Ethical Issues in Financial Stress Testing

This chapter provides insights on ethical issues inherent in financial stress testing. A simple normative framework is developed based on a set of normative principles. The framework serves as an analytical lens for the ethical discussion of different stress-testing applications. The chapter covers portfolio stress testing on the bank level as well as stress testing for supervisory and surveillance purposes. Prior to the actual discussion the fundamentals of financial stress testing are introduced. This includes the concept of stress testing and a brief historical outline. The ethical discussion shows that several moral principles are relevant for guiding the conduct of stress testing and for regulating between good and bad behaviour. Most notably, the discussion demonstrates that bank regulation and ethics are no substitutes but rather complements that reinforce each other. In this regard, the chapter also contributes to the contemporary debate about rule-based versus principle-based regulation.