4.6.1 General requirements

59. The specific design, complexity and level of detail of the stress test methodologies should be appropriate to the institution’s nature, scale and size, as well as the complexity and riskiness of its business activities. It should take into account the strategy and business model as well as the portfolio characteristics of the institution.

60. Institutions should take into account the stage within the economic cycle when designing stress test methodologies, including the scenario and the need for possible management actions.

61. Institutions should identify appropriate, meaningful and robust mechanisms for translating risk factors into relevant internal risk parameters (probability of default (PD), loss given default (LGD), write-offs, fair value haircuts, etc.) that provide an institution and a group view of risks.

62. The link between stressed risk factors and the risk parameters not only should be based on institutional historical experience and analysis, but should be supplemented, where available and appropriate, with benchmarks from external sources and, when possible, from supervisory guidance.

63. Because of the complexity involved in modelling hypothetical and macroeconomic-based risk factors/scenarios, institutions should be aware of the model risk involved and ensure that the following have been performed when setting those factors/scenarios: