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Stress Testing in Banking: A Critical Review

Author

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  • Adrian Pop

    (IEMN-IAE Nantes - Institut d'Économie et de Management de Nantes - Institut d'Administration des Entreprises - Nantes - UN - Université de Nantes, LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - IEMN-IAE Nantes - Institut d'Économie et de Management de Nantes - Institut d'Administration des Entreprises - Nantes - UN - Université de Nantes)

Abstract

Stress testing is used both by banks as a risk management tool and by banking authorities in macroprudential regulation in order to determine how certain extreme, but still plausible, shock scenarios would affect the value of bank asset portfolios or the stability of the banking system. Before the inception of the Global Financial Crisis of 2007, the stress tests had been conducted following a bottom-up approach, on a bank-by-bank basis. Since then, many observers have advocated for a more extensive use of stress tests, especially as a useful macroprudential tool. This chapter examines the theoretical underpinnings of the various stress testing methodologies in use at central banks and prudential authorities, as well as some practical aspects related to the calibration of stress scenarios.

Suggested Citation

  • Adrian Pop, 2017. "Stress Testing in Banking: A Critical Review," Post-Print hal-04212972, HAL.
    • Handle: RePEc:hal:journl:hal-04212972
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    Cited by:

    1. Darné, Olivier & Levy-Rueff, Guy & Pop, Adrian, 2024. "The calibration of initial shocks in bank stress test scenarios: An outlier detection based approach," Economic Modelling, Elsevier, vol. 136(C).

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