Out of the comfort zone

US banking supervisors will complete stress tests early this month to determine if the country's largest banks need to hold more capital to withstand a worsening in economic conditions. But industry practitioners raise concerns about the effectiveness of stress tests based on macroeconomic conditions, and question whether the results are comparable. Mark Pengelly investigates

Stress testing is considered by many risk managers to be a useful supplement to other, more quantitative risk measures, such as value-at-risk. By taking a variety of core scenarios, such as the 1987 stock market crash and the Russian debt default of 1998, banks have been able to determine how their own portfolios and hedges would be affected by similar shifts in market variables.

Since the financial crisis struck in the third quarter of 2007, however, regulators have criticised the use of stress