The 2007–08 crisis demonstrated how easily a failed financial institution – in particular, systemically important ones – could send tremors across jurisdictions worldwide. Shockwaves can be transmitted, for instance, directly via the liquidity channel by way of severe constraints to access funding or indirectly via second-round effects resulting from an economic slowdown.
It is thus important that financial institutions build up resilience to be able to absorb both internal as well as external shocks. Many regulators have made stress testing an integral component of the capital planning exercise for financial institutions. The Bank of Mauritius has recently developed stress testing models to independently assess the resilience of banks to shocks, both at macro and micro levels.