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Stress testing at major financial institutions: survey results and practice


  • Bank for International Settlements


Introduction In May 2004, the Committee on the Global Financial System (CGFS) initiated an exercise on stress tests undertaken by banks and securities firms. The exercise had two main aims. The first was to conduct a review of what financial institutions perceived to be the main risk scenarios for them at that time, based on the type of enterprise-wide stress tests that they were running. The second aim was to explore some of the more structural aspects of stress testing and examine how practices had evolved, particularly over the period since the previous CGFS survey, the results of which were published in A survey of stress tests and current practice at major financial institutions in April 2001. There were two main parts to the latest exercise. The first part involved a survey of stress tests being conducted at banks and securities firms. The survey asked respondents to list details of the stress test scenarios and associated risk factors that were in use as at the end of May 2004. Sixty four banks and securities firms from 16 countries participated in the survey, with the reporting institutions selected by their national central banks.2 Firms participating in the survey reported to their national central bank; the data were then submitted on a no-name basis to the BIS-based CGFS secretariat and entered into a database. Around 960 stress tests were reported and more than 5,000 risk factors were listed.3 Reflecting a desire to focus on the range of scenarios being employed and confidentiality concerns, survey respondents were not asked to report the results of any scenario runs. In the second stage, national central banks conducted follow-up meetings with institutions that had participated in the stress test survey. National central banks met to discuss the results of the survey and these interviews. As part of this meeting, senior risk managers from several large complex financial firms were invited to discuss stress test practice. Both the follow-up meetings and the group discussion with risk managers made clear that risk measurement and the role of stress testing in risk management vary widely across firms, reflecting differences in both the complexity of risks faced by firms and the breadth and scale of the different businesses. The output of the group is a synthesis of observations based on the survey, interviews with respondent firms and discussion with market participants. The exercise illustrated the wide range of practices and risk management frameworks at firms. This reflected, inter alia, the heterogeneous business models that are being employed by firms. The use of stress tests has expanded from the exploration of exceptional but plausible events, to encompass a range of applications. It has met with wider acceptance within firms because it is a flexible tool which can adapt quickly and efficiently to the changing environment and specific needs of a firm and provide important information on the risk exposures of firms. Notwithstanding this positive development, a number of challenges remain, most notably in the areas of stress testing credit risks, integrated stress testing and the treatment of market liquidity in stress situations.

Suggested Citation

  • Bank for International Settlements, 2005. "Stress testing at major financial institutions: survey results and practice," CGFS Papers, Bank for International Settlements, number 24, August.
  • Handle: RePEc:bis:biscgf:24

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    Cited by:

    1. Markus K. Brunnermeier & Gary Gorton & Arvind Krishnamurthy, 2012. "Risk Topography," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 149-176.
    2. Huang, Xin & Zhou, Hao & Zhu, Haibin, 2009. "A framework for assessing the systemic risk of major financial institutions," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2036-2049, November.
    3. Rodriguez, Adolfo & Trucharte, Carlos, 2007. "Loss coverage and stress testing mortgage portfolios: A non-parametric approach," Journal of Financial Stability, Elsevier, vol. 3(4), pages 342-367, December.
    4. Karimalis, Emmanouil & Kosmidis, Ioannis & Peters, Gareth, 2017. "Multi yield curve stress-testing framework incorporating temporal and cross tenor structural dependencies," Bank of England working papers 655, Bank of England.
    5. Mr. Martin Cihak, 2007. "Introduction to Applied Stress Testing," IMF Working Papers 2007/059, International Monetary Fund.
    6. Borio, Claudio & Drehmann, Mathias & Tsatsaronis, Kostas, 2014. "Stress-testing macro stress testing: Does it live up to expectations?," Journal of Financial Stability, Elsevier, vol. 12(C), pages 3-15.
    7. Dunbar, Kwamie, 2012. "Forecasting and Stress-testing the Risk-based Capital Requirements for Revolving Retail Exposures," Working Papers 2012001, Sacred Heart University, John F. Welch College of Business.
    8. Bellotti, Tony & Crook, Jonathan, 2011. "Forecasting and Stress Testing Credit Card Default Using Dynamic Models," Working Papers 11-34, University of Pennsylvania, Wharton School, Weiss Center.
    9. María Fernanda Hernández & Juan José Valero & María Bernardette Díaz, 2007. "Perfil de riesgos del sistema bancario venezolano: aplicación de la metodología de stress testing," Monetaria, CEMLA, vol. 0(4), pages 405-452, octubre-d.
    10. Basu, Sanjay, 2011. "Comparing simulation models for market risk stress testing," European Journal of Operational Research, Elsevier, vol. 213(1), pages 329-339, August.
    11. Martin ÈIHÁK & Jaroslav HEØMÁNEK & Michal HLAVÁÈEK, 2007. "New Approaches to Stress Testing the Czech Banking Sector (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 57(1-2), pages 41-59, March.
    12. Morris Goldstein, 2005. "What Might the Next Emerging-Market Financial Crisis Look Like?," Working Paper Series WP05-7, Peterson Institute for International Economics.
    13. Petar Marković & Branko Urošević, 2011. "Market Risk Stress Testing For Internationally Active Financial Institutions," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 56(188), pages 62-90, January –.
    14. Niluthpaul Sarker & Shamsun Nahar, 2018. "The Vulnerability Trends of the Banking Sector of Bangladesh: A Stress Testing Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 8(3), pages 75-85.
    15. Kesjana Halili & Hatice Jenkins, 2010. "An Evaluation of the Risk Management Practices of Commercial Banks in North Cyprus," Development Discussion Papers 2010-01, JDI Executive Programs.
    16. Mark Flood & George Korenko, 2013. "Systematic Scenario Selection," Working Papers 13-02, Office of Financial Research, US Department of the Treasury.
    17. So, Mike K.P. & Wong, Jerry & Asai, Manabu, 2013. "Stress testing correlation matrices for risk management," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 310-322.
    18. International Monetary Fund, 2006. "Bulgaria: Selected Issues and Statistical Appendix," IMF Staff Country Reports 2006/299, International Monetary Fund.
    19. Chang Liu & Raja Nassar, 2019. "Stress Testing for Retail Mortgages Based on Probability Analysis," Computational Economics, Springer;Society for Computational Economics, vol. 53(1), pages 433-455, January.
    20. L C Thomas, 2010. "Consumer finance: challenges for operational research," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 61(1), pages 41-52, January.
    21. Michal Kováč, 2018. "Comparison of stress testing models for regulatory purposes by institutions using the IRBA method [Porovnání stres test modelů pro regulatorní účely institucí využívajících IRBA metodu]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2018(3), pages 41-56.

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