Stress Testing: Observations of Its Possible Effect

Abstract

This article examines important aspects of regulatory stress testing. It states that the way stress testing is implemented might increase systemic risk faced by the banking industry. It also states that despite the effort of using uniform stress testing scenarios, the results are not transparent and uniform for different banks due to the fact that different empirical models behave materially different when stressed parameters are used as an input. Several improvements are suggested in the article.