Stress Testing (2nd Edition)
First published:
ISBN: 978-1-78272-391-2
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A New Framework for Stress Testing Banks’ Corporate Credit Portfolio
Olivier de Bandt, Vincent Martin and Eric Vansteenberghe
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
Since the global financial crisis triggered a major overhaul of the banking regulatory framework, unprecedented attention has been given to the stress testing of financial institutions. As a consequence, stress-test exercises have become a key risk management tool to assess the potential impact of extreme events on banks’ profit and loss (P&L) and balance-sheet structures. Stress tests are viewed as complementary to traditional risk measurement metrics such as value-at-risk (VaR) as they are an important mechanism for detecting the weaknesses of a single financial institution as well as threats to financial stability.
Globally, financial institutions are now required to perform regular exercises within Pillar II of the regulatory framework of the Basel Accord to assess the overall impact of adverse events or changes in market conditions on banks’ capital adequacy. Supervisory authorities are used to leading such exercises. For instance, the International Monetary Fund (IMF) has its regular Financial Sector Assessment Program, the European Banking Authority (EBA) has the Single Supervision Mechanism in Europe with their “bottom-up” stress tests that are disclosed on an
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