Stress Testing (2nd Edition)
First published:
ISBN: 978-1-78272-391-2
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Stress Testing and Other Risk Management Tools
Foreword
Introduction
Response to Financial Crises: The Development of Stress Testing over Time
Stress Testing and Other Risk Management Tools
Econometric Pitfalls in Stress Testing
Stress-testing applications of Machine Learning Models
Four Years of Concurrent Stress Testing at the Bank of England: Developing the Macroprudential Perspective
Stress Testing for Market Risk
The Evolution of Stress Testing Counterparty Exposures
Liquidity Risk: The Case of the Brazilian Banking System
Operational Risk: An Overview of Stress-testing Methodologies
Peacetime Stress Testing: A Proposal
Stress-test Modelling for Loan Losses and Reserves
A New Framework for Stress Testing Banks’ Corporate Credit Portfolio
EU-wide Stress Test: The Experience of the EBA
Stress Testing Across International Exposures and Activities
The Asset Market Effects of Bank Stress-test Disclosures
An Alternative Approach to Stress Testing a Bank’s Trading Book
Determining the Severity of Macroeconomic Stress Scenarios
Governance over Stress Testing
The later chapters of this book will focus on various elements and aspects of stress testing. Although stress tests have gained in prominence since the financial crisis of 2007–09, stress testing existed in the arsenal of risk managers well before the financial crisis. However, it has not existed in isolation: along with stress tests, risk managers have always used other tools.
Quite sophisticated stress testing existed in many banks’ management of market risk before the 2007–09 crisis, and it often focused on the trading book, including both transaction and portfolio-level stress testing. In contrast, the stress testing of credit risk was more likely to be at a transaction level. Portfolio-level stress-testing was often rudimentary, if it existed all. Enterprise-wide stress tests also tended to be rudimentary (with one or two notable exceptions), especially for institutions that had large banking books.
Risk management in financial institutions has always relied on a panoply of tools and measures. Textbooks on risk management at financial institutions describe various other tools, such as position limits and exposure limits, as well as limits on the Greeks, including delta
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