The Methodology of Stress Tests for the Kazakh Banking System

In this paper, we describe the results for the section “Stress Testing Methodology for Kazakh Banking System” which is part of the “Development of an Early Warning System for Kazakhstan” project. The participating Kazakh institutions are the National Bank of Kazakhstan (NBRK), the Financial Supervisory Agency (FSA) and the National Analytical Centre of the Government and the National Bank of Kazakhstan (NAC). In this section, we apply different methodologies for developing stress testing tools for the Kazakh banking system: the “bottom-up” and “top-down” approaches. The “bottom-up” approach is based on questionnaires we have transmitted to Kazakh banks asking them to calculate their own risk positions under stress. The collected results and the analyses show that banks tend to underestimate the decline in real estate prices and to overestimate currency devaluation. In the “top-down” approach, we apply methodologies for portfolio and macro stress tests to raw data collected by FSA and estimate the impact of the external macroeconomic shocks on the expected losses of financial institutions. In the portfolio stress test, the change in the expected losses under stress ranges between 34 percent and 86 percent relative to the unconditional expected losses. In the macro stress test, we find an average change of 26 percent in the ratio of bad loans to total loans under stress scenario 1 and an average change of 80 percent under scenario 2 relative to the baseline scenario.