الفهرس 
Stress Testing Banks’ Solvency : The Case of Egyptian Banks
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Abstract
Stress test is a tool to quantify the impact of extreme, but plausible macroeconomic and/or financial adverse shocks on a financial institution or the whole financial system in a forward-looking manner and consider the preventive measures to reduce risks to an acceptable level. Stress tests have become an integral tool for banks’ risk management practices as well as for financial stability assessments by central banks. They are a key component of the Financial Sector Assessment Programs (FSAPs) launched by the IMF and World Bank in the late 1990’s. Since the global financial crisis, stress tests are focusing on assessing the solvency of banks due to the fact that capital is the main loss absorber of a bank. Solvency stress tests are used in the capital adequacy assessment and the determination of recapitalization needs. Indeed, the literature of stress testing banks’ solvency is abundant, but no study has been conducted on stress testing Egyptian banks’ solvency. Hence, this study aims at assessing the resilience of the Egyptian banks’ solvency under severe stress scenarios to determine their capacity in absorbing the adverse effects of macroeconomic shocks and being capable of meeting the minimum required solvency hurdle rates by the CBE in terms of capital adequacy ratio for tier one, capital adequacy ratio (CAR) and leverage ratio. The study depends on the balance sheet-based approach using hypothetical scenario analysis. The stress test focuses on the credit risk. The credit risk parameter is impairment provision for credit losses stated in the income statements of banks. The study relies on the Top-down stress testing approach. The forward-looking stress test spans over a five-year horizon (2020-2024) under a macro-economic baseline scenario and three adverse scenarios. A panel Ordinary Least Squares “OLS” regression model with random effects is used to translate the designed macroeconomic scenarios into the financial statements of the banks in order to predict the value of the the impairment provision for credit losses for each bank which is the dependent variable (Y). The values of the stressed independent macro-economic variables are produced using the method of the standard deviation from the historical values of the selected independent variables. The forward stress test results reveal that seven banks, out of a sample of sixteen banks which accounts for 73% of the Egyptian banking sector assets, are resilient to macro-economic shocks and these banks have capital surplus, so they are granted a passing grade. While the rest which fail below the solvency hurdle rates and proved to have capital shortfall, are recommended to increase their capital to improve their solvency positions. To sum up, total recapitalization needs for the Egyptian banks in order to reach the minimum required CAR is manageable as they are equal to EGP 55.7 billion at the maximum which represent only 0.9% of nominal GDP in 2020.