I. Stress testing has become an integral part of a bank’s risk management system and is used to evaluate its potential vulnerability to certain unlikely but plausible events or movements in financial variables. The vulnerability is usually measured with reference to the bank’s profitability, liquidity and/or capital adequacy. Stress testing helps in managing banks' risks by alerting bank management and supervisors to the potential impact of adverse shocks that are both unexpected and plausible, as well as by indicating the necessary financial resources to absorb any resulting losses. Thus, stress testing can be a vital tool in identifying, monitoring, and assessing risks.

II. These guidelines for stress testing are based on the principles of stress testing as outlined in the "Stress testing principles" publication by the Basel Committee on Banking Supervision (BCBS). The Guideline provides high-level principles that banks should follow to establish a reliable Stress Testing Framework.