By Mario Quagliariello
"Stress checks are utilized in chance administration through banks as a way to ensure how yes drawback situations could impact the worth in their portfolios, and through public professionals for monetary balance reasons. until eventually the 1st half 2007, curiosity in stress-testing was once mostly limited to practitioners. because then, the worldwide economic system has been hit via deep turbulences, together with the fallout from sub-prime loan lending. Many observers have mentioned that the severity of the problem has been principally because of its unforeseen nature and feature claimed extra huge use of stress-testing methodologies could have helped to relieve the repercussions of the concern. This ebook analyses the theoretical underpinnings, in addition to the sensible points, of employing such methodologies. development at the event received via the economists of many nationwide and overseas monetary specialists, it offers an up to date toolkit for either practitioners and academics"--P.  of cover. Read more...
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Extra info for Stress-testing the banking system : methodologies and applications
Finally, the interconnections across markets and intermediaries increase the probability that the shocks are transmitted among the major components of the ﬁnancial system, thus exacerbating the crisis. Because of this propagation mechanism, an idiosyncratic shock at, for example, one or a few banks may result in a systemic crisis where many institutions or markets are in turn affected through their linkages with these banks. Two main channels exist through which such contagion risks can occur, namely the exposure channel and the information channel.
This ‘catastrophic scenario’ approach 11 12 Indeed, the set up of historical scenarios is based on the assumption that future crises will be similar to past ones. ‘The use of historical data would not make sense without this assumption’ (Breuer and Krenn, 1999). An interesting reference is Matz (2007). 1 Some examples of historical scenarios and crisis triggers 1973 1979 1987 1991 1992 1995 1997 1998 2001 2007–08 First oil crisis – increase of oil prices by OPEC Second oil crisis – cut of Iranian oil supply Black Monday – stock market crash in the US Gulf war – oil price increase European Monetary System crisis – speculation against weaker currencies Tequila crisis – Mexican current account deﬁcit East Asian crisis – US dollar peg cutting LTCM – LTCM collapse September 11 – terrorist attacks in the US Sub-prime mortgages crisis – rise in home foreclosures can be useful for benchmarking purposes and should not be ruled out a priori from the ﬁnancial stability surveillance toolkit.
Ferguson, R. , P. Hartmann, F. Panetta and R. Portes (2007), International Financial Stability, CEPR. Hoggarth, G. and V. Saporta (2001), ‘Costs of Banking System Instability: Some Empirical Evidence’, Bank of England Financial Stability Review, June. , J. Kakes and G. J. Schinasi (2004), ‘A Framework for Safeguarding Financial Stability’, IMF Working Paper, 101. International Monetary Fund (2001), Macroprudential Analysis: Selected Aspects Background Paper, Washington DC. Padoa-Schioppa, T. (2003), Central Bank and Financial Stability, Remarks at the Bank of Indonesia, Jakarta.