102. Institutions should ensure that the stress testing of individual risk is proportional to the nature, size and complexity of the business and risks.

103. Institutions should take into account, at the individual level, the impact of second-round effects in the individual risk for stress testing.

4.7.1 Credit and counterparty risks

104. Institutions should analyse at least:

a) a borrower’s ability to repay their obligations, e.g. the PD;

b) the recovery rate in the event of a borrower defaulting including the deterioration of the collateral values or credit worthiness of the guarantee provider, e.g. the LGD; and

c) the size and dynamics of credit exposure, including the effect of undrawn commitments from borrowers, e.g. the exposure at default (EAD).

105. Institutions should ensure that their institution-wide credit risk stress tests cover all their positions in their banking and trading book, including hedging positions and central clearing house exposures.

106. Institutions should endeavour to determine specific risk factors and set out, on a preliminary basis, how these factors can affect their total credit risk losses and capital requirements. Institutions should endeavour to make that determination on an exposure class by exposure class basis (e.g. factors relevant to mortgages may be different from those relevant to corporate asset classes).