Macroprudential stress testing is one of the monitoring tools that the SARB uses to assess the financial system’s resilience to unexpected disruptions.

The SARB’s common scenario stress test (CSST) is conducted every two years and covers banks that are designated as systemically important financial institutions (SIFIs). The tests estimate potential losses and capital shortfalls in the banking sector resulting from severe and plausible scenarios over a three-year horizon. A risk assessment matrix is used to identify the stress-testing scenarios.

These tests are conducted on bottom-up (BU) and top-down (TD) bases and include sensitivity analyses intended to assess the effects of specific risk factors that might adversely affect the solvency position or liquidity profile of a financial institution. Participating banks receive the scenarios to conduct BU stress tests based on their internal models, while the SARB simultaneously conducts a TD stress test to validate and benchmark the results from each bank. Both approaches are designed to assess the effect of the scenarios on the solvency position (including, credit risk, market risk and interest rate risk in the banking book) and the liquidity profile of the South African banking sector. For each scenario, new capital and liquidity ratios are calculated and compared to their minimum prudential regulatory requirements. Individual bank results are not published, although sector-wide results are published in the SARB’s Financial Stability Review.

The ongoing COVID-19 pandemic posed unprecedented risk to financial stability. In 2020 the SARB conducted a TD stress test which was designed to assess the vulnerability of the banking system to the economic disruptions that resulted from lockdowns across the globe. The results of the stress test demonstrated that South African banks’ balance sheets were well positioned to weather the crisis. In 2021 the SARB conducted a CSST to assess the solvency and liquidity positions of the SIFIs. The solvency results indicated that banks are adequately capitalised and able to withstand the protracted economic disruptions contained in the adverse scenario. The liquidity stress test showed that participating banks have sufficient resources to weather liquidity shocks under both the baseline and adverse scenarios, across short- and longer-term horizons. More detailed analysis of the 2020 TD exercise and the 2021 CSST are available in the second edition Financial Stability Reviews of 2020 and 2021 respectively. See Financial Stability Review - Second edition 2020 and Financial Stability Review - Second edition 2021.  

For the first time, the 2021 CSST included a BU climate change risk add-on that focussed mainly on physical risks emanating from climate change as the result of a drought scenario. Banks were requested to quantitatively simulate the solvency impact of the scenario, with the impact incorporated into the already stressed solvency positions from the CSST adverse scenario. This was complemented by qualitative assessments of the impact of transition risks and the materiality of environmental risks to different economic sectors. 

In 2020/21, as part of the development of a stress-testing framework for the insurance sector, the SARB undertook an exploratory BU sensitivity stress test of the South African insurance industry. The exercise design, developed in consultation with the industry, provided insights into the impact of identified stresses on the solvency position of selected insurers and an approximation of the impact on the wider insurance industry. In addition to the standard risk types, this exploratory exercise also partially assessed the interconnectedness between the banking and insurance industries. The exercise was conducted on a solo-entity basis, with identified stress parameters treated as instantaneous shocks. Overall, the insurance industry was found to be largely resilient to the identified shocks.

SARB stress testing




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