporate.pdf

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 The key responsibility of implementing a sound stress testing program rests with the
headofriskmanagement;and
Seniormanagementshouldtakesuitableactionbasedonstressresultsandincorporate
stress testing outputs into the institutions strategic and business decisionmaking
processandcapitalallocation.

Specifically,seniormanagement,afterreviewingtheresultsofstresstests(whethermandatory
testsorthoseproducedforinternaluse),mayconsidertakingappropriateactionslike:

Reducingrisklimitsifcertaintolerancelevelshavebeenbreached;
Introducing some risk mitigation measures like increasing collateral requirements or
hedgingexposures;
Repricingofportfoliostoincorporateriskswhichwerepreviouslyunidentified;
Putting up additional arrangements for ensuring availability of sufficient funds (e.g;
throughcreditlinesorchangingasset/liabilitystructure);and
Strengtheningthecapitalbasetowithstandassumedshocks.

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 Section2.MandatoryStressTests
Thissectiondescribessomestandardstresstests,usingsensitivityanalysis,whichallbanks/DFIs
are required to conduct on quarterly basis and submit their results to SBP on a prescribed
format(seeAnnexureC)within30daysofthecloseofeachquarter.Themandatorytestscover
credit, market, and liquidity risk and contain three levels of shocks under each scenario. The
three levels of shocks are defined as (i) Minor, (ii) Moderate, and (iii) Major shocks. This
classificationreflectstheintensityoftheshocksandmagnitudeoftheirimpact.

In total, sixteen stress scenarios/shocks are defined in this section. While banks (both
conventional and Islamic) are required to conduct and report all sixteen stress tests, DFIs
need to carry out only eleven of these tests. Specifically, five scenarios (two credit risk
scenarios;CR5,CR6,andthreeliquidityriskscenariosL1,L3andL4)arenotapplicableto
DFIs.

It needs to be emphasized that stress tests are inevitably subjective. Designing shocks and
defining their level is a challenging task. Our selection of scenarios is based on both the
historical and hypothetical movements in the risk factors. The objective of this exercise is to
measure the level of resilience against these what if scenarios, which though are not the
forecasts, have been designed under plausible but extreme assumptions. The banks/DFIs are
expectedtogaugetheirresilienceagainsttheseandsimilarshocksandbuildtheircapacityto
maintaineitherthelevelofresilienceorpreparednessagainstmajorityoftheseshocks.

2.1CreditRiskScenarios
Creditriskisariskofaneconomiclossfromafailureofthecounterpartytofulfillitscontractual
obligations.Stresstestsinthiscategoryassesstheimpactoftheincreaseinprovisionsdueto
an adverse shift in the overall loan portfolio, default of top private borrowers, adverse
migration of noninvestment grade corporate borrowers, deterioration in default rates of the
corporate credit portfolio, adverse shift in SME and Agriculture loans portfolio and
deteriorationintheperformingloansoftheconsumerportfolio.

Foreachofthecreditriskscenario,banks/DFIsshould:

Calculate additional provisioning requirement under each shock. Benefit of liquid

securities against the defaulted portfolio may be taken into account while calculating
additionalprovisions;and
Compute taxadjusted impact of the additional provisions and aftershock Capital
AdequacyRatio(CAR).

2.1.1 Shocks to Overall Credit Portfolio: Following are the two stress scenarios
applicabletooverallloanportfoliosofbanks/DFIs.

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CR 1 Adverse Shift in Overall Loan Portfolio: This scenario estimates the impact of
deterioration in the credit quality of banks/DFIs overall credit portfolio by applying
thefollowingthreelevelsofshocks:
(i) 5% of performing loans move to substandard, 50% of substandard loans move to
doubtfuland50%ofdoubtfulLoansmovetothelosscategoryofNPLs;
(ii) 10%ofperformingloansmovetosubstandard,70%ofsubstandardloansmoveto
doubtfuland70%ofdoubtfulloansmovetothelosscategoryofNPLs;and
(iii) 20%ofperformingloansmovetosubstandard,100%ofsubstandardloansmoveto
doubtfuland100%ofdoubtfulloansmovetothelosscategoryofNPLs.

CR2DefaultofTopPrivateBorrowers:Thisscenariointendstoascertaintheriskofcredit
concentration in financial institutions. Banks/DFIs should estimate the additional
provisioning against the default (under substandard category requiring 25% provision)
oftheir(i)top2,(ii)top3and(iii)top5performingborrowers/groups,selectedbased
onamountofexposure.

Thisshockshouldseparatelybeappliedto:

A. Fund based exposure of top private sector borrowers/groups, identified

basedonfundbasedexposureonly;and
B. Sum of the Fund based and NonFund based exposures of top private
sector borrowers/groups, identified based on gross sum of the fund
based and nonfund based exposures. For calculation of impact under
thisshock,thecreditconversionfactor,asprescribedunderBSDCircular
No. 8 of 2006, should be applied to the nonfund based exposure to
calculatecreditequivalentamount.Thiscreditequivalentamountshould
beaddedtothefundbasedexposuretogetthetotalcreditexposure(on
balancesheet&offbalancesheet)andprovisionbecreatedonthesum
balance,accordinglyunderthisshock.

Undertheseshocks(A&B),theimpactoftheincreaseinNPLsshouldalsobetakenon
risk weighted assets, by increasing the risk weight of the unprovided part of the
additionalNPLsto100%4.

2.1.2ShockstovariousSubcategoriesofOverallCreditPortfolio: Followingstress
scenariosareapplicabletosubcategoriesofbankscreditportfolio,includingcorporateloans,
consumerloansandSME/Agricultureloans.

CR 3 Adverse Migration of NonInvestment Grade Corporate Borrowers: This scenario

assumesastressedsituationwhereloanstobelowinvestmentgradeborrowers(rated
as 7, 8 and 9 as per BSD circular No. 8 of 2007) become nonperforming. Banks/DFIs

4
For instance a top borrower carries 50% credit risk weight on its outstanding loan of say Rs100 million. Assuming the loan
becomes substandard, a provision of 25% shall be deducted from capital. Since the loan becomes nonperforming, the risk
weightoftheremaining75%shallincreaseto100%,thusincreasingthecreditriskweightedassetsoftheborrowerfromRs
50mtoRs75million.ThisadditionalRs25millionshouldbeaddedtothepreshockcreditriskweightedassetsofthebank.

