Practice Guide: Auditing Capital Adequacy and Stress Testing for Banks

By: The Institute of Internal Auditors

This Practice Guide is provided as a service to members of The IIA. To learn more about the value of an IIA membership, click here. 

History has taught us that no organization, no bank, is “too big to fail.” Survival depends on how well organizations are capitalized, the quality of that capital, and if there is enough capital to run the business while absorbing the shifts and volatility in credit, market, and operational risks. 

This practice guide reviews the Basel Committee on Banking Supervision’s strengthened guidelines, developed in the wake of several global economic events, intended to prevent or at least minimize the effects of the cyclical nature of business. Tools provided include:

  • An alignment of IIA standards to a capital adequacy audit engagement
  • Explanations of approaches to model credit, market, and operational risk
  • A high-level discussion of stress-testing capital adequacy
  • An example of a stress-testing model in a recession scenario
  • A guide to the global progress of Basel III implementation
  • Key terms and phrases
  • An extensive reference list for additional information

This guide helps internal audit activities develop an understanding of how capital adequacy helps banks accomplish their long-term objectives and supports the financial viability of the global economy. 

 

Item Number: 10.1291.dl

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Practice Guide: Auditing Capital Adequacy and Stress Testing for Banks - PDF
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