Credit risk stress tests need more work, says BIS

Leading banks have yet to develop a solid framework for credit risk stress tests that deals with all the likely effects stress events would have on their businesses, according to the latest report by the Bank for International Settlements (BIS).

While the Basel-based co-ordinating body for the world’s leading financial regulators said stress testing had gained wide acceptance among the risk management community, the main thrust of their work concentrated heavily on market risks, rather than credit risks.

Theoretically, credit spread tests have become easier due to the development of the credit default swap market on the loan-book side. But there are still significant problems. One of these is the lack of transparency of many firms