Financial crises highlight certain weaknesses in stress testing frameworks, chief among them the fact that stress testing was not adequately incorporated into the integrated risk management and decision-making processes of financial institutions.
International standards pertaining to sound and prudent risk management, set out by bodies such as the Basel Committee on Banking Supervision (BCBS) and the International Association of Insurance Supervisors (IAIS), encourage financial institutions to adopt a forward-looking view in the management of their day-to-day activities, strategic planning and capital management.
The AMF’s expectations regarding stress testing are based on the fundamental principles set out by international bodies. The AMF believes that an effective stress testing program helps both to improve risk management practices and decision-making and to prepare financial institutions for difficult market conditions. Stress testing should therefore be an integral part of an institution’s integrated risk management policy.
In light of this, financial institutions should implement a stress testing program to identify the sources, types and scope of risks to which they are exposed.