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 should calculate the additional provisioning requirements under the following three
levelsofshocks:

(i) Classify all loans to borrowers mapped under rating class 9 under loss category
(100%provisioning);
(ii) Classify all loans to borrowers mapped under rating class 8 and 9 under doubtful
(50%provisioning)andloss(100%provisioning)categoryrespectively;and
(iii) Classify all loans to borrowers mapped under rating class 7, 8 and 9 under
substandard (25% provisioning), doubtful (50% provisioning) and loss (100%
provisioning)categoryrespectively.

Thisshockshouldseparatelybeappliedto:

A. Fund based exposure only of the noninvestment grade

borrowers/groups;and
B. Sum of the Fund based and NonFund based exposure of private sector
borrowers/groups. For calculation of the impact under this shock, the
credit conversion factor as prescribed under BSD Circular No. 8 of 2006
should be applied to the nonfund based exposure to calculate total
creditexposure.

SimilartothatoftheCR2,undertheseshocks(A&B)theimpactofincreaseinNPLs
should also be taken on risk weighted assets, by increasing the risk weight of the un
providedpartoftheadditionalNPLsto100%.

CR 4 Deterioration in Default Rates of Corporate Credit Portfolio: This scenario assumes

deteriorationinthequarterlydefaultratesoftheoverallcorporatecreditportfolio.For
thispurpose,benchmarkdefaultrateforthecorporateportfolioneedstobecalculated
basedonthedefaultratesofthelastfourquartersasperAnnexAoftheseguidelines.
Thethreeshocklevelsforthisscenarioare(i)1.5times,(ii)2timesand(iii)2.5timesof
thisbenchmarkdefaultrate5.Undereachscenario,assumethedefaultedexposureis
classified under substandard category, requiring 25% provisioning and calculate
additional provisioning. Calibrate the shock and calculate the impact of additional
provisioningoncapitaladequacyratioofthebank.

CR5 AdverseshiftinSME&AgricultureLoansPortfolio: Thisscenariocapturestheimpact

of increased provisioning requirements due to deterioration in the quality of loans to
bothSMEandAgricultureSectorunderthefollowingthreelevelsofshocks:

(i) 5% of performing loans move to substandard, 50% of substandard loans move to

doubtfuland50%ofdoubtfulloansmovetothelosscategoryofNPLs;

5
Forexample,ifthebenchmarkdefaultratecomesto8%,firstshockof1.5timeswouldrequirethatstresseddefaultratebe
takenas12%(i.e=8%*1.5).

8
 (ii) 10%ofperformingloansmovetosubstandard,70%ofsubstandardloansmoveto
doubtfuland70%ofdoubtfulloansmovetothelosscategoryofNPLs;and
(iii) 20%ofperformingloansmovetosubstandard,100%ofsubstandardloansmoveto
doubtfuland100%ofdoubtfulloansmovetothelosscategoryofNPLs.

CR6 DeteriorationintheLoansofConsumerPortfolio6:Thisestimatestheimpactofweak
economicoutlookwithattendantriseinunemployment,erosioninpurchasingpowerof
the borrowers, and increase in defaults in the overall consumer loan portfolio. The
threelevelsofshocksassume(i)5%,(ii)10%and(iii)20%ofperformingloansbecoming
overdueby90daysandcategorizedunderthesubstandardcategoryofNPLsrequiring
25%provisioning.

2.2 MarketRiskScenarios
Marketriskarisesoutofchangesinfinancialmarketpricesandtheirimpactonthevalueofan
asset. It typically consists of four market risk factors namely: interest rates, exchange rates,
stockpricesandcommodityprices.

2.2.1ShockstoInterestRatePortfolio: Interestrateriskisthelikelihoodofanadverse
impact of the interest rate change on the interest income or the value of the portfolio.
Following four shocks have been designed to assess the impact of an interest rate change.
Undereachshock,theimpactneedstobecalibratedonthecapitaladequacyratio.

IR1ImpactofDecreaseinInterestRateonNetInterestIncome(NII): Thisscenarioassumes
theimpactofdecreaseininterestratesoftheearningassetsby(i)2%,(ii)3%and(iii)4%,
onthenetinterestincome(NII)ofthebanks/DFIsusingtheRepricingGaps(seeAnnex
B).Followingarethekeystepsinvolved:

DeterminetotalamountofRiskSensitiveAssets(RSA)andRiskSensitiveLiabilities(RSL);
ComputetheGAPbetweenRSAandRSLi.e.GAP=RSARSL;and
Multiply the change in the level of interestrates i.e. one of the assumed shocks, with
theGAPamount.Thiswoulddeterminethedecreaseinnetinterestincomeunderthe
shock,whichshouldbeadjustedincapitaltocalculateaftershockCAR.

IR 2 Impact of Parallel Shift in the Yield Curveon theMarket Value ofEquity (MVE): This
scenario captures impact of an upward movement of the yield curve by assuming
increaseininterestratesalongallthematuritiesby(i)2%,(ii)3%and(iii)4%andtaking
itsimpactonMVEornetworthofbanks/DFIs.RepricingGapsshallbeusedtocalculate
theimpactoftheseshocks.Followingstepsshallbefollowed:

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Thisstressscenarioisapplicabletobanksoverallconsumerloanportfolioswhichtypicallyincludesegmentslikecredit
cards/balancetransferfacility,autoloans,mortgageloans,personalloansandconsumerdurableloans.

9
 CategorizealltheRSA&RSLacrossdifferentmaturitybuckets7.Theabsoluteamountof
ratesensitiveoffbalancesheetitemsmaybeplacedacrossthesematuritybucketsand
categorizedasRSAifpositiveorasRSLifnegative;
Foreachmaturitybucket,calculatethegapbetweenRSA&RSL(RSARSL)separately;
Calculateaveragematurity(onannualbasis)ofeachbucket;
CalculatechangeinMVEforeachmaturitybucketusingthefollowingformula:

inMarketValueofEquity(MVE)=(Av.Maturityinyears)*inyield/(1+Y)*(Gapamount)

CalculatetotalchangeinMVEusingthefollowingformula:

TotalinMarketValueofEquity(MVE)=inMVEBucket1+inMVEBucket2+.+inMVEBucket11

IR3ImpactofMovementintheSlopeofYieldCurveontheMarketValueofEquity(MVE):
This scenario captures the impact of changes in the yield curve (shift, flattening or
steepeningoftheyieldcurve)onMVEorNetWorthofbanks/DFIsbyassumingfollowing
changesintheinterestratesalongdifferentmaturities.

