FRSGlobal

"Compelling Events" series :
Stress testing in the Middle East

Each month FRSGlobal CoR²Experts present the results of ongoing research into the major compelling events affecting global financial services institutions with imminent deadlines. This month's topic was stress testing in the Middle East

It is not that banks did not conduct stress tests prior to the current crisis which forced them to rapidly examine their own operations. In fact the results of these examinations revealed that the banks were well capitalized and are capable of dealing with shocks. The problem seems to be that the stress tests first, were not strong enough, second, did not take into account various permutation and combination of silos working together and thus magnifying risks in multitude. Banks needed to integrate and look at stress tests as a complete exercise and not as silo stress on individual risk factors. The most important lesson of the current crisis is the realization that risks do not work in silos, especially when there is crisis, and stress tests are primarily meant for such a situation!

Central banks in the region are also aware of this situation and are rapidly putting together new legislation following for example papers from BIS on this specific subject.

The webinar on “Stress Tests and Middle East” looked specifically at:

• What stress tests can do with regards to specific risks
• What are the pitfalls of stress testing
• How integrated stress tests are more effective
• What stress tests are most important and pertinent for the Middle East market