Stress Testing in the Aftermath of the Financial Crisis

Abstract

Recent turmoil in the capital markets has showed again the vulnerability of the international financial system and highlighted the need for efficient stress testing of financial institutions trading and lending books. In fact, the severity of current European sovereign bonds crisis is primarily attributable to its unexpected nature and a more rigorous application of stress testing could have probably contributed to reduce the repercussions of this crisis. Under these circumstances, stress testing has become a primary concern for international policy makers and regulators who are continuously working on solution to address the vulnerabilities identified. In such a context, the Basel Committee on Banking Supervision is also attempting to reinforce principles for sound stress testing in risk governance practices, and an important part of the Supervisory Review Process and the Pillar 2 requirements are related to this subject matter.