Abstract

In 1996, the Basel Committee proposed that banks regularly conduct stress testing programs in the case of market risk. The underlying idea was to identify events that could generate exceptional losses and understand the vulnerability of a bank. The use of stress tests has been increasing with the implementation of the Basel II Accord. Indeed, stress testing is the core of the Pillar 2 supervision, in particular for credit risk. At the same time, stress testing programs have been extended to the financial sector taken as a whole. In this case, they do not concern a given financial institution, but a set of banks or institutions. For example, the financial sector assessment program (FSAP) conducted by the International Monetary Fund and the World Bank measures the resilience of the financial sector of a given country or region. In Europe, EBA and ECB are in charge of the EU-wide stress testing. Since the 2008 Global Financial Crisis, they have conducted six stress testing surveys. In the US, the Fed performs every year a stress testing program that concerns the largest 30 banks. This annual assessment includes two related programs: The ‘Comprehensive Capital Analysis and Review’ (CCAR) and the ‘Dodd-Frank Act stress testing’ (DFAST). The objective of this last program is to evaluate the impact of stressful economic and financial market conditions on the bank capital. Recently, the Basel Committee on Banking Supervision has published a consultative document on stress testing principles. It highlights the growing importance of stress testing in the banking supervision model:

“Stress testing is now a critical element of risk management for banks and a core tool for banking supervisors and macroprudential authorities”