(i) 3%increaseininterestratesofupto1yearmaturity(fourbuckets),2.5%increase
in interest rates of overone year to up to 5 year maturity (four buckets) and 2%
increaseininterestratesontheremainingmaturities(threebuckets)assumingan
upwardshiftcoupledwithflatteningoftheyieldcurve;
(ii) 4%increaseininterestratesofupto1yearmaturity(fourbuckets),3%increasein
interest rates of overone year to up to 5 year maturity (four buckets) and 2%
increaseininterestratesontheremainingmaturities(threebuckets)assumingan
upwardshiftcoupledwithflatteningoftheyieldcurve;and
(iii) 2%increaseininterestratesofupto1yearmaturity(fourbuckets),2.5%increase
in interest rates of overone year up to 5 year maturity (four buckets) and 3%
increaseininterestratesontheremainingmaturities(threebuckets)assumingan
upwardshiftcoupledwithsteepeningoftheyieldcurve.

Impact of this shock shall be calculated using the repricing gap methodology as mentioned
underIR2,whichshouldbeadjustedincapitaltogetaftershockCAR.

IR4ImpactofIncreaseinInterestRatesonInvestmentsCategorizedunderHeldforTrading
(HFT) & AvailableforSale (AFS): This scenario assumes impact of increase in interest
ratesonthevalueofinterestbearinginvestments,whichincludeinvestmentinFederal
GovernmentSecuritiesi.e.MarketTreasuryBills(MTBs)andPakistanInvestmentBonds
(PIBs),TFCs,andanyotherinterestbearinginvestmentscategorizedundertheHeldfor
Trading (HFT) and AvailableforSale (AFS) categories. Decrease in the value of interest
ratesensitiveinvestmentsshallbecalculatedunderthefollowingshocks:

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11maturitybucketsaspertheQuarterlyReportofConditionssubmittedtoSBPundertheReportingChartofAccounts
throughtheDataWareHousePortal.

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 (i) 2%increaseininterestratesalongallmaturities;
(ii) 3%increaseininterestratesofupto1yearmaturity,2.5%increaseininterestrates
of upto 5 years maturity and 2% increase in interest rates of over 5 years
maturities;and
(iii) 2%increaseininterestratesofupto1yearmaturity,2.5%increaseininterestrates
of upto 5 years maturity and 3% increase in interest rates of over 5 years
maturities.

Marktomarket value of these investments shall be calculated under each shock and
deficitshallbeadjustedintheregulatorycapitaltoarriveataftershockCAR.

2.2.2ShockstoExchangeRatePortfolio: Exchangerateriskariseswhenamovementin
currencyexchangeratesadverselyimpactsthevalueofaninstitutionsonbalancesheetassets,
liabilitiesoritsoffbalancesheetpositions.Exchangerateriskmaybeeithera)directwherein
banks/DFIsholdapositioninforeigncurrency;orb)indirectwhereaforeigncurrencyposition
isheldbythebanksclients.Followingexchangeratescenarioaimstocaptureonlythedirect
foreignexchangeriskofbanks/DFIs.

ER1 DepreciationofPKRExchangeRate: Thisscenariocapturesthedirectforeignexchange

riskbyapplyingthreedifferentlevelsofshocksi.e.assumingdepreciationinPKRby(i)
20%,(ii)30%and(iii)50%.Theshock,applicablebothtoonbalancesheetaswellasoff
balancesheetforeigncurrencyexposuresofbanks/DFIs,istobecalibratedasunder:

Calculate the overall foreign currency exposure by taking either the sum of net short
positionsorsumofnetlongpositions,whicheverishigherregardlessofthesign8;and
Basedontheoverallexposure,computetheamountofprofit/lossandrevisedCAR(on
taxadjustedbasis)fortheassumeddepreciationinPKRundereachofthethreeshocks.

2.2.3 Shocks to Equity Investments: Equity price risk emanates from adverse impact of
changes in equity prices or market indices on the share holdings of an individual/institution.
Equitypriceriskmaybefurtherdividedintospecific/idiosyncraticandgeneralequitypricerisk.
Followingshockisbasedonthelattercategorywhichassumesafallinoverallindices.

EQ 1 Decline in General Equity/Stock Market Prices: Banks/DFIs may apply three levels of
shocks,assumingafallingeneralequitypricesby(i)30%,(ii)40%and(iii)50%oftheirequity
exposures/investments,andcomputetheamountoflossandreportthetaxadjustedimpact
ontheirrevisedCAR.Forthisshocktheequityexposureshouldincludebothdirectandindirect
equity exposures. The direct equity exposure includes all investments in shares/TFCs/Mutual
Funds(excludinginvestmentsinassociates&subsidiaries),whereas,indirectexposureincludes

8
Forexample,thebankmayhavenetlongpositionofRs500millioninYen,EuroandUSDandthenetshortpositioninGBPand
AustraliandollarofRs600million.Thetotalforeigncurrencyexposurewillbethegreaterofthetwoi.e.sumoftheshort
positionsofRs600million.

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financing/lendingagainstshares/TFCs/MutualFunds.Fallinvalueofdirectequityinvestments
under the shocks will be equivalent to the shock level. However in case of financing/lending,
theimpactshallbecalculatedafteradjustingthemarginsheldbythebanks9.

2.3 LiquidityRiskScenarios
LiquidityriskhasbeenclassifiedasAssetLiquidityRiskandFundingLiquidityRisk.Theformer
referstotheinabilitytoexecuteatransactionatthecurrentmarketpricesbecauseofthesize
of the transaction whereas the latter signifies the inability to meet payment obligations in
timelymanner.Thefirstthreescenariosaimtotestresilienceagainstfundingliquidityriskwhile
thefourthscenarioattemptstocapturebothaspectsofliquidityrisk.

Forthepurposeofliquidityriskscenarios,liquidassetsinclude(i)cashandtreasurybalances,
(ii) balances with other banks, (iii) lending to financial institutions and (iv) unencumbered
investmentsingovernmentsecuritiesandSukuks,whereasliquidliabilitiesinclude(i)deposits
&otheraccounts,and(ii)UnsecuredBorrowings.

