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Introduction to Applied Stress Testing

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  • Martin Cihák
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    Abstract

    Stress testing is a useful and increasingly popular, yet sometimes misunderstood, method of analyzing the resilience of financial systems to adverse events. This paper aims to help demystify stress tests, and illustrate their strengths and weaknesses. Using an Excel-based exercise with institution-by-institution data, readers are walked through stress testing for credit risk, interest rate and exchange rate risks, liquidity risk and contagion risk, and are guided in the design of stress testing scenarios. The paper also describes the links between stress testing and other analytical tools, such as financial soundness indicators and supervisory early warning systems. Furthermore, it includes surveys of stress testing practices in central banks and the IMF.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/59.

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    Length: 74
    Date of creation: 01 Mar 2007
    Date of revision:
    Handle: RePEc:imf:imfwpa:07/59

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    Related research

    Keywords: Stress testing; Financial soundness indicators; Financial systems; Financial risk; Credit risk; Interest rates; Exchange risk; Liquidity; Fund; banking; foreign exchange; capital adequacy; financial stability; financial sector; financial institutions; interest rate risk; banking system; national bank; banking sector; financial system; bonds; capital adequacy ratio; banking systems; bank data; present value; bank soundness; probability of default; bank of england; interbank market; bank safety; bank failures; bank exposures; bond; financial markets; net present value; foreign exchange exposure; income statement; monetary authority; bank for international settlements; stock prices; equity capital; financial statements; bank risk; return on assets; government bonds; nominal exchange rate; banks ? solvency; loan classification; bank research; deposit rates; banking supervision; cash flow; bank runs; stock market; bond portfolio; derivative; bank credit; bank stocks; banking institutions; mortgage loan; stock indices; equity markets; bank financing; deposit interest rates; stock price; bank asset; future cash flow; reserve requirements; bank owners; bank failure; bank capital; bankruptcies; deposit interest; banking license; bank ? exposures; bond portfolios; stock market index; bank management; bank run; bank asset quality; cash flows; currency of denomination; bank supervisors; bond prices; banking business; repricing gap; banks ? balance sheets; bank size; return on equity; excess liquidity; nominal interest rate; bank of norway; liquidity support; financial instability; loan concentration;

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    1. Snorre Evjen & Arild J Lund & Kjersti Haare Morka & Kjell B Nordal & Ingvild Svendsen, 2005. "Monetary and financial stability in Norway: what can we learn from macroeconomic stress tests?," BIS Papers chapters, Bank for International Settlements, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 409-30 Bank for International Settlements.
    2. Helmut Elsinger & Alfred Lehar & Martin Summer, 2002. "Risk Assessment for Banking Systems," Working Papers, Oesterreichische Nationalbank (Austrian Central Bank) 79, Oesterreichische Nationalbank (Austrian Central Bank).
    3. Glenn Hoggarth & Andrew Logan & Lea Zicchino, 2005. "Macro stress tests of UK banks," BIS Papers chapters, Bank for International Settlements, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 392-408 Bank for International Settlements.
    4. Virolainen , Kimmo, 2004. "Macro stress testing with a macroeconomic credit risk model for Finland," Research Discussion Papers, Bank of Finland 18/2004, Bank of Finland.
    5. Kexue Liu & Jean Salvati & Renzo G. Avesani & Alin Mirestean, 2006. "Review and Implementation of Credit Risk Models of the Financial Sector Assessment Program (FSAP)," IMF Working Papers, International Monetary Fund 06/134, International Monetary Fund.
    6. Ivan Baboucek & Martin Jancar, 2005. "Effects of Macroeconomic Shocks to the Quality of the Aggregate Loan Portfolio," Working Papers, Czech National Bank, Research Department 2005/01, Czech National Bank, Research Department.
    7. Andrew Crockett, 1997. "Why is financial stability a goal of public policy?," Economic Review, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, issue Q IV, pages 5-22.
    8. Andrew Crockett, 1997. "Why is financial stability a goal of public policy?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 7-36.
    9. Bank for International Settlements, 2005. "Stress testing at major financial institutions: survey results and practice," CGFS Papers, Bank for International Settlements, number 24.
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    Cited by:
    1. Mizuho Kida, 2008. "A macro stress testing model with feedback effects," Reserve Bank of New Zealand Discussion Paper Series DP2008/08, Reserve Bank of New Zealand.
    2. Nguenang, Christian & Kamgna, Sévérin yves & Tinang, Nzeusseu Jules, 2010. "Une approche Macroprudentielle du risque systémique en zone CEMAC
      [A Macro-prudential approach of systemic risk in CEMAC zone]
      ," MPRA Paper 25632, University Library of Munich, Germany.
    3. Francisco B. Covas & Ben Rump & Egon Zakrajsek, 2013. "Stress-testing U.S. bank holding companies: a dynamic panel quantile regression approach," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2013-55, Board of Governors of the Federal Reserve System (U.S.).
    4. Natasa Erjavec & Boris Cota & Sasa Jaksic, 2012. "Sign restriction approach to macro stress-testing of the Croatian banking system," Financial Theory and Practice, Institute of Public Finance, Institute of Public Finance, vol. 36(4), pages 395-412.
    5. DeLisle Worrell, 2008. "Stressing to Breaking Point," IMF Working Papers, International Monetary Fund 08/148, International Monetary Fund.
    6. Claudio Borio & Mathias Drehmann & Kostas Tsatsaronis, 2012. "Stress-testing macro stress testing: does it live up to expectations?," BIS Working Papers 369, Bank for International Settlements.
    7. Rasmus Kattai, 2010. "Credit risk model for the Estonian banking sector," Bank of Estonia Working Papers, Bank of Estonia wp2010-01, Bank of Estonia, revised 04 Feb 2010.
    8. repec:onb:oenbwp:y::i:150:b:1 is not listed on IDEAS

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