Download Stress-testing the Banking System: Methodologies and by Mario Quagliariello PDF
By Mario Quagliariello
Tension assessments are utilized in danger administration by means of banks with a purpose to ensure how sure concern eventualities could have an effect on the worth in their portfolios, and by way of public gurus for monetary balance reasons. until eventually the 1st 1/2 2007, curiosity in stress-testing used to be mostly constrained to practitioners. in view that then, the worldwide economic climate has been hit through deep turbulences, together with the fallout from sub-prime loan lending. Many observers have mentioned that the severity of the predicament has been principally as a result of its unforeseen nature and feature claimed extra vast use of stress-testing methodologies might have helped to relieve the repercussions of the drawback. This e-book analyses the theoretical underpinnings, in addition to the sensible elements, of utilising such methodologies. development at the event won by means of the economists of many nationwide and foreign monetary specialists, it offers an up-to-date toolkit for either practitioners and lecturers.
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Additional resources for Stress-testing the Banking System: Methodologies and Applications
Example text
31 Macroeconomic stress-testing: definitions and main components time horizon should be determined depending on whether changes in the portfolio under analysis take a longer time to realise or not as well as on the realism of the ceteris paribus assumption regarding market participants and authorities’ behaviour under stress conditions. , one or more years), since shocks are slowly transmitted to the banking books and intermediaries cannot adjust their credit policies as quickly as they do for trading activities.
However, the presence of a macroeconometric model does not reduce the need for expert judgment. Indeed, the design of the scenario entails a series of decisions that are crucial for the validity of the exercise and the reliability of the results. First of all, the interpretation of the shocked variables depends on the assumption of the baseline scenario. This may be a simple no-change scenario based on the last available data or a more forward looking one, based on the most recent forecasts. Furthermore, it should be assessed whether and to what extent the ceteris paribus assumption is valid or, rather, if some variables – beyond those that are directly stressed – are expected to react (and how) as a consequence of the shock.
Are countermeasures available? Should emergency plans be implemented? 1 Coverage The process of stress-testing begins with the selection of the intermediaries. While considering the whole financial system of a country would allow a comprehensive simulation of the effects of the stress scenario, this approach may be extremely burdensome. In most countries, it is advisable to select a group of core institutions that are considered particularly important for the stability of the financial system and are likely to be affected by common risk factors.