Weekly economic review (29.08- 03.09.2011)

Analysis Materials 7 September 2011 15:03

Central Bank of Azerbaijan suggests preparing three scenarios for stress testing in banks

Azerbaijan 's banks have to conduct stress testing at least one time per month in order to ensure operationability of decision-making as required in the Central Bank of Azerbaijan's draft rules on conducting stress testing.

The rules have been prepared taking into consideration the international experience and Azerbaijani Law on Banks, as well as other legislative acts. Conducting stress testing should be directed to determining the sustainability of the bank's capital to shocks, maximum losses because of shocks, gaps in the bank's activities, assessing various risks and their relationship, as well as determining the dependence of the bank on macroeconomic factors. Depending on the size and complexity of activities, each bank should prepare a corresponding model of conducting stress test.

While conducting stress testing, it needs to prepare "the worst", "very good" and "supposed" scenarios, and separate shocks and criteria should be defined for each scenario.
Stress testing should be conducted under the personal supervision of the bank's management and the emergency plan should be revised in accordance with its results. If necessary, it should be amended.

After each stress testing, a report should be prepared and then submitted to the Supervisory Board.

In July this year, the European banking organization has tested the sustainability of 91 banks to the deterioration in the macroeconomic situation in the region. The assets of the tested banks account for 65 percent of the assets of the banking system of the European Union. Two scenarios - basic and unfavorable - were considered. The first one involves the growth of EU GDP by 1.7 percent in 2011 and 2 percent in 2012, negative - decrease by 0.4 percent this year and zero growth next year.

Eight banks have not passed stress testing, including five Spanish, two Greek and one Austrian. In case of the negative scenario, they would need additional capitalization of 2.5 billion euros over the next two years.

From the point of view of Azerbaijani evaluations, the stress testing of banks in Europe have shown a good result, one might even say - good, judging by the fact that the banks in the countries (except Austria), where there are financial problems, the banks failed to conduct stress testing. However, it is possible to only guess how much the stress testing of the domestic banks will be indicative. And in this case, the CBA has to do everything possible to prepare local banks for this responsible task.