CBE stress tests show banking sector resilient to severe shocks

The Central Bank of Egypt (CBE) has confirmed that it and the Financial Regulatory Authority (FRA) continuously develop and update stress tests to ensure they reflect existing and emerging risks, strengthen their ability to assess financial institutions’ resilience to shocks, and identify the channels through which such shocks could spread and their potential implications for financial stability.

In its recently published Financial Stability Report, the CBE explained that stress tests provide a forward-looking assessment of financial institutions’ capacity to absorb the effects of a wide range of low-probability external or domestic shocks through the simulation of hypothetical scenarios.

These assessments take into account rapid developments in the regional and global economic and financial environment, heightened uncertainty, and multiple sources of risk that could affect financial stability, including escalating geopolitical tensions, climate-related risks, and cyber risks.

Such developments could adversely affect economic activity and financial markets, with consequences for financial institutions’ capital adequacy, liquidity, asset quality, and profitability indicators.

The CBE said scenario-based stress tests had been conducted on the banking sector to assess its exposure to potential systemic risks under two scenarios: changes in macroeconomic and financial conditions, and climate change.

The tests measured the potential impact on the capital adequacy of the 10 largest banks, which accounted for approximately 80% of total banking sector assets in March 2026, as well as the impact on local- and foreign-currency liquidity across the banking sector.

Three levels of severity were applied to the shocks under each scenario.

According to the CBE, the hypothetical macroeconomic and financial risk scenario covers systemic risks arising from sovereign exposures, including credit, interest rate, and liquidity risks.

It also covers systemic risks associated with non-performing loans, including credit risks relating to economic sectors, microenterprises, and individuals.

The scenario further examines contagion risks, both between non-banking financial activities and the banking sector and among domestic banks, using an interconnectedness matrix.

The CBE added that sensitivity tests were also conducted to assess the impact of a single shock or variable while assuming that other variables remained unchanged.

These tests aim to identify the highest-risk shocks with the greatest potential impact on the banking sector’s capital adequacy and liquidity.

They include concentration risks in claims on sovereign entities, concentration risks in corporate loan portfolios, foreign-currency corporate credit risks, exchange-rate market risks, interest-rate risks arising from repricing gaps, and cybersecurity risks.

Reverse stress tests were also conducted to determine the maximum increase in the ratio of non-performing loans to the total loan portfolio that would cause the capital adequacy ratio to fall to the regulatory minimum.

The tests also sought to determine the haircuts on certain liquid assets that would reduce the average local- and foreign-currency liquidity ratios to their prescribed regulatory minimums.

According to the CBE, the climate-related financial risk scenario aims to assess the potential impact of both physical and transition risks on the credit risk exposure of the banking sector’s 10 largest banks.

This is achieved by estimating the potential deterioration in the credit ratings of loan and credit facility portfolios associated with economic activities particularly sensitive to these risks.

The physical risk scenario assumes an intensification of physical climate risks, with economic activities exposed to severe and chronic climate shocks that damage assets and infrastructure.

The transition risk scenario, meanwhile, assumes an orderly transition towards a low-carbon economy in both domestic and export markets.

The CBE said the stress test results indicated low to moderate levels of capital adequacy and local- and foreign-currency liquidity risks.

The banking sector was able to absorb all losses arising from the assumed shocks across the different severity levels under the macroeconomic and financial risk scenario, the climate change scenario, and the various sensitivity tests.

As a result, the capital adequacy ratio of the 10 largest banks remained above both the CBE’s prescribed regulatory minimum and the Basel Committee’s requirements.

The banking sector’s liquidity coverage ratio and net stable funding ratio also remained above their respective regulatory minimums.

The CBE added that liquidity cash-flow stress tests showed that the liquid assets of the five largest banks were sufficient to cover 100% of their cumulative negative liquidity gaps after stress, assessed individually for each bank.

Regarding reverse stress tests, the results showed that the banking sector’s capital adequacy ratio would fall to the regulatory minimum only under an exceptional shock causing a substantial deterioration in the quality of its credit portfolio.

Similarly, the average local- and foreign-currency liquidity ratios would decline to their prescribed regulatory minimums only if exceptionally high haircuts were applied to government securities included in the numerator of the ratios.

The CBE said these findings highlighted the banking sector’s financial resilience.

Comprehensive annual assessment of banking sector risks

In the same context, the CBE revealed that it conducts an extensive annual assessment of the prevailing risk environment in the banking sector, drawing on a range of recognised sources to develop, strengthen, and improve the effectiveness of supervisory tools.

The CBE explained that the process begins with a systematic analysis of risk sources, helping to update risk classifications, assess the effectiveness of supervisory controls, and determine residual risk levels.

Based on the assessment’s findings, supervisory questionnaires and reports are updated, while supervisory resources are directed towards the areas presenting the greatest risks.

This enhances the efficiency and effectiveness of risk-based supervision.

The CBE added that the assessment process relies on several questionnaires containing qualitative and quantitative components designed to measure the implementation and effectiveness of controls and the level of risk.

Continuous coordination and follow-up with banks are also undertaken to support the implementation of necessary corrective action plans.

These efforts contribute to strengthening internal control systems and improving the effectiveness of anti-money laundering and counter-terrorist financing frameworks across the banking sector.

According to the CBE, banks recorded a notable improvement in their management of these risks during 2025 and 2026.

The CBE also conducts an annual sector-wide assessment of money laundering and terrorist financing risks at the national level, using an approved methodology based on an analysis of qualitative and quantitative indicators and factors.

Qualitative factors include, for example, transparency levels and ownership structures.

Quantitative factors include customer profiles, geographical distribution, the nature of products and services offered, and the channels through which they are delivered.

For certain quantitative indicators, the assessment uses the highest recorded balance for each customer category.

According to the CBE, the assessment aims to identify and measure the level of money laundering and terrorist financing risks facing the banking sector.

This supports the efficient allocation of supervisory resources, the assignment of specialised inspection teams to conduct on-site examinations, and the development and monitoring of corrective action plans to address deficiencies and mitigate identified risks.

The CBE stressed that identifying and assessing risks is the essential starting point for developing appropriate mitigation measures and a fundamental component of implementing risk-based supervision.

Second cybersecurity regulatory framework under development

Separately, the CBE said it was working on issuing a second cybersecurity regulatory framework to keep pace with emerging developments and international standards and accommodate advanced technologies.

In its recently published Financial Stability Report, the bank explained that the new framework would include several specialised guidance documents covering critical areas such as artificial intelligence security, governance, risk and compliance, and cloud computing security.

The CBE affirmed that it continues to strengthen cybersecurity as one of the principal pillars of financial stability through an integrated strategic approach.

This approach has involved implementing a range of regulatory and supervisory measures, including proactive responses to potential cyberattacks through the Financial Sector Computer Emergency Response Team.

Among the most significant initiatives is a project to establish electronic connectivity with the largest state-owned and commercial banks, financial institutions, and the Egyptian Credit Bureau (I-Score).

The CBE is also providing cybersecurity-related technical services and consultancy support.