STRESS TESTING AND PCA FRAMEWORK
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Risk Management (Elective) — CAIIB.
One-liners from this chapter
Free sample — 8 of 66 rapid-fire Q&A cards.
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.
What are the two broad categories of stress tests used by banks?
Stress tests are broadly classified into sensitivity analysis (single-factor shocks) and scenario analysis (multi-factor, simultaneous adverse changes across macroeconomic and financial variables).
Which committee recommended stress testing guidelines for Indian banks?
RBI's Standing Committee on Financial Stability.
What is a reverse stress test?
A reverse stress test starts from a predefined outcome of failure or severe distress and works backward to identify scenarios or combinations of events that could produce that outcome.
Under PCA, what does restriction on 'dividend distribution' mean for a bank?
Bank cannot pay dividends to shareholders during PCA.
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