Stress Testing (2nd Edition)
First published:
ISBN: 978-1-78272-391-2
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Peacetime Stress Testing: A Proposal
Paul Calem, Jose Canals-Cerda, Arden Hall and Lauren Lambie-Hanson
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
In Calem and Hall (2013), some basic principles of bank capital stress tests regarding the objectives and limitations of stress testing, design of appropriate scenarios and the role of models were outlined. Particular attention was focused on stress-test modelling of balance-sheet loan loss. In that paper, we adopted a somewhat sceptical view of whether stress tests can reliably project credit losses for a hypothetical future downturn due to the need to rely on models that have been fitted to historical data. We opined that “there can be no assurance either that future behaviour under stress conditions will resemble past performance, or that the historical data incorporate a sufficiently diverse range of economic conditions to guarantee accuracy of the prediction”.
Accordingly, we expressed the view that the stress testing of bank capital is most useful as a “diagnostic” rather than a predictive tool. Stress-test models inherited from a previous downturn should not be expected to yield reliable loss projections, given how the nature and scope of banks’ risk exposures may have evolved over the intervening period. They are, however, useful for appropriately defined purposes. They
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