The bank should perform stress testing in various circumstances - stress scenarios, in order to

identify their influence on the bank's liquidity position, as well as on the possibility to observe

the set limits. The stress scenarios are especially important in determining and comprehending

the liquidity risk level that exists in the bank, but for the purpose of meeting this objective, they

should be realistic, i.e. compatible with the condition not only in the bank, but on the market as

well. Hence, these scenarios should take into consideration the internal (specific for the bank)

and external (market) factors.

Stress scenario means significant negative change of different internal and external factors

which have an appropriate influence on the bank's liquidity. In addition, simultaneous changes

to several factors are made (for example, changes in the level of the sight deposits, highly

liquid securities, the level or the quality of the credit exposure, the exchange rate, interest

rates), reflecting the situation the bank's managing bodies find possible in the future. The

stress scenario can be based on certain significant event which happened in the past (historic

scenario - for example, the Kosovo crisis), or on a certain event for which there is no

example in the past (hypothetical scenario). Accordingly, those presumptions the change of

which will have the largest influence on the final stress-test results should be selected as a

base of the testing. Also, the stress-tests and the presumptions have to be adjusted to the

characteristics of the current financial situation periodically (at least once a year) and renewed

in order to encompass the new sources of risk as well. It means that the stress-testing should

correspond to the characteristics of the bank itself, its risk profile, the manner of risk

management, etc.

In order to accomplish an efficient stress-testing, the envisaged changes and movements in

the scenario should be sufficiently big and shocking. The small changes are not relevant for

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the stress-testing, because those changes can be well covered by the other traditional models

for liquidity monitoring.

Regarding the liabilities, the stress scenarios can be useful for determining the core deposit

base. Namely, if the basic elements for successful stress-testing are followed accurately, the

following four questions can be answered:

operation? The most stable sources of funds, such as the saving deposits of the depositors,

which follow the established deposit insurance scheme in the country, should be identified;

which rate? This group should include the deposits and those interbank borrowings, for

which there is a relatively high possibility to remain in the bank even in case of significant

problems, and for which the analyses indicate that will decrease gradually during a crisis;

the bank when the first signs of operating problems become evident? In most of the

cases, these are liabilities with possibility of early withdrawal, deposits without maturity

which will most probably be transformed into safer investments (Government bonds,

etc.), as well as deposits of large legal entities which have an access to a larger number

of information on the market and banking system developments.

the liquidity problems? Such assets include the unused back-up lines concluded with other

entity, which the bank can use as an additional source of funds, as well as the credits of

the central bank.

The main presumption of the stress-test on the assets side could be either the incapability of

the bank to provide a single additional external source of financing, or its incapability to collect

its claims. In this case, the only way of financing the needs of the bank is the sale of a part of

the assets items, i.e. the scenario enables to identify for how long the bank will be able to

continue repaying its short-term liabilities by selling the available funds. The above will help

the bank to determine the real marketability of its assets.

The stress-tests create a clearer picture of the risk profile of the bank from the aspect of the

liquidity risk. This is especially important for the Board of Directors and the Risk

Management Board which should revise the stress-tests results on a regular basis. The

stress-tests represent a solid basis for determining the liquidity risk and planning in case of

crisis.