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A regulatory stress test to-do list: Transparency and accuracy

Author

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  • Kupiec, Paul H.

    (Resident Scholar, The American Enterprise Institute, USA)

Abstract

Regulatory stress tests use forecasts of bank performance over hypothetical multi-year stress scenarios to set minimum regulatory capital requirements. Notwithstanding their popularity among US and European regulators, little is known about the accuracy of supervisory stress test models. Regulators keep the details of their stress test models confidential, inhibiting an independent verification of regulatory model performance. Using data from the 2008 financial crisis, this paper demonstrates how the lack of transparency and model inaccuracy have the potential to create costly misallocations of banking resources.

Suggested Citation

  • Kupiec, Paul H., 2018. "A regulatory stress test to-do list: Transparency and accuracy," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 11(2), pages 132-147, March.
    • Handle: RePEc:aza:rmfi00:y:2018:v:11:i:2:p:132-147
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    More about this item

    Keywords

    stress test accuracy; stress test transparency;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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