Next Generation Balance Sheet Stress Testing (Hasan M., Schmieder C., Puhr C.)

Basel I-III Risk-taking and Risk Management Stability&Soundness Structure of Assets&Liabilities

Abstract This paper presents a "second-generation" solvency stress testing framework extending applied stress testing work centered on Cihak (2007). The framework seeks enriching stress tests in terms of risk-sensitivity, while keeping them flexible, transparent, and user-friendly. The main contributions include (a) increasing the risk-sensitivity of stress testing by capturing changes in risk-weighted assets (RWAs) under stress, including for non-internal ratings based (IRB) banks (through a quasi-IRB approach); (b) providing stress testers with a comprehensive platform to use satellite models, and to define various assumptions and scenarios; (c) allowing stress testers to run multi-year scenarios (up to five years) for hundreds of banks, depending on the availability of data. The framework uses balance sheet data and is Excel-based with detailed guidance and documentation.
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Libref/ Hasan M., Schmieder C., Puhr C. (2011) "Next Generation Balance Sheet Stress Testing", IMF Working Paper No. 11/83, pp. 1 - 43
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