Press Releases

29.12.20Press Statement

CBK Implements an Advanced Stress Testing Framework on Banking System Units

In light of its continuous efforts towards reinforcing financial stability and adopting best practices in support of banks’ capacity to operate in stressed conditions, the Central Bank of Kuwait (CBK) developed a new framework for stress testing the banking system.

In a statement, Dr. Mohammad Y. Al-Hashel, the Governor of the Central Bank of Kuwait, said that the newly developed framework represents a holistic, highly flexible and dynamic stress-testing approach that allows the incorporation of varied scenarios with a multitude of micro/macro economic and financial variables with capabilities to reflect the impact in granular detail on different sectors.

The Governor pointed out that since the outbreak of COVID-19, CBK has been developing stress-testing frameworks and models. These frameworks, built in collaboration with an international consultant, match the increasingly complex and highly uncertain economic environment by utilizing advanced technology, analysis of a multitude of economic and banking variables and input by global experts to ensure the ability of the newly developed framework to produce forward-looking outputs in line with the defined scenarios.

To ensure its efficacy, the new framework was back-tested using 2019 data. The results proved the framework’s effectiveness and capability in translating the varied stress-testing scenarios with consistent outputs. Thus, the CBK will start applying the new stress-testing framework on the current year’s data and announce the results thereof in the first quarter of 2021.

Dr. Al-Hashel added that the CBK was an early adopter of stress tests, given their rising importance following the Global Financial Crisis. Through the years, results consistently indicated the banking sector’s ability to withstand shocks and operate in stressful conditions. This was realized clearly during the COVID-19 pandemic, during which the banking sector continued playing its vital role efficiently as a result of the prudent regulatory policies adopted by the CBK. This has been affirmed by international institutions such as the International Monetary Fund as well as international credit rating agencies that have commended the Kuwaiti banking sector and ranked it among the best compared to its regional peers.

The Governor concluded his statement by indicating that the new stress-testing framework represents the completion of the first phase of a broader project, with the following phase now in-development. In the upcoming phase, the project will use machine learning and artificial intelligence to enhance output quality, increase its ability to analyze different drivers and capabilities and to capture evolving economic drivers and trends. This will instill a deeper understanding that will evolve alongside the economic landscape and banking sector and, hence, ensure the quality of the stress-testing exercises. This is in line with the CBK’s drive to continuously strengthen its ability to reinforce financial and monetary stability in the State of Kuwait.

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