Summary of feedback received on the stress testing Discussion paper

Original by Bank Of England, 2014, 13 pagesHamster_gagarin_linkedin
hamster writter This summary note was posted on 26 April 2016, by in Finance Stress Testing #, #

Bank of England, 2014

  • On a practical level, respondents highlighted the value of providing a detailed narrative alongside a set of variable paths
  • Respondents recognised the benefits of using a suite of models to deliver a richer perspective on the potential impact of stress scenarios on banks’ capital ratios.
  • Ultimately, an undue reliance on stress testing could lead to a collective failure of imagination when trying to spot new and emerging risks to financial stability.
  • There were numerous calls for international co-ordination of stress-testing exercises, especially in relation to large multinational banking groups.
  • For example, scenarios did not always have to focus on V-shaped recessions, but could also consider L-shaped downturns in activity, where losses could be considerably different.
  • Respondents also noted that the Bank should consider sovereign risk, cross-border risks and banks’ behavioural responses when generating scenarios
  • Provide paths for a larger set of variables.
  • On bespoke scenarios, many respondents questioned the proposed principle that these would be expected to result in higher losses than the common stress scenario
  • It was felt important for the framework to leave clear ‘daylight’ between reverse stress tests and the design of bespoke stress scenarios