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 is conducted every two years and covers banks that are designated as systemically important financial institutions. The tests estimate potential losses and capital shortfalls in the banking sector resulting from severe and plausible scenarios over a period of time (typically three to five years). 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 responded by conducting 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. The most recent BU common scenario stress test was conducted in 2018. This exercise, which focused on two stress scenarios and a baseline scenario, showed that the participating banks were adequately capitalised with sufficient liquidity to withstand the impact of scenarios. Detailed analysis of the 2020 TD exercise and the 2018 common scenario stress test are available in the second editions Financial Stability Reviews of 2020 and 2018 respectively. See Financial Stability Review - Second edition 2018  and Financial Stability Review - Second edition 2020.

The SARB is currently developing a stress-testing framework for the insurance sector. In the short term, the framework envisages an exploratory BU sensitivity analysis stress test, based on a common set of stress parameters. The SARB’s medium- to long-term goal is to supplement this exercise with a TD stress test based on a robust modelling framework. In future, both approaches will include an intertemporal element (analysing relationships over time), based on a combination of macrofinancial scenarios and sensitivity analysis. At this stage, the intention is to conduct the exercise every two years as is done for the banking sector.


SARB stress testing




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