BAKU, Azerbaijan, May 8. BAKU, Azerbaijan, May
8. The Management Board of the Central Bank of Azerbaijan (CBA) has
approved the "Regulation on Stress Testing in Banks," Trend reports.


The relevant decision was signed by CBA Chairman Taleh
Kazimov.


The regulation establishes the framework for risk assessment in
banks, the organization of stress tests, the development of models,
and the evaluation of results.


Under the new guidelines, banks are required to conduct stress
tests to identify and assess events that may adversely affect their
risk profile and to develop corresponding action plans. Stress
tests are to be prepared by the units responsible for risk
management in coordination with other relevant departments and must
be approved by the Supervisory Board and the Risk Management
Committee following agreement with the Management Board.


The frequency of stress tests will be determined based on the
bank’s operational characteristics, risk exposure, and changes in
market and macroeconomic conditions. The results will inform
strategic planning, risk appetite, internal policies, and risk
limits.


The regulation also specifies requirements for the design of
stress-test models. Models must be grounded in economic, financial,
and statistical theory, reflecting the size, activities, and risk
profile of the bank. They are required to be statistically and
economically robust and to logically incorporate the
interrelationships among economic indicators.


In addition, econometric models should be used when preparing
stress tests, and the models should be tested across different
economic periods and scenarios. The impact of macroeconomic
indicators on the bank's risk profile should also be predicted.


According to the regulations, banks should conduct sensitivity
and scenario analyses at the portfolio or bank-wide level.
Sensitivity analyses aim to measure the impact of risk factors on
the bank. In this context, changes in interest rates, a decrease in
the value of liquid assets, the bankruptcy of large counterparties,
and other shocks can be assessed.


Scenario analyses will be conducted under "very unfavorable",
"unfavorable", and "likely" scenarios. The analyses will take into
account both historical data and hypothetical events.







According to the document, banks must conduct stress tests on
liquidity, credit, market, and operational risks at a minimum. The
liquidity risk tests will take into account the market situation,
credit, and other risks.


Credit risk analyses will also assess the characteristics of the
loan portfolio and events that could affect the value of the
securities acting as collateral.


Operational risk stress tests should also consider risks such as
increased intra-bank fraud during economic crises. Market risk
analyses will assess the impact on the bank of changes in interest
rates, exchange rates, and prices of securities and
commodities.


The regulations also include requirements for "bottom-up" stress
tests. Thus, the CBA will submit macroeconomic forecasts to banks
for annual stress tests by December 30 and semi-annual stress tests
by June 30 of each year.


Systemically important banks must conduct "bottom-up" stress
tests on a semi-annual and annual basis, and other banks on an
annual basis. The results of annual stress tests and the action
plan must be submitted to the CBA within 45 calendar days after the
submission of macroeconomic forecasts.


According to the regulations, during the "bottom-up" stress
tests, cases such as purposeful reduction of the loan portfolio,
improvement of the risk group of assets, or artificial increase of
income in unfavorable scenarios aren't allowed.


The results submitted by the CBA will be evaluated within 30
calendar days, and the results will be taken into account in the
risk-based supervision process.


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