Stress Testing (2nd Edition)
First published:
ISBN: 978-1-78272-391-2
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Operational Risk: An Overview of Stress-testing Methodologies
Brian Clark and Bakhodir Ergashev
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
Numerous international regulatory standards require the implementation of stress testing as a risk management tool. The Basel Committee on Banking Supervision (BCBS, 2009), a key international regulatory guidance on stress testing, recommends including stress tests in a bank’s overall risk management toolkit. The document broadly refers to stress tests as “the evaluation of a bank’s financial position under a severe but plausible scenario”. It provides general principles for stress-testing practices, while allowing banks ample discretion in choosing stress-test methodologies. However, it refrains from prescribing any particular stress-testing approach, thereby leaving banking institutions with broad discretion in choosing stress-testing methodologies.
The purpose of stress testing is often viewed by regulatory bodies and financial institutions as a means to determine how a financial institution’s capital or financial position would be impacted by an adverse scenario. In most applications, this requires modelling a link between a macroeconomic event or series of macroeconomic events and the performance of a bank’s portfolio of assets. In the context of credit and market
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