BIS Working papers No 369
- What matters most is the mindset of the those employing it
- Micro stress tests: test the performance of individual portfolios or the stability of individual institutions
- Macro stress tests: test the stability of groups of financial institutions and which can have an impact on the economy as a whole
- Objectives of macro stress tests: Identify vulnerabilities and support crisis management and resolution
- Ong et al (2010) propose to use reverse stress tests as simple tools to uncover vulnerabilities in countries with limited data
- Integrate credit and interest rate risk in the banking booking. Need to model assests and liabilities simultaneously to take into account accounting consistency (Drehmann et al 2010)
- Lack of econometrical equations means liquidity risk is modelled by a range of indicators that change in stressed conditions based on rules of thumbs calibrated to past prices (Kapadia et all 2011)
- Most complete approach is RAMSI by the bank of England (Aikman et all 2009)
- It has so far proved to be very hard to integrate market risk or liquidity risk with credit risk in the banking book
- Two types of approaches: rely of history and use judgement to avoid the risk of relying excessively on the past (however judgement is often based on historical experience)