4.1 This chapter on reverse stress testing was added to this supervisory statement on 3 August 2015 following consultation on proposals in CP17/15.

4.2 Reverse stress testing is a risk management tool used to increase a firm’s awareness of its business model vulnerabilities. Firms in scope of Chapter 15 of the Internal Capital Adequacy Assessment Part of the PRA Rulebook must carry out reverse stress testing in accordance with Chapter 15 of that Part. This includes requirements on the firm to reverse stress test its business plan; that is, to carryout stress tests and scenario analyses that test its business plan to failure.

4.3 Business plan failure in the context of reverse stress testing should be understood as the point at which the market loses confidence in a firm and, as a result, the firm is no longer able to carry out its business activities. Examples of this would be the point at which all or a substantial portion of the firm’s counterparties are unwilling to continue transacting with it or seek to terminate their contracts, or the point at which the firm’s existing shareholders are unwilling to provide new capital. Such a point may be reached well before the firm’s financial resources are exhausted.

4.4 The PRA may request a firm to quantify the level of financial resources which, in the firm’s view, would place it in a situation of business failure should the identified adverse circumstances crystallise.