L 1 Withdrawal of Deposits & Borrowings Over a Given Period: This shock assumes a
significant withdrawal of deposits and unsecured borrowings for a particular time
period.Theshockassumeswithdrawaloftheliabilitiesforconsecutivethreedaysasper
thefollowings:

(i) Withdrawalofdeposits&unsecuredborrowingsby5%onDay1;
(ii) Withdrawalofdeposits&unsecuredborrowingsby5%onDay1andadditional10%on
Day2;and
(iii) Withdrawalofdeposits&unsecuredborrowingsby5%onDay1,additional10%onDay
2andanother10%onDay3.

Thiswithdrawaloftheliabilitiesshouldbedeductedfromtheliquidassetsandthelevel
ofremainingliquidassetsneedstoberecalculatedundereachlevelofshock.

L 2 Withdrawal of Wholesale10 & Interbank Deposits/Borrowings: This shock measures an

impact of high volatility in private sector wholesale deposits and deposits/unsecured
borrowings from financial institutions on the liquidity condition of a bank. The shock
assumes withdrawal of the private sector wholesale deposits and deposits/unsecured
borrowingsfromfinancialinstitutionsforconsecutivethreedays,asperthefollowing:

9Forinstance;abankhasextendedfinancingofRs100againstsharesofRs130millionassuminga30%marginrequirement.
Underashockof50%declineinequityprice,thevalueofshareswillfalltoRs65million,andthebankwillbooklossof
Rs35million(10065).
10Includesallprivatesectordeposits(excludingdepositsunderLien)otherthanindividualsdepositsanddepositsoffinancial
institutions.

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 (i)Withdrawal of the private sector wholesale deposits and deposits/unsecured
borrowingsfromfinancialinstitutionsby10%onDay1;
(ii) Withdrawal of the private sector wholesale deposits and deposits/unsecured
borrowingsfromfinancialinstitutionsby10%onDay1andadditional30%onDay2;
and
(iii) Withdrawal of the private sector wholesale deposits and deposits/unsecured
borrowings from financial institutions by 10% on Day 1, additional 30% on Day 2,
60%onDay3and100%onDay4.

This withdrawal of the wholesale deposits & interbank liabilities should be deducted
fromtheavailableliquidassetsandthelevelofremainingliquidassetsneedstobere
calculatedaftereachday.

L3WithdrawalofTopDeposits: Thisscenarioteststheimpactofdepositconcentrationon
theresilienceofbanks/DFIsbyassumingawithdrawalbykeydepositors.Threedifferent
levelsofshocksassumecompletewithdrawalsby(i)top10,(ii)top15and(iii)top20
depositors respectively. In order to honour the assumed withdrawals, liquid assets
would be utilized, and after shock liquid assets shall be calculated, which if remain
positivesignifiesthatbanks/DFIscansustaintheshock.

L 4 Shock to Liquidity Coverage Ratio: This scenario has been designed in the light of Liquidity
Coverage Ratio (LCR), recently introduced by Basel Committee on Banking Supervision (BCBS).
Specifically,

LiquidityCoverageRatio=A/max(B,C)

Where

A. TotalLiquidAssets(asdefinedunderSection2.3)
B. Liabilitiesmaturingwithin1monthminusAssetsmaturingwithin1month(basedon
thebehavioralstudy11)
C. 25%ofLiabilitiesmaturingwithin1month

BanksshouldcalculateaftershockLCRbyusingeachofthefollowingthreescenarios:

(i) Applying 20% haircut to the value of Investments in Government Securities while
calculatingcomponentAoftheratio.
(ii) AssumingC=70%ofliabilitiesmaturingwithin1month
(iii) Applying 20% haircut to the value of Investments in Government Securities while
calculatingAcomponentoftheratioandincreasingthedenominatormax(B,C)
by20%.

11
Seeparano.3ofBSDCircularLetterNo.3of2011.

13
 Section3.GuidanceforOptionalStressTests
Mandatory stress tests (Section 2) are minimum requirements to promote a culture of stress
testinginbanks/DFIs.However,SBPencouragesbanks/DFIstoconductadditionalstresstests,
for their inhouse consumption that are commensurate with the size and complexity of their
operations.Thissectionprovidesguidanceondesigningmoresophisticatedstresstests,which,
atpresent,areoptionalandincludescenarioanalysisandreversestresstestsandstresstests
for operational risk. Moreover, Islamic Banking Institutions12 (IBIs) are also encouraged to
designstresstestsaspertheiruniqueriskprofile.
Banks/DFIs should endeavor to build their capacity to regularly use these tests for internal
consumption.Largebanks,withashareof4%oraboveintotalassetsofthebankingsystem
are required to start working on advanced approaches the scenario analysis and reverse
stresstests,andsharethesamewithSBPbyDecember,31,2012.

3.1ScenarioAnalysis

Whilesensitivityanalysisprovidesaquickinitialassessmentofresilienceofaportfolioagainst
specific shocks, it ignores the interrelationships between various risk factors. However, in
reality,theriskfactorsdonotmoveinisolationandareinterrelatedandaffectedbybroader
macroeconomicconditions.Forinstance,asurgeininterestratesmayimpactthemarketvalue
ofassetsandalsoincreasetheprobabilityofdefaultbyimpairingtherepaymentcapacityofthe
borrower.Scenarioanalysisjointlyaccountsformultiplesourcesofrisksandincorporatesthe
interrelationships among the risk factors. This explains the widespread popularity of certain
scenariobased techniques like Macro Stress Testing, particularly among supervisors. SBP is
presently carrying out macro stress testing of the banks credit portfolio and its results are
beingpublished.

Commercial banks, may also design their own scenarios using either a portfoliodriven
approach or an eventdriven approach. The former approach starts with risk identification at
the portfolio level and then works backwards to conceive plausible scenarios which would
causeidentifiedriskstomaterialize.Thelatermethodologybeginswithsimulatingplausiblebut
extreme events that can have a serious bearing upon a given portfolio. Scenarios can be
hypothetical(basedonexpertjudgment),historical(likethestockmarketcrashof2008orthe
impact of the 2010 floods), simulated (through Monte Carlo simulations) or hybrid (mix of
historicalandhypothetical).

