Financial Institution Perspectives on the Evolving Role of Enterprise-wide Stress Testing

Andy McGee and Ilya Khaykin

Enterprise-wide stress testing,11Enterprise-wide stress testing is a process that a financial firm uses to explore the impact of economic scenarios on its financial condition over multiple periods, typically using regulatory capital metrics. The impact is estimated for all businesses and risks, using models that link financial performance to macroeconomic or other factors. In capital adequacy assessment, the “test” is typically whether the institution retains sufficient capital to remain a going concern at the worst point of the forecasted period. as a formal discipline for risk and capital management, was born out of the financial crisis. Stress tests had previously been carried out for certain types of risk or for specific portfolios, but rarely for all the risks faced by an entire enterprise. For example, market risk stress testing was widely adopted in the 1990s to supplement value-at-risk (VaR) measures, whose calculation tends to underestimate extreme losses. While these narrow stress tests were useful for managing specific risks or portfolios, they shed little light on the overall effect that a “stress event” would have on an institution.

During the 2000s, some institutions

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