Applicable to all institutions

1. With respect to securitisation the stress testing programme could cover complex and bespoke products such as structured credit products (securitisation positions). Stress tests for securitised assets consider the underlying assets, their exposure to systemic market factors, relevant contractual arrangements and embedded triggers in the securitisation structure, and the impact of leverage, particularly as it relates to the subordination level in the securitisation structure.

2. Institutions have underestimated the risk of some products (such as CDOs of ABS) by relying too much on external credit ratings or historically observed credit spreads related to (seemingly) similar products like corporate bonds with the same external rating. Such approaches cannot capture the relevant risk characteristics of complex, structured products under severely stressed conditions. Therefore, stress tests could include all relevant information related to the underlying asset pools their dependence on market conditions dependence of the securitisation positions on market conditions, complicated contractual arrangements and effects related to the subordination level of the specific tranches.

3. Institutions enhance their stress testing methodologies to capture the effect of reputational risk. Institutions integrate risks arising from off-balance sheet vehicles and other related entities in their stress testing programmes.