Using stress testing methodology in evaluating banking institution’s exposure to risk

Ioan Trenca, Simona Mutu and Maria-Miruna Pochea
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Maria-Miruna Pochea: Babes-Bolyai University, Cluj-Napoca

Finante - provocarile viitorului (Finance - Challenges of the Future), 2010, vol. 1, issue 11, 208-217

Abstract: In order to correctly estimate the unpredictable effects on their transaction portfolios, the banks developed stress testing methods which turned out to be a very important tool in the bank supervision process. Moreover, the supervision authorities started using stress-testing methods for evaluating systemic risk and for determining the adequacy degree of capital in the banking sector. Taking into account the importance of these simulations, the present paper presents methodologies with which stress testing methods could be implemented by banks as well as their role in the management of credit risk, market risk and liquidity risk while also meeting the requirements imposed by the Basel II accord. By means of a case study we have simulated several scenarios in which the inter-bank market interest rate was varied, quantifying its impact on bank revenues as well as on the market value of their portfolios.

Keywords: stress testing; credit risk; market risk; liquidity risk; capital adequacy; Basel II Accord (search for similar items in EconPapers)
JEL-codes: C15 C41 G21 G32 (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:aio:fpvfcf:v:1:y:2010:i:11:p:208-217

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