Background

As an important tool, Central Banks and other financial supervisors use stress testing as part of their internal risk management processes and to meet the requirements of capital adequacy frameworks such as Basel III. Stress testing exposes unexpected adverse outcomes related to a variety of risks. It indicates how much capital might be needed to absorb losses if large shocks occur. Stress tests indicate the required level of capital necessary to endure deteriorating economic conditions.

The recent developments affecting the financial sector such as the climate-related shocks, geo-political issues, fast-paced financial innovation, and digital financing have led to the emergence of new risks in the financial sector thereby making supervising banks more complex. Beyond individual banks, the new developments have brought new dynamics and interconnectedness in the financial sector, prompting supervisors to adopt more robust regulatory approaches and tools. As a result, most Central Banks and other regulatory agencies have intensified the use of forward-looking tools such as stress testing to undertake risk assessments.

Although stress testing has been widely adopted by regulators, weaknesses such as the use of scenarios that are not adequately severe and lack of consideration of feedback and system-wide effects remain. Therefore, MEFMI will conduct this workshop to assist financial sector regulators and other institutions that monitor the level of risks in the financial system to strengthen their stress testing practices.

Objectives

To enable participants to:

• Identify and assess the full spectrum of risks affecting the financial sector, including emerging risks such as climate-related financial risks and cybersecurity threats.

• Develop stress testing scenarios that incorporate both conventional and emerging risk factors, including climate change impacts and cyber incident scenarios.

• Undertake stress testing, including for climate and cyber resilience; and

• Interpret and report stress testing results, with a focus on understanding systemic vulnerabilities and institution-specific exposures to climate and cyber risks.

Content

The course will cover the following:

• Principles for sound stress testing practices and supervision, including treatment of emerging risks such as climate and cyber risks.

• Overview of stress testing approaches and practices, including scenario-based and reverse stress testing for climate change and cyber incidents.

• Developing Stress Testing Scenarios and Stress Testing Models, with dedicated modules on physical and transition climate risk scenarios and cyber-attack impact models.

• Undertaking solvency, liquidity and macro-stress tests, with case studies and exercises involving climate risk shocks and cyber event disruptions; and

• Interpreting and reporting stress testing results, incorporating findings relevant to climate risk disclosure frameworks and cyber resilience assessments.

Target Group

This training workshop is designed for financial sector supervisors, including those engaged in prudential risk-based supervision and macroprudential oversight, as well as IT examiners and cybersecurity professionals responsible for evaluating technology risk, cyber resilience, and operational risk frameworks.

Participants should possess an intermediate to advanced level of knowledge in risk management and financial sector supervision. While a basic understanding of stress testing concepts is recommended, essential foundational concepts will be briefly reviewed. Previous exposure to climate risk frameworks and cybersecurity standards is advantageous, though not mandatory.