Macrofinancial Scenarios for System-wide Stress Tests: Process and Challenges
Jérôme Henry
Foreword
Introduction
Risk Assessment in the EU
The Single EU Supervisory Reporting
The EU Harmonised Definition of Non-performing Exposures: Origins, Main Features and Possible Improvements
Towards Consistent and Effective Risk Indicators
Data Workflow: From Quality Checking to Risk Dashboards
EU-wide Stress Tests: Rationale and Basics
EU-Wide Stress Test: Methodology
Macrofinancial Scenarios for System-wide Stress Tests: Process and Challenges
Benchmarking of Credit Risk Models For Determining Own Funds Requirements
Benchmarking of Market Risk Models For Determining Own Funds Requirements
The Analysis of Funding Plans
Transparency and Market Discipline
Afterword: The Post-crisis Regulatory Regime and Bank Business Models
Stress tests have been conducted by a number of authorities around the world on a regular basis, especially since the late 2000s. The exercises focused on latterly, which will be discussed in this chapter to explore their underlying scenarios, are those carried out system-wide with a view to testing the resilience of a whole banking sector. This wave of stress tests started immediately after the financial crisis emerged, and is still ongoing. Namely, since the 2007–08 subprime and Lehmann episodes, stress tests have been carried out on an almost yearly basis overall, be it in the US, the UK, the EU as a whole, or in some of countries confronted with specific (fiscal or housing) crises (see, for example, FRB, 2014; Bank of England, 2015; ESRB, 2014). These stress tests have all used as a basis a consistent and complete set of macrofinancial assumptions that were specifically designed to stress the banks’ balance sheets, in other words what is commonly called a “scenario”, which we will consider in what follows. These macrofinancial assumptions were meant in general to replicate a crisis situation, and have been closely related to the very motivation of a stress test, ie, assessing
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