Stress Testing Methodologies for Islamic Finance
This Chapter discusses a curtail requirement for preparing the various regulatory documents we discussed in earlier chapters of this book (Chaps. 11 and 12). Stress testing and reverse stress testing should be incorporated in capital and liquidity assessments as an integral component, and should include EWIs (early warning indicators) and ongoing monitoring by the management of IFIs (Islamic financial institutions) to identify any threats as early as possible. In this context, I highlight the importance of stress testing as a risk management tool for IFIs, I also discuss macro and micro stress testing, the implication of stress testing to IFIs and particular consideration in stress testing and reverse stress testing for IFIs. The analysis provided here outlines a blue-print template for stress testing and reverse stress testing for a resilient financial system that would act as a guide for the Islamic finance industry. It will help all Islamic financial institutions tailor their stress testing scenarios for any financial, market or liquidity shocks or capital and liquidity requirements to reflect their Shariah governance and specific operational model, while still complying with applicable capital adequacy and liquidity regulations.
- Alamad, Samir. (2016). Risk Management Methodologies: An Empirical Macro-prudential Approach for a Resilient Regulatory Framework for the Islamic Finance Industry, in Zulkhibri, Muhamed et al. (editors), Macroprudential Regulation and Policy for the Islamic Financial Industry Theory and Applications, UK: Springer.Google Scholar
- Ali, Wan Abdul Rahim Kamil Wan Mohamed (ed.). (2012b). Shariah Rulings and Opinions on Ijarah, Musharakah and Mudarabah. [Islamic Capital Market Series]. Petaling Jaya: Thomson Reuters Malaysia (Sweet & Maxwell Asia).Google Scholar
- Bank for International Settlements (BIS), (2008), Basel Committee on Banking Supervision- Principles for Sound Liquidity Risk Management and Supervision, September 2008.Google Scholar
- Bank for International Settlements (BIS), (2009), Basel III: International framework for liquidity risk measurement, standards and monitoring, December 2009.Google Scholar
- Bank for International Settlements (BIS), (2010a), Basel Committee on Banking Supervision- International framework for liquidity risk measurement, standards and monitoring, December 2010.Google Scholar
- Bank for International Settlements (BIS), (2010b), Basel III: A global regulatory framework for more resilient banks and banking systems, December 2010.Google Scholar
- Bank of England, (2014). Stress testing in the UK banking system: 2014 results. Available from: <http://www.bankofengland.co.uk/financialstability/Documents/fpc/results161214.pdf> [Accessed on 11 July 2016].
- Barfield, Richard and Shyam, Venkat, (2008), Liquidity risk management, The Journal-Global perspectives on challenges and opportunities, (2008). Available from: http://www.pwc.com/gx/en/banking-capital-markets/pdf/Liquidity.pdf [Accessed on 7 July 2016].
- BCBS, (2006). The management of liquidity risk in financial groups. Available through: <http://www.bis.org/publ/joint16.pdf> [Accessed on 14 January 2016].
- BCBS, 2009. Principles for sound stress testing practices and supervision. Available from: <http://www.bis.org/publ/bcbs147.pdf> [Accessed on 10 November 2015].
- Board of Governors of the Federal Reserve System, (2012). Guidance on stress testing for banking organisations with total consolidated assets of more than $10 Billion. Available from: <http://www.federalreserve.gov/bankinforeg/srletters/sr1207a1.pdf> [Accessed on 18 November 2015].
- Borio, Claudio; Mathias, Drehmann; and Kostas Tsatsaronis, (2012). Stress-testing macro stress testing: does it live up to expectations? BIS working Papers, No. 369, Available from: <http://www.bis.org/publ/work369.pdf> [Accessed on 20 February 2016].
- European Central Bank (ECB), (2008), EU Banks’ Liquidity Stress Testing and Contingency Funding Plans, November 2008.Google Scholar
- Fell, John, (2006). Overview of stress testing methodologies: from micro to macro. European Central Bank, Seoul, Available from: <https://www.imf.org/external/np/seminars/eng/2006/macropr/pdf/Fell.pdf> [Accessed on 28 November 2015].
- GARP, (2011), A New Regulation for Liquidity Risk, Garp, December 2011.Google Scholar
- IMF Working paper, (2011), Next Generation System-Wide Liquidity Stress Testing, January 2011.Google Scholar
- Matten, Chris, (2009), PRMIA Members’ Meeting, Stress testing liquidity and the contingency funding plan, 24 February 2009.Google Scholar
- OSFI, (2009). Stress testing (sound business and financial practices). Available from: <http://www.osfi-bsif.gc.ca/eng/docs/e18.pdf> [Accessed on 28 December 2015].
- Peria, Maria Soledad Martinez; Giovanni Majnoni; Matthew T. Jones, and Winfrid Blaschke, (2001). Stress testing of financial systems: an overview of issues, methodologies and FSAB experiences, International Monetary Fund, IMF working paper, Issues 1-88, 2001.Google Scholar
- TATA, 2013. A stress testing framework for liquidity risk. Available from: <http://www.tcs.com/SiteCollectionDocuments/White%20Papers/BFS-Whitepaper-Stress-Testing-Framework-Liquidity-Risk-0413-2.pdf> [Accessed on 25 March 2016].