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Stress testing as a tool for simulating the effects of crisis in banks

Author

Listed:
  • Edward Wiszniowski

    (The Wroclaw University of Economics, Poland.)

Abstract

Emergence of crisis in financial markets, especially banks, have forced a change in approach to risk management. It has become necessary to develop new or refine existing models of early bankruptcy threat warning, as well as establishing the potential impact of bank failures. One of the tools, indicating that resistance to the phenomenon of crisis is “stress testing”. Its aim, at least in the case of banks, is concerned with estimating the level of economic resistance towards the occurring risk. Some of these risks are: the non-payment of loans due to deterioration in the economic situation of a country, fluctuations in interest rates, exchange rates and a fall in prices of securities which are traded on stock exchanges. This article discusses the nature of stress testing and shows the current legislation in Poland and presents the results of a stress testing conducted on the largest U.S. banks in May 2009. The rank and results of these studies show the importance of the role of stress testing as a complementary research of a diagnostic and prognostic nature.

Suggested Citation

  • Edward Wiszniowski, 2010. "Stress testing as a tool for simulating the effects of crisis in banks," Business and Economic Horizons (BEH), Prague Development Center, vol. 1(1), pages 58-66, April.
    • Handle: RePEc:pdc:jrnbeh:v:1:y:2010:i:1:p:58-66
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    Citations

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    Cited by:

    1. Chang Liu & Lin Tang & Dongtao Lin & Jiayi Guo, 2023. "Testing to extreme: An application of reverse stress testing engineering on mortgages of commercial banks in China," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 187-192, January.

    More about this item

    Keywords

    Banking; banking risks; risk management; financial crisis.;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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