Scenarioscanbedevelopedforalltypesofrisks.Banksthathavemarketriskmodels(likeValue
atRiskVaR)inplacecanextendthesemodelsforcalculationofstressedVARsforinterestrate,
exchange rate and equity price risks. For credit risk, macro stress testing offers a variety of

12
IncludeIslamicBanksandIslamicBankingBranches

14
options. For instance, credit portfolio view model (CPV) helps to determine a relationship
between macroeconomic variables and some indicators of asset quality (like the Non
Performing Loan RatioNPLR) by simulating a large number of scenarios using Monte Carlo
simulation.Alternatively,someprobitmodelscanbeusedtogenerateconditionalprobability
of loss for a given credit portfolio. Even VaR techniques are being widely applied to arrive at
CreditValueatRisk(CVaR)ofagivenportfolio.

To carry out scenario based stress tests for credit risk at bank level, first some indicators of
asset quality are calculated (eg. probability of default) using credit risk models like Credit
Matrix,CreditRisk+andMoodysKMV13.Atthesecondstage,resultsfromthecreditriskmodel
areusedasakeyinputinestablishingitsrelationshipwithmacroeconomicvariables.Oncesuch
a relationship is established, stressed values of macroeconomic variables can be used to
generatetheimpactofmacroeconomicshocksonacreditportfolio.

SBP encourages large banks to build requisite capacity for conducting scenario analysis and
subsequently, to carry out scenario analysis and share the results at regular intervals14. The
choice of methodology should fairly commensurate with the size and complexity of the
institution,sophisticationoftheriskmanagementframeworkinplaceandthelevelofexpertise
available.

3.2ReverseStressTests
Whiletraditionalstresstestsexaminetheimpactofextremeyetplausiblescenariosonagiven
portfolio,reversestresstests,asthenameimplies,overturnthisprocess.Suchtestsbeginwith
a worstcase scenario (i.e. failure of a bank) and then proceeds to identify the circumstances
whichmaycausethistohappen.

Specifically,areversetestmaystartwithanassumedresult(stressscenario)like(i)failureof
thefirmsbusinessmodel,(ii)significantbreachofacertainregulatoryratio/requirementlike
capital adequacy ratio, liquidity reserve requirements, etc., or (iii) materialization of an
assumed amount of loss that is commensurate with the risk appetite of the bank. Once the
outcome has been assumed, risk managers can proceed to identify and evaluate the
circumstances/changesinriskfactorsthatwouldturntheassumedoutcomeintoareality.

Forinstance,abankmayassumethatitsCARdropsbelowtherequiredlevelof10%andthen
identifythepotentialsourcesforthisproblemtomaterialize.Alternatively,aDFIcanassumea
certainsizeoflosstotakeplaceandthenexplorethepossiblereasonsthatwouldleadtosuch
anadverseoutcome.Asanextremecase,abankmayassumeitsinsolvencyandthenidentify
thefactorsthatcancausesuchanadverseoutcome.

13
Foranaccessiblediscussiononvariouscreditriskmodels,pleaseseeCaouette,B.Johnetal(2008),ManagingCreditRisk;
TheGreatChallengefortheGlobalFinancialMarkets,WileyFinance.Fordesigningandimplementationofcreditriskmodels,
pleaseseeGunterLoeffler&PeterN.Posch(2007)CreditRiskModelingusingExcelandVBA,WileyFinanceSeries.
14
Fordetailedguidanceonvariousmethodsofmacrostresstests,pleaseseeMarioQuagliariello,(2009).StressTestingthe
BankingSystem,MethodologiesandApplications,CambridgeUniversityPress.

15
Reverse stress testing forces senior management to forensically examine the circumstances
that can make their worst fears come true15. The key benefit of such an approach is the
elaborate consideration of various sources of risks that can undermine an institutions
existence.Theapproachtoidentifysuchfactorscanbequalitativeorquantitative,depending
upon the sophistication of tools available. For small banks with unsophisticated risk
managementframeworks,evenaqualitativeassessmentofthekeyrisksthatcanthreatenthe
viability of the institution is useful. For sophisticated banks, a rigorous quantitative approach
canbeusedtoidentifyaspecificleveloflossorsomeotherimpactlikeerosionofcapitalbya
certain amount/percentage and then working backward to indentify the conditions that can
makethishappen.

After carrying out such analysis, the banks/DFIs can devise some counter strategies if the
outcome is beyond their risk appetite. In case they choose to take no action, management
shouldjustifythesame(e.g.assumedbreach/sizeoflossmightbewithintherangeofbanks
riskappetite).

SBPencouragesthelargebanks/DFIstocarryoutreversestresstestscommensuratewiththeir
risk exposure, size, complexity of operations, and sophistication of risk management systems
and share the results of the exercise with SBP. It is expected that the idea of reverse stress
tests shall be used as a potential tool to not only generate a fruitful discussion on the key
vulnerabilities of financial institutions but also as an effective mechanism for internal
communicationabouttherisksfacedbytheseinstitutions.

3.3StressTestsforOperationalRisk
Forthepurposeofriskmeasurementandmanagement,operationalriskmaybedefinedasthe
risk of direct or indirect losses resulting from inadequate or failed internal processes, people
and systems or from external events. Weaknesses in internal controls and corporate
governancearethekeyriskfactorswhichcanleadtooperationallosses.Financialinstitutions
have undergone a sea change in recent years in terms of financial engineering, technological
innovationandgrowingconsolidation.Allthishasadirectbearingonthelevelofoperational
riskthefinancialinstitutionsfacetoday.Recognizingitsgrowingimportance,allthreepillarsof
theNewBaselCapitalAccord,minimumcapitalrequirements,thesupervisoryreviewprocess
andmarketdisciplinesetforthguidanceforoperationalrisk.Pillar1offersthreemethodsfor
calculatingoperationalriskcapitalchargeinacontinuumofincreasingsophisticationandrisk
sensitivity.Sinceoperationalriskeventscanresultintohugelosses,sometimesbiggerthanthe
onesexperiencedundercreditandmarketriskevents,operationalriskrelatedstresstestsneed
tobeinstituted.

15
Inthecontextoftheglobalfinancialmeltdownof20078,ithasbeenarguedthatbankscouldhaveidentifiedsomeoftheir
vulnerabilitiesbyconductingreversestresstests(i.ebyaskingwhatscenarios/exposurescanrenderthembankruptevenin
apparentlybenignconditions).

