Stress testing continuing to evolve as a practical risk management tool, says CGFS

The Committee on the Global Financial System (CGFS) today released a report entitled Stress testing at major financial institutions: survey results and practice.

The report summarises the findings of a working group of the CGFS that was established to review what financial institutions perceived to be the main risk scenarios for them based on the stress tests they were running, and to examine how stress test practices have evolved over the past few years. As part of the exercise, 64 banks and securities firms representing 16¿countries participated in a survey of enterprise-wide stress tests.

The exercise illustrated the wide range of stress tests being run and practices at banks and securities firms. The use of stress tests continues to broaden from the exploration of exceptional but plausible events - the traditional focus of stress testing - to cover a much wider range of applications. These include the exploration of the risk profile of a firm, the allocation of economic capital, and the evaluation of business risks. Stress testing has also become a very effective communication tool between firms’ senior management and business lines.

Notwithstanding the progress that has been made, challenges remain. Some reporting firms felt that there was a need to develop better firm-wide stress tests and stress tests incorporating loan portfolios. Efforts to develop firm-wide credit stress tests for both trading and loan books have been hindered by differences in accounting treatment, regulatory environments, a lack of trading markets for certain products, and/or the organisational structure of firms. Some of these hurdles are gradually being overcome, assisted by improvements in technology, increased market transparency and the broadening of traded credit markets.

Notes for editors

The Committee on the Global Financial System is a central bank forum established by the Governors of the G10 central banks. It monitors and examines broad issues relating to global financial markets. The Committee seeks to identify and assess potential sources of stress, further the understanding of the underpinnings of these markets, and promote the development of well functioning and stable financial markets. Recent projects by CGFS subgroups have included studies on foreign direct investment in emerging market economies and the role of rating agencies in structured finance.

The working group that prepared the report was chaired by Hiroshi Nakaso, Director-General, Financial Markets Department, Bank of Japan. The working group’s members are listed in the report.

Specific questions regarding the report may be sent to the CGFS by e-mail (Service.GFSCommittee@bis.org) or fax (+41 61 280 9100). For further information or to request a printed copy, please phone the press enquiries number given above.