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For the first time in Egypt: FRA conducts stress testing on non-banking financial sector – Thursday 21/5/2020

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* Dr. Omran: The Authority sets precautionary measures and follows up on business continuity plans of non-banking financial markets under its supervision to contain the negative economic impact of COVID-19 

Dr. Mohammed Omran – FRA’s Chairman revealed that FRA formed a Crisis Management Team to face the impact of COVID -19 on the non-banking financial activities. He noted that since the beginning of the pandemic, the Crisis Management Team has called upon companies under FRA’s supervision to set business continuity plans under the assumption of different scenarios to continue their business under the Coronavirus pandemic.

He adds that for the first time in Egypt, FRA’s crisis team designs a stress testing to determine the ability of the non-banking financial sector to bear the financial impact resulting from the coronavirus (COVID-19). Also, he points out that stress testing is considered as the most important preventive measure taken in the recent period. Thus, stress testing shall be applied on all non-banking financial institutions under FRA’s supervision.

Dr. Omran notes that conducting stress testing shall determine the ability of the non-banking financial sector to bear the financial impact resulting from the coronavirus (COVID-19) and the impact of these risks on  the financial performance and on the indicators of each activity.

FRA’s Chairman says that the methodology of these tests is based on a combination of two components, the first of which is the effect of the macroeconomic variables alone on the activity. The second component is the effect of macroeconomic variables with specific scenarios on the most important emerging risks associated with the current crisis which varies according to the nature of the activity in any of the three markets under FRA’s supervision. Also, such testing based on measuring the impact of the change in a limited number of independent variables on a variety of dependent variables that differ according to  each activity and its reflection on the expected financial statements of 2020 for each institution according to three scenarios to measure the extent of financial tolerance at the micro level for each of them separately and then the extent of tolerance at the aggregate level for each activity. These scenarios took into account many factors, most important of which is the diversity of the level of financial stress required to be applied gradually to the institution and according to the nature of the surrounding economic and prospective conditions for each activity.

FRA’s Chairman states that many non-banking financial institutions (NBFIs) have shown great flexibility in meeting requirements of  stress testing.  He adds that entities under FRA’s supervision have been provided with details, assumptions and test scenarios since the beginning of April. Also, (NBFIs) been given a month to provide the Authority with the results of the scenarios to measure the degree of tolerance at the markets’ level as well as at the level of each company. The companies have expressed cooperation with the crisis team that provided the required technical assistance in this regard on the scope of each activity to follow up on the implementation of the tests. On the other hand, the Authority receives daily results of financial stress testing by financial institutions in various activities.

Dr. Omran appreciates this measure which is conducted for the first time in Egypt. He adds that stress testing shall help FRA forming a general perception on the flexibility of the non-banking financial sector and its ability to absorb the impact of the pandemic and its consequences. Thus, FRA shall provide help for  the non-banking financial institutions (NBFIs) , whether in developing its solutions for dealing with current and future risks or by interfering with specific preventive or remedial control measures for possible adverse effects, as the case may be.

FRA’s Chairman explains that the Authority stresses on the need to find continuous mechanisms to measure and manage risks in the non-banking financial sector in accordance with international best practices, in line with the central objectives of its comprehensive strategy for non-banking financial activities 2018-2020 regarding achieving better management of risks related to the safety and stability of the financial system. So, this leads the Authority to  cooperate with a number of international development institutions specialized in this context, the most important of which is the German SANAD FUND which  provides FRA with the  technical support to develop a comprehensive sustainable system according to the best international methodologies to apply financial stress testing  and form a so-called early warning mechanism for future risks . Thus, covering the needs of different markets to establish the basic pillar of a comprehensive risk management system for the non-banking financial sector, which is expected to be implemented in the early second half of 2020. The results of stress testing – currently- conducted by the Authority are the cornerstone for launching a comprehensive risk management system.  In addition, FRA cooperates with the International Finance Corporation (IFC) regarding the application of financial stress testing on microfinance activity in Egypt in light of the privacy of this sector and the nature of the precautionary measures taken by the Authority to maintain its stability during that pandemic. Moreover, FRA’s Chairman emphasizes that the Authority shall monitor all developments that occur in the non-banking financial sector to take the necessary measures and / or decisions to protect and maintain the stability of activities under its supervision.

It is worth mentioning that the Authority has previously issued successive packages of various precautionary measures to confront the impact of COVID-19 on the Egyptian society and business environment and in line with the orientations of the Egyptian state, where it initiates the issuance of several measures aimed primarily at stimulating and protecting various non-banking financial markets with its three sectors  namely,  capital market, insurance activity, non-banking financing activity (financial leasing, factoring, real estate financing, microfinance) in a way that achieves the safety and stability of these various activities and preserves the interests of those dealing with the non-banking financial sector.

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Regulator Information

Abbreviation: FRA
Jurisdiction: Egypt

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