16
Banks should aim to develop a framework for operational risk management particularly for
collecting operational loss data. In respect of designing operational risk stress tests, key
indicators,likehumanerrors,frauds,orfailuretoperformintimelymanner,breachinglimits,
failureofinformationtechnologysystemsoreventssuchasmajorfiresorotherdisastersmay
be identified against the business lines. Shocks may be given to these risk events, their
frequency and severity of losses. Once the operational loss events are identified, the level of
shocksmaybedesignedbylookingintoboththehistoricalaswellashypotheticalleveloflosses
underthoseriskevents.

SBP encourages the major banks/DFIs to design stress tests for their operational risk events,
including both the quantitative and qualitative risk factors, as per the sophistication of their
systems,availabilityofdataandlevelofexpertisetoassesstheresilience.Withtheincreasing
sophistication in the quantification of the systems used for operational risk management16 at
thebankslevel,thestresstestsmayberefinedfurther.

3.4StressTestsforIslamicBankingInstitutions
Apartfromtheconventionalriskfactorsaffectingbanks,IslamicBankingInstitutions(IBIs)face
unique risks like Shariah noncompliance risk, fiduciary risk, rate of return risk, and displaced
commercialrisk17.Further,transformationofriskfromonecategorytoanotherduringdifferent
stagesofatransactionalsocomplicatestheprocessofscenarioselectionforIBIs.Forinstance,
inMurabahatransactions,marketriskisanimportantriskbeforethecommoditiesaresoldto
the counterparty; once done, market risk transforms into credit risk since the payment is on
deferredterms.SuchpeculiaritiesnecessitateasetofcustomizedstresstestsforIBIs.

Following paragraphs provide broad guidance on designing stress tests specifically for IBIs.
Unlikesection2,thesetestsarenotmandatoryatthisstage.However,IBsshouldconductsuch
orsimilartypesoftestsonregularbasisfortheirinhouseconsumption.

Stress scenarios can be developed assuming different magnitudes of withdrawals that

mighttakeplaceinsituationswhereIBIspaybelowmarketreturns;
Intimesofstress,displacedcommercialriskislikelytobehigherasinvestmentreturns
normally drop. This may compel IBIs to draw upon their funds/reserves to maintain a
given level of payouts to their profit sharing investment accounts. Scenarios can be
developedincorporatingdifferentdepletionlevelsofreservesandthusdeterminingthe
adequacyofsuchreservesundertimesofstress;
SomeIBIsmayhavesignificantexposuretorealestate,apopularassetclassduetoIBIs
preference for asset based financing. Given the cyclical trends in real estate markets,
scenarioscouldbedevelopedassumingasubstantialdropinpropertyprices.Whilethe
datasetofpropertypricesinemergingmarketsisnotreadilyavailableandimpreciseat

16
Foradditionalinformationonoperationalriskmanagementpleasesee:BaselCommitteeonBankingSupervisionJune2011:
PrinciplesfortheSoundManagementofOperationalRisk,BankforInternationalSettlements,Basel,Switzerland.
17
Fordefinitionsoftheseterms,pleaserefertoIslamicBankingDepartmentsCircularNo.3ofJanuary02,2008.

17
 best, housing markets in advanced countries can be studied for developing some
appropriatescenariosforthedeclineinpropertyprices18;
InvestmentbookofIBIstypicallyconsistsofsomeinvestmentinSukukswhichareprone
tomarketshocksandshouldbesuitablystresstested;
IBIs may also hold large inventories of commodities against contracts like Murabaha,
Salam, and Istisna. Stress scenarios can be developed assuming a significant drop in
prices of such commodities or tangible losses due to inadequate storage facilities of
suchcommodities;
Liquidityrelatedstresstestsarealsorelevantbecauseofbalancesheetimbalanceson
the duration of assets and liabilities. The fluctuations linked to different types of cash
flowbasedportfoliosneedtobestressedsuchas:i)knowncashflows(Murabaha,Ijara
and Diminishing Musharakah), ii) conditional but predictable cash flows (Salam and
Istisna receivables) and iii) conditional but unpredictable cash flows (Musharakah
investment). Further, stress scenarios for limited access to Shariah compliant funding
anditsimpactonsolvencycanalsobetested;and
Scenarios assuming noncompliance with Shariah standards and materialization of
fiduciary and legal risks can also be tested with an aim to determine their potential
impact on the reputation of Islamic banking business. IBIs may use various stress
scenarios of deposit withdrawals that may take place due to adverse reputation
regarding Shariah compliance and their impact on bank solvency. Further, if certain
IslamicmodesoffinancingaredeclarednonShariahcompliantbythecourts,theimpact
of existing and future financing extended in that particular mode may also be stress
tested.

Theabovelistisbynomeansexhaustive.Byhighlightingafewareasparticularlyrelevantfor
Islamicbanking,SBPencouragesIBIstodevelopscenarioswhichbettercapturetheirbusiness
complexityandriskprofiles.

18
Forinstance,CaseShillerHousingPriceIndex,whichprovidesdataforUShousingmarketfrom1987,canbestudiedto
developsomescenariosofhousingmarketcrash.

18






ANNEXURES

19

AnnexureA

ScenarioCR4:
CalculationofDefaultRate:
Credit Risk Scenario4 (CR4) stresses the default rate of a corporate portfolio and gauges its
impactoncapitaladequacyratioofabank.Forthisshock,theDefaultRateshallbedefinedas
follows:
Definitionofdefault:Anexposureiscategorizedunderdefaultif;
i. classifiedundersubstandardcategoryorbelowand/orclaimsareoverdueby90daysor
more;or
ii. hasundergonerestructuring/rescheduling
FortheshockC4,thedefaultrateisdefinedasaratioofamountofoutstandingexposurethat
defaulted (as per definition above) to the total amount of exposure that could potentially
defaultduringaspecifiedperiodoftime.
FormulatoCalculateQuarterlyDefaultRate:
Following formula should be used to calculate quarterly default rate using outstanding
exposuresoftheborrowers:
DefaultRateofaQuarter=DRqi=Dqi/(LPiRi)
Here
LPi=Outstandingamountofperformingloansatthebeginningofthequarter
Dqi=AmountofdefaultsattheendofthequarteroutofthetotalLP.
Ri =Repaymentsi.e.Amountofloansrepaidduringthequarteroutofthetotal
LPi.

