Stress Testing for Financial Institutions
First published:
ISBN: 9781906348113
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Integrating Stress-Testing Frameworks
Integrating Stress-Testing Frameworks
Stress Tests, Market Risk Measures and Extremes: Bringing Stress Tests to the Forefront of Market Risk Management
Credit Cycle Stress Testing Using a Point-in-Time Rating System
Stress-Testing Credit Value-at-Risk: a Multiyear Approach
Stress Testing the Impact of Group Dependence on Credit Portfolio Risk
Hedge the Stress: Using Stress Tests to Design Hedges for Foreign Currency Loans
Survey of Retail Loan Portfolio Stress Testing
Stress Tests for Retail Loan Portfolios
Stress-Testing Banks’ Credit Risk Using Mixture Vector Autoregressive Models
Uncertainty, Credit Migration, Stressed Scenarios and Portfolio Losses
Worst-Case and Stressed Correlations in the Asymptotic Single Risk Factor Model
Risk Aggregation, Dependence Structure and Diversification Benefit
Stress-Testing Credit Distributions of Banks’ Portfolios: Risk Structure and Concentration Issues
Time-Varying Correlations for Credit Risk: Modelling, Estimating and Stress Testing
Macro Model-Based Stress Testing of Basel II Capital Requirements
Risk Tolerance Concepts and Scenario Analysis of Bank Capital
Basel II-Type Stress Testing of Credit Portfolios
Bank regulators (compare Basel Committee on Banking Supervision 2006) expect financial institutions to provide sufficient Tier I and Tier II capital to cover future worst-case credit portfolio losses. These worst-case losses are based on conservative assumptions for a set of parameters such as the probability of default (PD), asset correlation, loss given default (LGD) or exposure at default (EAD)
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Stress of PD: probability of default is based on a one factor, non-linear model where the factor equals the 99.9th percentile of a systematic standard normally distributed variable and the sensitivity is based on the so-called asset correlation.
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Stress of EAD and LGD: EAD and LGD are modelled based on economic downturn conditions.
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Stress of asset correlations: asset correlations can be interpreted as a measure of the sensitivity of PD to the business cycle and therefore have a major impact on the stress of the PD. As a matter of fact, the Basel Committee specifies values that are significantly higher than estimates observed in various empirical studies (see, for example, Dietsch and Petey 2004, Rösch and Scheule 2004, 2005). Examples are 15% for residential mortgage, 4% for
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