Governance over Stress Testing

David E Palmer

Governance and controls are a very important aspect of stress testing, yet are sometimes overlooked or given insufficient attention by financial institutions.¹¹ For the purposes of this chapter, the term “stress testing” is defined as exercises used to conduct a forward-looking assessment of the potential impact of various adverse events and circumstances on a banking institution. Proper governance and controls over stress-testing not only confirm that stress tests are conducted in a rigorous manner, but also help ensure that stress tests and their outcomes are subject to an appropriately critical eye. Governance and controls are particularly needed in the area of stress testing given the highly technical nature of many stress-testing activities, the generally large number of assumptions in stress-testing exercises and the inherent uncertainty in estimating the nature, likelihood and impact of stressful events and conditions.

While the exact form of governance and controls over stress-testing activities can and should vary across countries and financial institutions, there are some general principles, expectations and recommendations that financial institutions can follow. The