To understand how the financial resilience of domestic banks will be affected by low interest rates and the continuing impact of the COVID-19 pandemic, the FSC is planning to ask domestic banks and insurers to conduct their 2021 supervisory stress tests. The stress tests will be based on financial reports’ capital adequacy data of the end of 2020. Employing consistent stress test scenarios, banks and insurers will calculate the degree to which capital adequacy ratios, bank leverage ratios, and insurer net worth ratios have changed.
This round of domestic bank stress tests will adopt both mild and severe scenarios. The overall stress scenario will measure whether banks have sufficient risk bearing capacity to withstand: (a) increased losses resulting from a number of stress factors (e.g. falling economic growth rates in Taiwan, the US, the eurozone, mainland China, and Japan; rising domestic unemployment; and declining real estate prices) which result in increased credit risk and sharper volatility on bond, stock, exchange, and commodity markets, which in turn cause increased losses; and (b) the impact on earnings caused by a narrowing in net interest rate spreads and a decline in fee incomes. In addition, this round of stress tests will be the first time to test capital adequacy under operational risk stress scenarios (both mild and severe) which assume that a bank is subject to an enforcement action and has been required to increase its operational risk capital. Banks have also been reminded to strengthen their internal controls and reasonably assess the potential risk of losses due to employee malfeasance.

The scenarios for insurer stress tests focus on various factors that might affect insurer solvency, including the impact on investment position volatility and underwriting risks. The various scenario factors focus principally on the possible impact on economic and financial market volatility as reflected by increased volatility in domestic and overseas interest rates, stock prices, and exchange rates. Different underwriting risk scenarios are also considered. These stress tests measure whether an insurer has sufficient risk bearing capacity under a variety of different scenarios.