Stress testing methods

Stress testing has been a successful crisis response tool to provide insight into bank capitalisation. As countries emerge from the financial crisis, stress testing is becoming part of banks’ own risk management as well as part of the toolkit of bank supervisors. This course will cover the history, the main policy issues and the tools needed to address them. We will draw from the European and the US, from private and public sector experience.

We will look at stress testing from the banks’ as well as from the supervisors’ perspective. We will consider micro and macroprudential objectives. The specific topics include scenario design, modelling of losses, net revenue, and the balance sheet. We will examine required different approach for the banking vs. trading book. In addition we will consider different applications. For the supervisor/regulator, stress testing as a supervisory tool in peacetime: macro and microprudential considerations; stress testing and systemic risk; stress testing and monetary policy. For the banks, the immediate application is capital adequacy and capital planning; we also examine strategic planning and performance measurement.