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Stress Testing of Banking Systems (in English)

Author

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  • Martin Èihák

    (International Monetary Fund, Washington, D.C.)

Abstract

In response to the increased financial instability of many countries in the 1990s, policy makers sought a better understanding of the vulnerabilities of financial systems and of measures that could help prevent financial crises. A key technique for quantifying financial-sector vulnerabilities is stress testing. This paper surveys the literature in the developing field of stress-testing financial systems and in particular banking systems. Stress tests are useful because they provide a quantitative measure of the vulnerability of a financial system to risk factors. This can be useful in combination with other analyses to draw conclusions about the overall stability of a financial system. The value added of macroprudential stress tests derives from their forward-looking macroeconomic perspective, their focus on the financial system as a whole, and their uniform approach to the assessment of risk exposures across institutions. The value added of stress tests can be particularly high if tests are performed regularly and their results analyzed over time.

Suggested Citation

  • Martin Èihák, 2005. "Stress Testing of Banking Systems (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 55(9-10), pages 418-440, September.
  • Handle: RePEc:fau:fauart:v:55:y:2005:i:9-10:p:418-440
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    References listed on IDEAS

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    1. Mr. Paul Louis Ceriel Hilbers & Mr. Matthew T Jones & Mr. Graham L Slack, 2004. "Stress Testing Financial Systems: What to Do When the Governor Calls," IMF Working Papers 2004/127, International Monetary Fund.
    2. repec:onb:oenbwp:y:2002:i:3:b:3 is not listed on IDEAS
    3. Mr. Giovanni Majnoni & Mr. Maria Soledad Martinez Peria & Mr. Winfrid Blaschke & Mr. Matthew T Jones, 2001. "Stress Testing of Financial Systems: An Overview of Issues, Methodologies, and FSAP Experiences," IMF Working Papers 2001/088, International Monetary Fund.
    4. Harvir Kalirai & Martin Scheicher, 2002. "Macroeconomic Stress Testing: Preliminary Evidence for Austria," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 58-74.
    5. Furfine, Craig H, 2003. "Interbank Exposures: Quantifying the Risk of Contagion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 111-128, February.
    6. Mr. Rupert D Worrell, 2004. "Quantitative Assessment of the Financial Sector: An Integrated Approach," IMF Working Papers 2004/153, International Monetary Fund.
    7. repec:imf:imfops:212 is not listed on IDEAS
    8. Ms. Jingqing Chai & Mr. R. B. Johnston, 2000. "An Incentive Approach to Identifying Financial System Vulnerabilities," IMF Working Papers 2000/211, International Monetary Fund.
    9. Bank for International Settlements, 2001. "A survey of stress tests and current practice at major financial institutions," CGFS Papers, Bank for International Settlements, number 18, June.
    10. Martin Cihak, 2004. "Designing Stress Tests for the Czech Banking System," Research and Policy Notes 2004/03, Czech National Bank.
    11. José A. F. Machado, 2004. "Banco de Portugal Conference on "Portuguese Economic Development in the European Union": A Personal Summary," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    12. Helmut Elsinger & Alfred Lehar & Martin Summer, 2002. "A New Approach to Assessing the Risk of Interbank Loans," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 75-86.
    13. Marco Sorge, 2004. "Stress-testing financial systems: an overview of current methodologies," BIS Working Papers 165, Bank for International Settlements.
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    Cited by:

    1. Harun, Cicilia A. & Taruna, Aditya Anta & Ramdani,, 2021. "Capturing the nonlinear impact in distress state: Enhancing scenario design of stress test," Economic Analysis and Policy, Elsevier, vol. 69(C), pages 265-288.
    2. Pami Dua & Hema Kapur, 2017. "Macro Stress Testing of Indian Bank Groups," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 11(4), pages 375-403, November.

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    More about this item

    Keywords

    financial soundness; financial systems; stress testing;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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