On the completion of the pilot Asset Quality Assessment and Supervisory Stress Testing

In March 2022, the Agency of the Republic of Kazakhstan on Regulation and Development of the Financial Market, together with the National Bank of Kazakhstan, completed the implementation of asset quality assessment (AQR) and supervisory stress testing (SST) in the annual supervisory process.

The implementation was carried out in two phases. In the first phase, in the first half of 2021, methodological guidance, templates, and quantitative risk assessment models used in SSTs were developed. Methodological documents and templates were made available for review and feedback from second-tier banks. Within the framework of answering the banks' questions, the Agency explained the key approaches and details of the SST process. In addition, training sessions with the provision of all necessary materials were held for the banks.

In the second phase of testing, the created toolkit in the period from June 2021 to March 2022 successfully conducted SST in the pilot mode with the participation of 4 major banks.

The main criteria for determining the participating banks was the possibility to test the methodology and models on different business models of the banks. This approach made it possible to fully test the developed methodological approaches and the banks' ability to implement them, calibrate the Agency's verification models, and test the practical methods of SST implementation.

Based on the concept of SST, as a starting point for stress testing of banks are used balance sheets of banks, adjusted to AQR. Therefore, before starting the pilot SST, an assessment of the quality of assets of the participating banks was carried out, which identified areas for further activities of the second-tier banks in terms of the correctness of the reflection of assets on their balance sheets.

For the pilot SST, the Agency and the National Bank have developed baseline and stress scenarios, under which the risks of deteriorating epidemiological situation, price risks for commodities, the risks of declining oil production and deteriorating climatic conditions, the risks of a bubble in the real estate market were taken into account. The SST stress scenario included a wide set of macro-parameters, including the change in GDP in annual terms from -3.5% to 2.1%.

In the process of SST, the scenarios allowed banks and the Agency to take into account the impact of shocks on various types of risk and financial reporting items in the modeling process. The banks carried out calculations using internal models by the instructions and the stress scenario of the Agency. Upon receipt of the banks' stress test results, the Agency conducted its detailed analysis based on its models. In case of significant discrepancies, the banks were provided with detailed recommendations for correction of calculations and improvement of models. As a result of the pilot SST, the aggregate capital adequacy of the participating banks decreased by 2 p.p.

The models developed and tested in the framework of the pilot project allowed the Agency to monitor and forecast the financial condition of banks under different scenarios already in the current year. At present, the Agency plans to conduct AQR and SST for the expanded list of banks. To familiarize the banking sector with the processes and procedures of SST in the 2nd and 3rd quarters of this year, training sessions on methodological documents, templates and instructions will be held for banks participating in SST 2022.

 

External Communications Division of the Agency

+7 (727) 237 1090, press@finreg.kz