16

Stress tests used in assessment of capital adequacy

16.1

In order to be satisfied that the credit risk stress test undertaken by a firm pursuant to CRR Article 177(2) is meaningful and considers the effects of severe, but plausible, recession scenarios the PRA would expect that the stress test would be based on an economic cycle that is consistent with the supervisory statement on the Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP).

16.2

The level of cyclicality assumption used in calculating the long-run average PD for residential mortgages referred to in paragraph 12.4 above should not be relied on when undertaking the credit risk stress test required under CRR Article 177(2) and the PRA expects firms to consider the possibility that the model proves more cyclical than anticipated.

(CRR Article 177(2))