Stress testingStress testing

Stress testing

1. In addition to the requirements contained in paragraphs 52 to 56 of this Prudential Standard, an LCR ADI must conduct stress tests on a regular basis for a variety of short-term and protracted institution-specific and market-wide stress scenarios (individually and in combination) to identify sources of potential liquidity strain and to ensure that current exposures remain in accordance with the ADI’s liquidity risk tolerance.
2. The stress test outcomes must be used to adjust the ADI’s liquidity management strategy, policies and positions and to develop effective contingency plans to deal with events of liquidity stress.
3. Stress tests must enable the ADI to analyse the impact of stress scenarios on its Level 1 and Level 2 liquidity positions, as well as on the liquidity positions of individual business lines.
4. An LCR ADI’s stress test scenarios and related assumptions must be well documented and reviewed together with the stress test results. Stress test results and vulnerabilities and any resulting actions must be reported to, and discussed with, the Board and APRA. Results of the stress tests must be integrated into the ADI’s strategic planning process and its day-to-day risk management practices. The results of the stress tests must be explicitly considered in the setting of internal limits.
5. An LCR ADI must decide how to incorporate the results of stress tests in assessing and planning for related potential funding shortfalls in its contingency funding plan.