Stress test on Lebanese banks asserts importance of liquidity, stress test as a precaution against future economic crisis in the region.

 BEIRUT: Lebanese banks have been subjected to a stress test as a precaution against potential future economic crises in the region, the head of the Banking Control Commission said Tuesday.

Speaking at a risk management conference organized by the Union of Arab Banks, Osama Mikdashi said the test “included all the local banks in Egypt, Syria, Jordan and most recently Turkey.”

A stress test, in financial terminology, is a simulation designed to determine the ability of a given financial instrument or financial institution to deal with an economic crisis. Instead of making financial projections on a “best estimate” basis, a company or its regulators may do stress testing, in which they look at how robust a financial instrument is during crashes, a form of scenario analysis.

Mikdashi added that the primary goal of the test, which lasted 30 days, was to consolidate and buttress resistance against risks in the short term, by ensuring the existence of high-quality liquidity.

“The second goal was to reduce the risks of long-term financing, by requesting that banks finance their operations through sources of stable funding in order to reduce the risks of funding in the future,” he explained.

He pointed out that the Lebanese banks involved in the test were connected to a network whose branches and subsidiaries span 27 countries.

Joseph Torbey, the chairman of the World Union of Arab Bankers, stressed that the global financial crisis in 2008 had underlined the importance of having abundant liquidity in order to weather any future crisis.

He said some international banks had failed to manage wisely the liquidity that was at their disposal, claiming this was one of the causes of the crisis.

He added that Lebanese and Arab banks were improving their risk management strategies to strengthen their position.