Stress Testing Presented to The Institute of Banking (IOB)

1. Stress TestingPresented to The Institute of Banking (IOB) Riyadh, 23rd March 2011

2. Purpose and Use of Stress Testing • Stress Tests are used to support the statistical tools such as Value-at-Risk (VaR) to gauge the impact of the ‘tail risks’. • Stress Tests are non-statistical tools where risk factors are stressed to assess their impact on the bank. Hence, stress testing complements the VaR / Unexpected Loss methodologies to assess the kind of losses that may occur if the markets are very stressed and start behaving abnormally ('tail risk'). • Stress Tests are used by Senior Management and the Board to ensure that the Bank has sufficient Capital to withstand such losses should they ever occur. • Stress Tests serve as an input to test the Risk Appetite of the Bank – e.g. if any particular risk is unwanted and, therefore, should be avoided

3. Stressing Models vs. Scenario Analysis

4. Developments in Stress Testing & Impact of 2008 Financial Crisis • Stress Testing importance has been magnified • Stress testing methodologies have been developed and formally documented as a policy • In some cases results of past stress tests validated and in other areas assumptions used have been revisited • Results of stress tests are now being presented in a more comprehensive manner at the entity level to the Senior Management and the Board • Actions are being taken to manage risks highlighted through stress tests • Results of Stress testing on capital are being presented and discussed with SAMA as part of the ICAAP process • SAMA endorsed the “Principles for sound stress testing practices and supervision” issued by The Basel Committee on Banking Supervision in 2009 • Frequency of stress tests and reviewing underlying assumptions increased • Public disclosures could be mandated in future by International Financial Reporting Standards or Regulators