Stress Testing involves testing a model or a system under extreme or unfavorable situations, circumstances that fall outside normal events, to assess the impact on results and returns.
This exercise is done to come up with a more robust model in the physical world, and is used to determine capital requirements for multiple risk factors in the financial services world.
Regulators require management teams and board members to use Stress Testing to better plan and prepare for unexpected situations that may arise in the future.
Today stress testing using a combination of techniques. Review of historical data to identify worst case shocks, extreme movement scenarios, probability of shortfall and ruin as well as breakdown of correlation structures in asset classes and combining all of the above in one massive stress test. The primary focus is on answering a handful of questions. What would it take for this bank to fail? How would we fare if the past repeated itself? How strong is our balance sheet and our capital? How much more capital would we need?
Free Lessons and Guides
- Internal Capital Adequacy Assessment Process (ICAAP) – Overview and Core concepts
- Basel III – Liquidity Framework – Reforms to Global Liquidity Risk Regulations
- Basel III: Basel II Framework Revisions
- The ALM Crash course and survival guide
- Stress Testing. A guide for board members
- The evolution of bank stress tests
- Calculating Value at Risk (VaR)
- Stress testing correlation - The positive correlation stress test
- A simplified guide for reverse stress testing
- Calculating Economic Capital - Using Leverage ratio
- Stress testing guidelines for bank. A simple comparison of US, European and Asian guidelines.
- Stress Testing, ALM, Capital Adequacy online video courses
- Understanding Stress Testing: A guide to stress testing for board members
- Earnings at Risk - Asset Liability Management reporting
- Economic value of equity - Asset Liability Management reporting
- Finance Training Course – Course Outline – Asset Liability Management
- Basel III: Enhancements to Basel II: System-wide changes & Increased Stress Testing