Introduction to Applied Stress Testing
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.
|Date of creation:||01 Mar 2007|
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- Bank for International Settlements, 2005. "Stress testing at major financial institutions: survey results and practice," CGFS Papers, Bank for International Settlements, number 24, April.
- Ivan Baboucek & Martin Jancar, 2005. "Effects of Macroeconomic Shocks to the Quality of the Aggregate Loan Portfolio," Working Papers 2005/01, Czech National Bank, Research Department.
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- 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 06/134, International Monetary Fund.
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