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STRESS TESTING AND PCA FRAMEWORK
What is stress testing in the context of banking risk management?
Stress testing is a risk management technique used to evaluate how a bank's portfolio or balance sheet performs under extreme but plausible adverse scenarios, helping assess vulnerability to tail risks.
What is a 'shock' in the context of stress testing?
A hypothetical adverse change applied to risk factors.
Which RBI circular formally mandated stress testing for Indian banks?
RBI's guidelines on stress testing, issued under the Basel II/III framework and periodic master circulars on Risk Management, require banks to conduct stress tests as part of their Internal Capital Adequacy Assessment Process (ICAAP).
What does 'contagion' mean in systemic stress testing?
Spread of financial distress from one entity to others.
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