FSA has published a consultation paper on stress and scenario testing. The paper is part of FSA’s suite of papers, including those on liquidity and banking reform. It also plans a more general consultation on BIPRU firms’ prudential requirements early next year. This paper looks at:
- a plan to introduce a reverse-stress test requirement. FSA’s idea is to make relevant firms (deposit takers, CRD investment firms and insurers) consider tail risks. It thinks this would make them more aware of scenarios that would make their business models unviable and should lead to better risk management; and
- the reverse-stress test would be a holistic test. FSA also plans changes to its Pillar 2 ICAAP (or ICAS) provisions, or to affect firms when they use internal models to assess Pillar 1. FSA does not intend a fundamental change to the rules, but does want to address one of the problems that emerged from Northern Rock and prevent firms from being over-optimistic when they look at the severity and impacts of adverse scenarios.
The paper looks at the background to the changes, and lessons FSA has learned that the changes seek to address. It proposes changes to SYSC, including a new Chapter 19 and to GENPRU, BIPRU and INSPRU. FSA needs comments by 31 March.