A Global Perspective on Stress Testing

Bernhard Kronfellner, Stephan Süß and Volker Vonhoff

Since the 1990s, bank risk managers and regulators have become increasingly aware of the need to conduct stress tests on banks’ balance sheets to assess the resilience of single banks (commonly referred to as “microprudential stress tests”), as well as the financial sector as a whole (widely known as “macroprudential stress tests”). In general, stress testing is a simulation technique to quantify the impact of (mostly) adverse market conditions on a financial portfolio. Likely outcomes are evaluated for historical and/or plausible but severe hypothetical stress scenarios. As such, these are easy to understand and communicate to board members and senior management, stakeholders and regulators.

In this chapter, we provide a short summary of stress testing history, discuss the details of major stress testing frameworks and give guidelines for a stress testing programme setup. For brevity, we restrict the scope of our analysis mainly to the US, eurozone and the UK. In addition, we outline likely future developments in stress testing design and methodology and their applications for internal bank steering.

Stress testing in the banking industry before the 2007–9 financial crisis


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