MEASURING SYSTEMIC BANKING RESILIENCE: A STRESS TESTING APPROACH

Abstract

In accordance with regulatory requirements, banks should perform stress tests on their regulatory basis as well as their economic capital. The variety of stress tests is not crucial and is most often a technique, as an input for determining the form and size of the required bank capital. Another reason for differentiating stress tests is the division into performed and non- performing loans, as their respective capital requirements follow different rules. Special stress tests will be made for defaulted loans, loss provisions. Therefore, the following cases should be considered for stress testing: - Executed loans get a lower grade but achieve executed loans - economic capital assessment includes updating risk parameters;- Performed loans are downgraded and become nonperforming loans - commissions must be assessed including net exposures calculated with LGD; and - Deterioration of non-performing loans - commissions mustincrease based on changing LGD (decrease in LGD).A typical way of categorizing stress tests can be taken from market risks. The most important way of classifying stress tests is through methodology. One can distinguish stress tests with respect to techniques in statistics and model-based methods, and with consideration of conceptual elaboration in sensitivity analysisand scenario analysis.