4.4 Stress testing scope and coverage

Stress tests should take into account all types of material risk having regard to both the on- and off-balance-sheet assets and liabilities of an institution including relevant structured entities.

Stress tests should capture risks at various levels in an institution. In this regard, according to the proportionality principle, the scope of stress testing may vary from simple portfolio level sensitivity or individual risk level analyses to comprehensive institution-wide scenario stress testing.

Stress tests should take into account changes in correlations between risk types and risk factors, at individual entity and at a group-wide level. They should also take into account that correlations tend to increase during times of economic or financial distress and that case-by-case analyses of how certain correlations behave in certain scenarios are required.

4.4.2 Portfolio and individual risk level stress testing

Institutions should perform stress tests on an individual portfolio basis, covering all risk types that affect these portfolios, using both sensitivity and scenario analyses. Institutions should also identify risk factors and their adequate level of stress, wherever possible, at the level of an individual portfolio.

Institutions should ensure that they stress test portfolios and business lines or units to identify intra- and inter-risk concentrations – i.e. concentrations of common risk factors within and across risk types (including contagion effects).

In particular, when considering inter-risk concentrations, institutions should aggregate across risk types notably market and credit risk, to gain a better understanding of their potential risk concentrations in a stress situation. Institutions should identify potential links between exposures that could be risky during periods of economic or financial distress, as well as question assumptions about dependencies and correlations between risk types in a stress situation.

4.4.3 Institution-wide stress testing

In order to deliver a complete and holistic picture of the institution’s risks, in addition to stress tests on the level of single entities, stress testing should also be conducted at the group level and across portfolios and individual risk types.

It should be taken into account that:

• a) risks at the institution-wide level may not be well reflected by a simple aggregation of stress tests on portfolios, individual risk areas or business units of the group;
• b) correlations, offsetting of individual exposures and concentrations may lead to either the double counting of risks or to an underestimation of the impact of stressed risk factors; and
• c) specific group risks may arise at the institution-wide level and, therefore, institutions should ensure that all material risks and their corresponding risk factors are also identified at an institution-wide level; when looking at risks at an institution-wide level, particular attention should be paid to risk concentrations on a holistic basis.

A group or an institution that is internationally active should also perform stress tests at the level of business units in specific geographical regions or business sectors or business lines to account for differing risk factors in different businesses and regions.