LEAP Consulting
    White Paper2026-02-28

    Stress Testing Framework for Financial Institutions

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    Executive Summary


    Stress testing has become a cornerstone of modern financial risk management, particularly for institutions operating in emerging markets where economic conditions can change rapidly.


    Regulatory Context


    The Central Bank of Egypt (CBE) requires all banks to conduct regular stress tests covering:

  1. Credit risk stress testing
  2. Market risk stress testing
  3. Liquidity risk stress testing
  4. Operational risk assessment

    5. Methodology


    Scenario Design


    Historical Scenarios

  5. 2011 Revolution impact
  6. 2016 Currency float
  7. 2020 COVID-19 pandemic
  8. 2022-2024 Global inflation crisis

    9. Hypothetical Scenarios

  9. Severe economic recession (GDP decline of 5%)
  10. Currency crisis (50% devaluation)
  11. Interest rate shock (+800bps)
  12. Combined macro stress

    13. Credit Risk Stress Testing


    1. PD Migration: Model probability of default increases under stress

    2. LGD Stress: Adjust loss given default for collateral value decline

    3. EAD Stress: Account for drawdown on committed facilities


    Market Risk Stress Testing


    1. Apply historical or hypothetical shocks to market risk factors

    2. Revalue portfolio under stressed conditions

    3. Calculate stressed P&L and capital impact


    Liquidity Stress Testing


    1. Model deposit outflows under stress

    2. Assess asset liquidation capacity

    3. Calculate survival period

    4. Identify contingency funding needs


    Reporting Framework


    Stress test results should be reported to:

  13. Board of Directors (quarterly)
  14. ALCO Committee (monthly)
  15. CBE (semi-annually)

    16. Conclusion


    A robust stress testing framework is essential for financial institutions operating in emerging markets. It provides early warning of vulnerabilities and supports proactive risk management.

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