Guideline 14. An institution should identify outputs in relation to its regulatory capital and resources, and also relevant balance sheet and P&L impacts, as a result of its stress testing programme.

76. One essential output from a stress testing exercise is the estimate of the losses under a range of scenarios. The aim is to assess the capacity of an institution to absorb losses stemming from various shocks applied in the scenarios.

77. When undertaking stress testing, it is crucial to estimate potential losses which can derive from a specific configuration of macro-economic variables determined internally or exogenously. These potential losses mainly depend on:

a. the risks already taken by an institution at a certain point in time the starting point of the exercise; and 

b. developments in the volume, asset quality and prices of investment and funding activities under the scenarios contemplated.

78. When stress testing over a specific time period, consideration should be given to appropriately conservative adjustments to profit and loss forecasts. Notably, loss assumptions in the stress do not have to coincide with accounting losses shown at that specific point in time.

79. With regard to credit risk, institutions need to be aware of the impact of their ratings philosophies on the outcome. Misunderstandings can arise if they are not clearly specified when analysing measures of losses in a stress test.