Stress testing frameworks and practices in emerging markets: the case of dual banking system

Abstract

ABSTRACT This paper critical reviews and evaluates stress-testing frameworks and practices of supervisory authorities in a dual banking system namely Malaysia, Indonesia and Pakistan. The analysis suggests that similar to other banking system there are two main designs to stress testing -bottom-up and top-down – depending on the institutional responsibilities and computational capabilities. Hence, stress-testing approach for Islamic banking system should be developed capturing the unique balance sheets structure and risks of Islamic banking so that it provides accurate assessments of vulnerability in the Islamic banking system.