Stress Testing Across International Exposures and Activities

Robert Scavotto, Robert Skinkle and Hein Bogaard

Stress testing foreign exposures of internationally active financial institutions by regulators, private sector analysts or the institutions themselves presents an array of challenges. These include devising appropriate global and idiosyncratic country scenarios, developing datasets for estimating quantitative relationships, and identifying and implementing qualitative factors that may drive loss rates. The development of stress-testing models and methodologies that account for market- or country-specific factors may involve trade-offs between general applicability and specificity, and may also be constrained by an availability of data. This chapter will discuss key challenges and draw on the authors’ analysis of stress testing international real estate exposures, and work to stress test consumer loan portfolios across a group of countries, as well as efforts to integrate systemic banking crises into stress tests of a government’s debt servicing capacity.

CONDUCTING STRESS TESTS OF INTERNATIONAL ACTIVITIES IN AN IDIOSYNCRATIC WORLD

In foreign markets, financial institutions are subject to country risk, which is the risk that economic, social and political conditions and events

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