Stress Testing (2nd Edition)
First published:
ISBN: 978-1-78272-391-2
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The Evolution of Stress Testing Counterparty Exposures
Foreword
Introduction
Response to Financial Crises: The Development of Stress Testing over Time
Stress Testing and Other Risk Management Tools
Econometric Pitfalls in Stress Testing
Stress-testing applications of Machine Learning Models
Four Years of Concurrent Stress Testing at the Bank of England: Developing the Macroprudential Perspective
Stress Testing for Market Risk
The Evolution of Stress Testing Counterparty Exposures
Liquidity Risk: The Case of the Brazilian Banking System
Operational Risk: An Overview of Stress-testing Methodologies
Peacetime Stress Testing: A Proposal
Stress-test Modelling for Loan Losses and Reserves
A New Framework for Stress Testing Banks’ Corporate Credit Portfolio
EU-wide Stress Test: The Experience of the EBA
Stress Testing Across International Exposures and Activities
The Asset Market Effects of Bank Stress-test Disclosures
An Alternative Approach to Stress Testing a Bank’s Trading Book
Determining the Severity of Macroeconomic Stress Scenarios
Governance over Stress Testing
The call for better stress testing of counterparty credit risk (CCR) exposures has been a common occurrence from both regulators and industry in response to financial crises (CRMPG, 1999; CRMPG, 2005; FRB, 2011). Despite this, statistical measures have progressed more rapidly than stress testing. This chapter will therefore examine how stress testing may be improved by building off the development of statistical measures. It begins by describing how the measurement of counterparty risk has evolved by viewing the risk as a credit risk and as a market risk. The problems this creates for a risk manager who is developing a stress-testing framework for counterparty risk are then identified. Methods to stress test counterparty risk are described from both a credit risk and market risk perspective, starting with the simple case of stressing current exposures to a counterparty. These stress tests are also considered from both a portfolio perspective and individual counterparty perspective. Finally, some common pitfalls in stress testing counterparty exposures are identified.
THE EVOLUTION OF COUNTERPARTY CREDIT RISK MANAGEMENT
The measurement and management of CCR has evolved rapidly
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