Next Generation Balance Sheet Stress Testing

IMF Working Papers, April 1, 2011

Source details

Presents a "second-generation" solvency stress testing framework extending applied stress testing work centered on Cihák (2007).
Seeks to enrich stress tests in terms of risk-sensitivity, while keeping them flexible, transparent, and user-friendly.
Uses balance sheet data and is Excel-based with detailed guidance and documentation.
Allows stress testers to run multi-year scenarios (up to five years) for hundreds of banks, depending on the availability of data.

Increases the risk-sensitivity of stress testing by capturing changes in risk-weighted assets (RWAs) under stress, including for non-internal ratings based (IRB) banks (through a quasi-IRB approach).
Provides stress testers with a comprehensive platform to:
- use satellite models;
- define various assumptions and scenarios.
Enables multi-year scenario analysis capability: up to five years for many banks.

Excel-based implementation intended to be user-friendly and transparent.
Detailed guidance and documentation accompany the framework.
Designed for broad applicability depending on data availability (hundreds of banks).

Framework advances solvency stress testing by explicitly modeling RWA adjustments under stressed conditions.
Introduces a quasi-IRB approach to extend RWA sensitivity to non-IRB banks.
Supports use of auxiliary ("satellite") models to enrich scenario assumptions and transmission mechanisms.
Designed to be scalable (hundreds of banks) and to support up to five-year stress scenarios for multi-year solvency assessment.

Next Generation Balance Sheet Stress Testing, Christian Schmieder, Maher Hasan, Claus Puhr, April 1, 2011, IMF Working Papers 2011/083.

How to do a Meaningful Stress Test as a non-IRB Bank?
- How to do a Meaningful Stress Test as a non-IRB Bank? (Markdown version)
- How to do a Meaningful Stress Test as a non-IRB Bank? (PDF)