RBI's new guidelines for banks' stress-tests from April

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The Reserve Bank today issued updated guidelines for stress-testing of banks which will be effective from April.

"The RBI would expect the degree of sophistication adopted by banks in their stress-testing programmes (to be implemented from April, 2014) to be commensurate with the nature, scope, scale and the degree of complexity in the bank's business operations and the risks associated with those operations," RBI said.

The central bank also said, accordingly, banks will be classified into three groups based on their size.

As per the classifications, the first group having its risk weighted assets at over Rs 2 lakh crore, the second one for banks having their RWAs between Rs 50,000 crore and Rs 2 lakh crore; and the third category being those with RWAs of under Rs 50,000 crore.

Explaining the reason for the new guidelines, the RBI in a notification said, "The depth and duration of the recent global financial crisis has led many banks and supervisory authorities across the world to question whether the existing stress testing practices are sufficient and robust to cope with the rapidly changing circumstances."

The financial crisis proved to be more severe than the dark scenarios assumed by banks in their stress-testing, it said, adding, the country has been having stress-testing guidelines in place since 2007.

The updated guidelines are inspired by global best practices from the Basel Committee on Banking Supervision's 'principles for sound stress-testing practices and supervision' issued in May 2009, the RBI said.

Among other things, they contain guidelines on overall objectives, governance, design and implementation of stress testing programmes. They also give a list of possible shocks and require banks to carry out stress tests accordingly, it said, adding though the severity of the scenario differs, banks should pass at least the baseline shocks.

The mandatory stress-tests required to be carried out vary according to the size.

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