Stress Testing (2nd Edition)
First published:
ISBN: 978-1-78272-391-2
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Governance over Stress Testing
David E Palmer
Governance over Stress Testing
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
Governance and controls are a very important aspect of stress testing, and yet are sometimes overlooked or given insufficient attention by financial institutions.11 For the purposes of this chapter, the term “stress testing” is defined as exercises used to conduct a forward-looking assessment of the potential impact of various adverse events and circumstances on a banking institution. Proper governance and controls over stress testing not only confirm that stress tests are conducted in a rigorous manner, but also help ensure that the tests and their outcomes are subject to an appropriately critical eye. Governance and controls are particularly needed in the area of stress testing given the highly technical nature of many stress-testing activities, the generally large number of assumptions in stress-testing exercises and the inherent uncertainty in estimating the nature, likelihood and impact of stressful events and conditions.
While the exact form of governance and controls over stress-testing activities can, and should, vary across countries and financial institutions, there are some general principles, expectations and recommendations that financial institutions can follow
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