Followingexampledescribesdefaultratecalculation:
Example:
FirstQuarter(AssumeitsJanMarQuarter)
AssumethattheoutstandingexposureofperformingborrowersofabankonJanuary1st,the
startofthequarterwasRs105billion.Bytheendofthequarteri.e.March31st,outofthese
Rs105billion,Rs5billionofloans wererepaid,whichmeanstheyarenomoreonbooks,and
additionalRs3billionloansdefaulted(asperdefinitionabove).ThedefaultratefortheMarch
quartershallbecalculatedasfollows:
LP1=OutstandingamountofperformingloansonJanuary1st=Rs105billion
Dq1=AmountofdefaultsattheendofthequarteroutofthetotalLP=Rs3billion

20
 R1=Amountofloansrepaidduringthequarter=Rs5billion
DefaultRateforMarchquartershallbecalculatedasfollows:
DRq1=Dq1/(LP1R1)=3/(1055)= 3%
SecondQuarter(MarJun)
Now,onApril1st,outstandingexposureoftheperformingloansmayhaveincreasedtoRs104
billion due to new loans booked during the last quarter. During the June quarter, out of this
Rs104billions,Rs4billionwererepaidandRs5billionstanddefaultedbyJune30th.Thedefault
ratefortheJunequartershallbecalculatedusingtheaboveformula.
LP2=OutstandingamountofperformingloansonApril1st=Rs104billion
Dq2=AmountofdefaultsattheendofthequarteroutofthetotalLP=Rs5billion
R2=Amountofloansrepaidduringthequarter=Rs4billion
DefaultRateforJunequartershallbecalculatedasfollows:
DRq2=Dq2/(LP2R2)=5/(1044)= 5%
Thesamemethodshallbeusedtocalculatedefaultratefortheothertwoquarters.
Once default rate for the last four quarters is calculated, the benchmark default rate for the
shockC4shallbetakenasthemaximumofthelastfourquartersdefaultrateorthe2%,which
everishigher.Thiscanalsobecalculatedusingthefollowingformula:
BenchmarkDefaultRateforShockC4=Max(Max(DRq1,DRq2,DRq3,DRq4),2%)
This2%hasbeensetastheminimumbenchmarkdefaultrate.

21


AnnexureB
ScenarioIR1:
ChangeinNetInterestIncome(NII)usingRepricingGap:
The repricing gap is the difference between the rate sensitive assets (RSA) and the rate
sensitiveliabilities(RSL)foraparticulartimeband.Thechangeinnetinterestincome(NII)can
beestimatedusingtherepricinggaps.

A bank with more rate sensitive assets than rate sensitive liabilities would have positive
repricinggap,thuswithanyincreaseininterestratestherewillbeanincreaseinnetinterest
income.Accordingly,afinancialinstitutionwithmoreratesensitiveliabilitiesthanratesensitive
assetswouldbenegativelygapped,andincaseofincreaseintheinterestrates,therewillbea
decreaseinnetinterestincome.ChangeinNIIofabank/DFIduetochangesininterestrates
canbecalculatedbyusingthefollowingformula:

NII=GAP*R

whereGAP=(RSARSL)

22
ReportingFormats AnnexureC
NameofBank/DFI
Table:1StressTestResults
FortheQuarterendedon
(AmountinMillionPKR)
RegulatoryCapital xxxxxxxxxxxxx
RiskWeightedAssets xxxxxxxxxxxxx
CAR(%) xx.xx%

ShockstoOverallCreditPortfolio
ShockLevel1 ShockLevel2 ShockLevel3
IncreaseinNPLs
AfterShockNPLstoLoansRatio(%)
AdverseShiftin
IncreaseinProvisions
CR1 OverallLoan
Portfolio TaxadjustedImpactofProvisions
AfterShockCapital
AfterShockCAR(%)
IncreaseinNPLs
AfterShockNPLstoLoansRatio
DefaultofTop IncreaseinProvisions(25%ofNPLs)
PrivateBorrowers TaxadjustedImpactofProvisions
(ShockA) AfterShockCapital
AfterShockRiskWeightedAssets
AfterShockCAR
CR2
IncreaseinNPLs
AfterShockNPLstoLoansRatio
DefaultofTop IncreaseinProvisions(25%ofNPLs)
PrivateBorrowers TaxadjustedImpactofProvisions
(ShockB) AfterShockCapital
AfterShockRiskWeightedAssets
AfterShockCAR
ShockstoVariousSubcategoriesofOverallCreditPortfolio
IncreaseinNPLs
AdverseMigration AfterShockNPLstoLoansRatio(%)
ofNonInvestment IncreaseinProvisions
GradeCorporate TaxadjustedImpactofProvisions
Borrowers(Shock AfterShockCapital
A)
AfterShockRiskWeightedAssets
AfterShockCAR(%)
CR3
IncreaseinNPLs
AdverseMigration AfterShockNPLstoLoansRatio(%)
ofNonInvestment IncreaseinProvisions
GradeCorporate TaxadjustedImpactofProvisions
Borrowers(Shock AfterShockCapital
B)
AfterShockRiskWeightedAssets
AfterShockCAR(%)
AfterShockDefaultRate
IncreaseinNPLs
Deteriorationin AfterShockNPLstoLoansRatio(%)
DefaultRatesof
CR4 IncreaseinProvisions
CorporateCredit
Portfolio TaxadjustedImpactofProvisions
AfterShockCapital
AfterShockCAR(%)
IncreaseinProvisions
Adverseshiftin AfterShockNPLstoLoansRatio(%)
CR5 SME&Agriculture TaxadjustedImpactofProvisions
LoansPortfolio AfterShockCapital
AfterShockCAR(%)
IncreaseinProvisions
Deteriorationin
AfterShockNPLstoLoansRatio(%)
theLoansof
CR6 TaxadjustedImpactofProvisions
Consumer
Portfolio AfterShockCapital
AfterShockCAR(%)

23
 ShockstoInterestRatePortfolio
Impactof ChangeinNetInterestIncome
Decreasein TaxadjustedImpact
IR1 InterestRateon
AfterShockCapital
NetInterest
Income(NII) AfterShockCAR(%)

ImpactofParallel ChangeinMVE
ShiftintheYield TaxadjustedImpact
IR2 Curveonthe AfterShockCapital
MarketValueof
Equity(MVE) AfterShockCAR(%)

