Stress Testing: Approaches, Methods and Applications

265 Pages·2013·3.429 MB·English

by  Akhtar Siddique, Iftekhar Hasan, Akhtar Siddique, Iftekhar Hasan

The years since the fi nancial crisis have seen The book includes several of the high profi le S
stress testing emerge as a cornerstone of both system-wide stress-testing exercises that were tre Stress
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modern risk management and regulatory good essential elements of the public sector response s

practice. to the fi nancial crisis. Te
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Acknowledged as an essential part of the risk Key chapters focus on: g
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manager’s armoury, increasingly regulators • Counterparty exposures
and supervisors see stress tests as key to • Validation and independent review
understanding the risks an institution faces and • Scenario design and model estimation
also, critically, those macroprudential risks with • Capital ratios
systemic impact. • CCAR stress testing

Stress testing is the common currency of the Contributors include Paolo Bisio, Approaches, Methods
regulation shaping the future of the fi nancial Demelze Jurcevic and Mario Quagliariello
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and CRD-IV in Europe. Nicolas Dumontaux, Vincent Martin and
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Denys Médée (Autorité de Contrôle Prudentiel), y

In Stress Testing: Approaches, Methods and Benjamin M. Tabak, Solange M. Guerra, A
Applications, editors Akhtar Siddique (Offi ce Sergio R. S. Souza and Rodrigo C. C. Miranda k
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of the Comptroller of Currency) and Iftekhar (Central Bank of Brazil) and David E. Palmer ta
Hasan (Fordham University) have assembled (Federal Reserve Board). r
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contributions from key fi gures directly involved id EDITED BY AKHTAR SIDDIQUE
in the measurement and application of these new “With this book as a guide, both fi nancial d
stress-testing practices. regulators and fi nancial practitioners can gain iq AND IFTEKHAR HASAN
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insights that will help them do their jobs more e

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This new book sets out and analyses the eff ectively.” n
techniques used, providing key insight into MARK LEVONIAN, Senior Deputy Comptroller, d

supervisory perspectives and expectations. Offi ce of the Comptroller of the Currency Ifte
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PEFC Certified
This book has been
produced entirely from
sustainable papers that
are accredited as PEFC
compliant.
www.pefc.org
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Stress Testing: Approaches,
Methods and Applications
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Stress Testing: Approaches,
Methods and Applications
Edited by Akhtar Siddique and Iftekhar Hasan
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Published by Risk Books, a Division of Incisive Media Investments Ltd
Incisive Media
32–34 Broadwick Street
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E-mail: [email protected]
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© 2013 Incisive Media
ISBN 978-1-78272-008-9
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Publisher: Nick Carver
Editorial Development: Amy Jordan
Commissioning Editor: Sarah Hastings
Managing Editor: Lewis O’Sullivan
Designer: Lisa Ling
Copy-edited by Laurie Donaldson
Typeset by Tricolour Design
Printed and bound in the UK by Berforts Group
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While best efforts have been intended for the preparation of this book, neither the publisher, the
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Contents
Acknowledgements from the Editors vii
Foreword xi
About the Editors xv
About the Authors xvii
Introduction xxv
Akhtar Siddique; Iftekhar Hasan
Office of the Comptroller of Currency; Fordham University
1 Governance over Stress Testing 1
David E. Palmer
Federal Reserve Board
2 Stress Testing and Other Risk-Management Tools 15
Akhtar Siddique; Iftekhar Hasan
Office of the Comptroller of Currency; Fordham University
3 Stress Testing for Market Risk 25
Dilip K. Patro, Akhtar Siddique; Xian Sun
Office of the Comptroller of the Currency; Johns Hopkins University
4 The Evolution of Stress Testing Counterparty Exposures 37
David Lynch
Federal Reserve Board
5 Operational Risk: An Overview of Stress-Testing Methodologies 57
Brian Clark; Bakhodir Ergashev
Office of the Comptroller of Currency; Federal Reserve Bank of Richmond
6 Stress Testing of Bank Loan Portfolios as a Diagnostic Tool 71
Paul Calem, Arden Hall
Federal Reserve Bank of Philadelphia
v
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StreSS teSting: ApproAcheS, MethodS And ApplicAtionS
7 Stress-Test Modelling for Loan Losses and Reserves 89
Michael Carhill, Jonathan Jones
Office of the Comptroller of the Currency
8 A Framework for Stress Testing Banks’ Corporate Credit Portfolio 109
Olivier de Bandt, Nicolas Dumontaux, Vincent Martin, Denys Médée
Autorité de Contrôle Prudentiel (French Prudential Supervision Authority)
9 EU-Wide Stress Test: The Experience of the EBA 127
Paolo Bisio, Demelza Jurcevic and Mario Quagliariello
European Banking Authority
10 Stress Testing Across International Exposures and Activities 143
Robert Scavotto, Robert H. Skinkle
Office of the Comptroller of the Currency
11 Liquidity Risk: The Case of the Brazilian Banking System 161
Benjamin M. Tabak, Solange M. Guerra, Sergio R. S. Souza,
Rodrigo C. C. Miranda
Banco Central do Brasil
12 Determining the Severity of Macroeconomic Stress Scenarios 193
Kapo Yuen
Federal Reserve Bank of New York
Index 225
vi
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Acknowledgements from the Editors
We would like to acknowledge advice from and discussions with
colleagues in various settings. Akhtar would like to acknowledge
discussions with colleagues from the OCC, Federal Reserve Banks
and the FDIC during examinations as well as in policy settings. En-
couragement from Mark Levonian and Mike Carhill are particu-
larly acknowledged. We would also like to thank Clayton Lamar
for research assistance and help.
vii
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To the people in our lives. For Akhtar, the children in his life, Ayaan, Aahil and his
nieces Babu and Putul but above all, his parents, wife: Deepa, sister: Moon, and
his in-laws. For Iftekhar, his parents, parents in-law, siblings, nephews, nieces,
and his spouse.
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