Three ways to improve stress testing

Better scenario choice, iterative testing and top-down approaches could improve performance, says Ahraz Sheikh

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Three targets: areas still remain where stress testing can be enhanced to improve its usefulness

Following the global financial crisis (GFC), the Basel Committee placed a heavier reliance on the role of stress testing in ensuring the stability of the financial services sector. Previously, stress testing was weakly defined, and primarily focused on market risk through the sensitivity analysis of portfolios to univariate and multivariate market shocks over short time horizons. After the crisis, it was reformulated to assess the impact of hypothetical stress scenarios across all material

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