Impactof ChangeinMVE
Movementinthe TaxadjustedImpact
IR3 SlopeoftheYield
AfterShockCapital
Curveonthe
MarketValueof AfterShockCAR(%)

FallinMarketValueofPIBs&MTBs
Impactofincrease FallintheMarketValueofotherInterestBearing
inInterestRates Investments
onInvestments TotalFallintheMarketValueofInvestments
IR4 categorizedunder TaxadjustedImpact
HeldforTrading
AfterShockCapital
(HFT)&Available
forSale(AFS) AfterShockCAR(%)

ShockstoExchangeRatePortfolio
CurrencyExposure
Depreciationof EstimatedGain/(Loss)undertheShock
ER1 PKRExchange TaxadjustedImpact
Rate AfterShockCapital
AfterShockCAR(%)
ShockstoEquityInvestments
TotalEquityExposure(Shares+OtherListedStocks)
EstimatedLossundertheShock
DeclineinGeneral
EQ1 TaxadjustedImpact
EquityPrices
AfterShockCapital
AfterShockCAR(%)
ShockstoLiquidity
Withdrawalof WithdrawalofDeposits&UnsecuredBorrowings
L1 Deposits& LiquidAssetsnetofWithdrawal
BorrowingsOvera AfterShockLiquidAssetstoTotalAssetsRatio(%)
Gi P i d
WithdrawalofWholesaleDeposits&Unsecured
Withdrawalof Borrowings
L2 Wholesale&
LiquidAssetsnetofWithdrawal
InterbankDeposits
AfterShockLiquidAssetstoTotalAssetsRatio(%)
AmountofTotalDepositsWithdrawal
WithdrawalofTop
L3 LiquidAssetsnetofWithdrawal
Deposits
AfterShockLiquidAssetstoTotalAssetsRatio(%)
LiquidAssets
OfwhichInvestmentsinGovernmentSecurities
ShocktoLiquidity
L4
CoverageRatio AssetsmaturingwithinOneMonth
LiabilitiesmaturingwithinOneMonth
AfterShockLiquidityCoveregeRatio(%)

24
 NameofBank/DFI
Table:2SummaryDataforStressTesting
FortheQuarterendedon
(AmountinMillionPKR)
ShockstotheOverallCreditPortfolio
PerformingLoans
NonPerformingLoans
AdverseShiftinOverall
CR1 ofwhich:Substandard
LoanPortfolio
Doubtful
Loss
FundedExposureofTop2borrowers
DefaultofTopPrivate
FundedExposureofTop3borrowers
Borrowers(ShockA)
FundedExposureofTop5borrowers
FundedExposureofTop2borrowers
CR2 NonFundedExposureofTop2borrowers
DefaultofTopPrivate FundedExposureofTop3borrowers
Borrowers(ShockB) NonFundedExposureofTop3borrowers
FundedExposureofTop5borrowers
NonFundedExposureofTop5borrowers
ShockstoVariousSubcategoriesofOverallCreditPortfolio
FundedExposureof7ratedBorrowers

NonFundedExposureof7ratedBorrowers

AdverseMigrationofNon FundedExposureof8ratedBorrowers
CR3 InvestmentGrade
CorporateBorrowers NonFundedExposureof8ratedBorrowers

FundedExposureof9ratedBorrowers

NonFundedExposureof9ratedBorrowers
PerformingLoansofSMEs&Agri.
AdverseshiftinSME& NonPerformingLoansofSMEs&Agri
CR5 AgricultureLoans ofwhich:Substandard
Portfolio Doubtful
Loss
Deteriorationinthe PerformingLoansofConsumer
CR6 LoansofConsumer
Portfolio NonPerformingLoansofConsumer
ShockstoInterestRatePortfolio
ImpactofDecreasein RateSensitiveAssets
IR1 InterestRateonNet
InterestIncome(NII) RateSensitiveLiabilities

RepricingGap(RSARSL)ofupto1month

RepricingGap(RSARSL)of13months

RepricingGap(RSARSL)of36months

RepricingGap(RSARSL)of6months1Year

Impactof RepricingGap(RSARSL)of12Years
IR2/ Shift/Movementinthe
RepricingGap(RSARSL)of23Years
IR3 YieldCurveontheMarket
ValueofEquity(MVE) RepricingGap(RSARSL)of34Years

RepricingGap(RSARSL)of45Years

RepricingGap(RSARSL)of57Years

RepricingGap(RSARSL)of710Years

RepricingGap(RSARSL)ofover10years

25
 Impactofincreasein
InterestRateson InvestmentsinPIBs&MTBscategorizedunderHFT&AFS
Investmentscategorized
IR4
underHeldforTrading
(HFT)&AvailableforSale InvestmentsinotherInterestBearingInstrumentscategorized
(AFS) underHFT&AFS

ShockstoExchangeRatePortfolio
DepreciationofPKR SumofNetLongPositionsinForeignCurrency
ER1
ExchangeRate SumofNetShortPositionsinForeignCurrency
ShockstoEquityInvestments
InvestmentsinShares(Shares/MutualFunds/PreferenceShares)
DeclineinGeneralEquity
EQ1 FinancingsagainstShares/Stocks
Prices
MarginRequirementsagainstFinancings(Amount)
ShockstoLiquidity
LiquidAssets
WithdrawalofDeposits&
L1 BorrowingsOveraGiven TotalDeposits
Period
UnsecuredBorrowings

WithdrawalofWholesale TotalWholesaleDeposits(netofdepositsunderlien)
L2
&InterbankDeposits
FinancialInstitutions'Deposits
LiquidAssets
ShocktoLiquidity OfwhichInvestmentsinGovernmentSecurities
L4
CoverageRatio AssetsmaturingwithinOneMonth
LiabilitiesmaturingwithinOneMonth
NameofBank/DFI
Tabl:3SummaryDataforStressTesting
FortheQuarterendedon
(AmountinMillionPKR)

QuarterQ(Current
DefaultRateCalculation Quarter) QuarterQ1 QuarterQ2 QuarterQ3
DeteriorationinDefault Amountofperformingloansinthebeginningofthe
CR4 RatesofCorporateCredit quarter(a)
Portfolio ofwhich:Amountrepaidduringthequarter
(b)
Amountdefaulted(c.)
DefaultRate(c/(ab))

26