The Art of (Macroprudential) Stress Testing

Abstract

After the recent global financial crisis, stress testing has emerged as one of the most prominent macroprudential tools. Despite its rising reputation and substantial development in the recent years, it still has some room for further improvements. In this paper, we review current stress testing practices and critically assess its benefits and shortcomings. In addition, we suggest some recommendations for stress testing practices in the future. Briefly, our analysis suggests that even though stress testing has developed substantially in terms of scenario construction and methodological aspects, it still has some weaknesses particularly from technicality and follow-up action appropriateness. We suggest that complementing stress testing result with additional monitoring information would be able to mitigate some of these drawbacks.