Operational Risk: An Overview of Stress-testing Methodologies

Brian Clark and Bakhodir Ergashev

Numerous international regulatory standards require the implementation of stress testing as a risk management tool. The Basel Committee on Banking Supervision (BCBS, 2009), a key international regulatory guidance on stress testing, recommends including stress tests in a bank’s overall risk management toolkit. The document broadly refers to stress tests as “the evaluation of a bank’s financial position under a severe but plausible scenario”. It provides general principles for stress-testing practices, while allowing banks ample discretion in choosing stress-test methodologies. However, it refrains from prescribing any particular stress-testing approach, thereby leaving banking institutions with broad discretion in choosing stress-testing methodologies.

The purpose of stress testing is often viewed by regulatory bodies and financial institutions as a means to determine how a financial institution’s capital or financial position would be impacted by an adverse scenario. In most applications, this requires modelling a link between a macroeconomic event or series of macroeconomic events and the performance of a bank’s portfolio of assets. In the context of credit and market

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to Risk.net? View our subscription options

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here