Stress testing with multiple scenarios: a tale on tails and reverse stress scenarios

David Aikman, Romain Angotti and Katarzyna Budnik ()

No 2941, Working Paper Series from European Central Bank

Abstract: This paper proposes an operational approach to stress testing, allowing one to assess the banking sector’s vulnerability in multiple plausible macro-financial scenarios. The approach helps identify macro-financial risk factors of particular relevance for the banking system and individual banks and searches for scenarios that could push them towards their worst outcomes. We demonstrate this concept using a macroprudential stress testing model for the euro area. By doing so, we show how multiple-scenario stress testing can complement single-scenario stress tests, aid in scenario design, and evaluate risks in the banking system. We also show how stress tests and scenarios can be optimized to accommodate different mandates and instruments of supervisory and macroprudential agencies. JEL Classification: E37, E58, G21, G28

Keywords: banking sector risks; financial stability; macroprudential stress test; multiple scenarios; reverse stress testing; systemic risks (search for similar items in EconPapers)
Date: 2024-05
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
Note: 1355359
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20242941

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