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Of Runes and Sagas

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Author Info

  • Martin Cihák
  • Li L. Ong
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    Abstract

    The global financial crisis revealed weaknesses in the stress testing exercises performed on financial institutions and systems around the world. These failures were most evident in the area of liquidity risk, where now-obvious vulnerabilities were left largely undetected, with stress tests having largely focused on solvency risk. This paper uses publicly available data from a now-defunct bank in Iceland, where liquidity shocks were immense, to demonstrate how a combination of stress tests of the various risks would have provided a clearer picture of existing vulnerablities. We show that, ultimately, stress test models do not necessarily need to be complex or overly sophisticated. Basic stress tests, using appropriate assumptions and shocks, could reveal key areas of risk to inform contingency planning. The liquidity stress test templates used in this paper are included.

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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=24019
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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/156.

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    Length: 28
    Date of creation: 01 Jul 2010
    Date of revision:
    Handle: RePEc:imf:imfwpa:10/156

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    Related research

    Keywords: Liquidity; External shocks; Iceland; Stress testing; banking; financial institutions; bonds; hedging; banking sector; banking supervision; liquidity ratio; financial system; liquidity crises; banking crisis; banking systems; financial stability; liquid liabilities; financial sector; derivative; bond prices; financial markets; capital adequacy; financial statements; foreign exchange; stock prices; international payment system; cash flow; credit derivatives; bank runs; asset recovery; cash flows; international financial statistics; capital adequacy ratio; banking model; commodity derivatives; reserve requirements; foreign stock; savings account;

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    Cited by:
    1. 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.
    2. Eugenio Cerutti & Christian Schmieder, 2012. "The Need for "Un-consolidating" Consolidated Banks' Stress Tests," IMF Working Papers 12/288, International Monetary Fund.

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