KARACHI: The State Bank of Pakistan (SBP) has conducted stress test of all the three tiers (small, medium and large) banks and identified that small banks are found to be the least resilient against macroeconomic risks.
According to the SBP, in line with the system-level credit risk analysis, infection ratios of banking segments (small, medium and large sized banks) have also been projected.
This aspect of the banking industry is included to assess how cross-sectional heterogeneity affects the resilience of banks against various macroeconomic risks.
The resilience of small-sized banks segment, however, starts waning towards the end of simulation period under stress – CAR breaching the minimum standard by a narrow margin. These banks however have quite contained systemic implications due to their limited market share.
Small banks – constituting 4.18 percent of the banking system – are found to be the least resilient against both scenarios. From its existing level of 18.72 percent, the loan delinquency rate of small banks decreases by 46 bps in S0, whereas it rises by 530 bps under S1, by the end of three-year horizon. This is the highest level of infections in any segment of banks under stress scenario.
Given their comparatively lower lending exposure, the CAR of small banks rise by 30 bps in S0 and falls by 326 bps under S1 from the prevailing 14.39 percent
While maintaining resilience under the baseline, the small sized banks on aggregate basis may breach the domestic regulatory CAR standard towards the end of projection horizon under stress scenario. This is mainly due to the lowest level of pre-shock CAR among all categories.
Small banks thus demonstrate the least resilience in terms of maintaining compliance with domestic minimum capital requirements.
Overall, under the baseline scenario, the solvency of the banking sector portrays an encouraging picture with the delinquency ratio mostly hovering around the current level (9.19 percent) while capital adequacy staying well above the domestic regulatory benchmark. Under the hypothetical stress scenario as well, the banking sector should be able to withstand a severe and protracted downturn induced by adverse global and domestic macroeconomic conditions, including the COVID-19 pandemic.
In terms of size, the medium and large segments can withstand the stress conditions as well. Reassuringly, the large size banks, with the potential to cause systemic disruptions, carry sufficiently higher capital buffers and are thus able to sustain the impact of hypothesized shocks for three years. Also, the medium-sized banks never breach the solvency criteria during the projection horizon.
That said, the exact severity, duration and path of the COVID-19 pandemic globally and domestically remains clouded in uncertainties. As a result, the stress-test results are also subject to a significant uncertainty. Consequently, the SBP continues to closely watch the evolving situation and shall remain ready to take whatever actions necessary to safeguard financial stability.
