Mark Levonian

The evolution of stress testing in financial services has been fascinating. In the beginning, the set of methods that we call stress testing were best described as an acknowledged tributary of the broader river of risk management, although somewhat of a backwater. Such methods received limited attention, and in many cases the results of stress tests were regarded as interesting curiosities – a supplement to other, more prominent methods of assessing risk, but perhaps more of an entertaining novelty than a critically important tool.

Then came the global financial crisis, and stress became a real and immediate concern. Stress scenarios that once appeared plausibly severe no longer seemed all that stressful. Scenarios viewed as unrealistically stressful came to look plausible. And the tool of stress testing, which had seemed of secondary importance, began to be put to new and critically important uses. In effect, stress-testing methods were subjected to their own stressful test. The heightened focus revealed that much of the data and many of the methods underlying stress-testing tools were not adequate for the new post-crisis uses. Models and results were not very robust, and

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