CGFS releases report of the Task Force on a census of stress tests

The Bank for International Settlements is releasing today a report entitled A survey of stress tests and current practice at major financial institutions. The report has been prepared by a Task Force established by the Committee on the Global Financial System (CGFS) of the central banks of the Group of Ten countries. It follows up on earlier work carried out by the CGFS and reflects efforts to learn more about the role of stress testing in risk management.

Stress tests are tools used by financial firms to gauge their potential vulnerability to exceptional but plausible events. In recent years stress testing has grown in importance, alongside value-at-risk (VaR) and other risk measurement tools. The CGFS initiated, in early 2000, a census of stress test scenarios in use at 43 major financial institutions (commercial and investment banks) from 10 countries. Based on a detailed examination of the stress test scenarios reported on the census, a number of observations can be made:

• There is a perceived asymmetry in risks, as crashes were much more likely to be stress-tested than booms. Similarly, increases in interest rates and credit/liquidity spreads were more commonly stress-tested than decreases.
• The most common areas stress-tested were equity prices, interest rates and emerging markets.
• Banks rely heavily on stress tests for markets or products whose risks may be inadequately captured by statistical risk measures, such as VaR. In this regard, emerging markets were cited as a leading example for markets that are particularly well suited for stress testing.
• Similarly titled stress test scenarios run by different banks are found to be rather different, even when based on the same historical episode. This applies to the size of shocks as well as to the cross-market effects modelled.

The following implications of the census can be highlighted. First, it appears that stress testing has become an integral part of banks' risk management. Second, in interpreting the results of stress tests, firms appear to take into account their position in the market and the strategic aspects of risk management. There is thus no unique response by the reporting banks to the information gained through stress testing.

Notes to editors: The Committee on the Global Financial System (CGFS) is a central bank committee established by the Governors of the G10 central banks. It monitors and examines broad issues relating to financial markets and systems, with a view to elaborating appropriate policy recommendations to support the central banks in the fulfilment of their monetary and financial stability responsibilities. In carrying out its tasks, the Committee places particular emphasis on assisting the Governors in recognising, analysing and responding to threats to the stability of financial markets and the global financial system. The CGFS is chaired by Yutaka Yamaguchi, Deputy Governor of the Bank of Japan.

The Task Force that prepared the report was chaired by Alain Duchateau of the Banque de France/Commission Bancaire. The Task Force's members are listed in the report.