Introduction

Iftekhar Hasan, David Lynch and Akhtar Siddique

This book presents various stress-testing methodologies and approaches. While most of the contributors are at regulatory agencies or were in the past, the views in the chapters do not establish supervisory policy, requirements, or expectations. Instead, the information presented here should be useful for those who choose to conduct stress tests, such as modellers at financial institutions, as well as for regulatory authorities or equity analysts.

Since the first edition of this book was published, there have been significant improvements in stress testing for financial institutions. This was put succinctly by Andrea Enria, head of the Single Supervisory Mechanism (SSM) of the European Central Bank and former head of the European Banking Authority (EBA), in a speech in 2018 where he discussed the evolution of stress tests in the European Union (EU):11 Speech by Andrea Enria, “What we have Learnt from EU-wide Stress Tests”, National Bank of Romania, November 15, 2018.

The stress-test exercise was originally introduced in the EU as a crisis management tool in 2011. It has gradually turned into a regular and flexible tool for competent authorities to identify banks’ weaknesses

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