Sudanese Banking Sector and Stress Testing

Abstract

The repercussions of the 2008 Global Financial Crisis helped to reconsider the foundations used in assessing the banks’ withstand potential crises. In 2009, the BCBS issued a document entitled “Principles for Sound Stress Testing Practices and Supervision” as a basis for early evaluation of the performance of banking institutions and their ability to overcome sudden shocks and crises. The study aims to examine the ability of the Sudanese Banking Sector to pass stress testing and withstand sudden shock in light of the Basel II standards of stress test. The methodology was based on analyzing the performance of Sudan's economy, consolidated balance sheet, and financial soundness indicators of the banking sector (2005-2021). Additionally, it was based on a scenario designed for reverse stress testing (2022-2025). The results show that the Sudanese banking sector failed to bear sudden shocks and pass the stress testing due to its lack of commitment to applying the supervisory standards of Basel II. The war that broke out in the state of Khartoum on April 15, 2023, led to a deterioration in the political and economic conditions. It is expected to reduce the banking sector's power to absorb shocks. The paper recommends the Central Bank of Sudan follow up on the commitment of banks to apply the stress testing and financial soundness standards recommended by Basel II, especially capital adequacy, liquidity requirements, and political risk. Furthermore, the implementation of contractionary monetary policies serves to reduce inflationary pressures, which helps banks avoid credit and market risks.