THE MICROPRUDENTIAL STRESS TESTING FOR BANKING SYSTEM. A STUDY CASE ON ALGERIAN PRIVATE BANK, USING ACCOUNTING APPROACH

Mehdi Bouchetara, Sidi Eyih and Hinde Hadj Slimane Kheroua
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Mehdi Bouchetara: Higher National School of Management, Kolea, Algeria.
Sidi Eyih: Cheikh Anta Diop University of Dakar, Dakar, Senegal
Hinde Hadj Slimane Kheroua: Faculty of Economics, Business Studies and Management Sciences, University of Tlemcen, Tlemcen, Algeria

Studii Financiare (Financial Studies), 2021, vol. 25, issue 4, 34-70

Abstract: The aim of this article is to highlight the importance and effectiveness of stress testing as part of microprudential policy. We focus on microprudential stress testing to assess financial stability, the resilience and solvency of one important private bank in Algeria in the face of liquidity risk. Our empirical analysis adopts a bottom-up approach based on an accounting method. It studies the relationship between the bank solvency ratio (ratio cook) and bank portfolios, such as loans to the construction, trade, industry, and automotive sectors. Microeconomic stress tests assess the credit risk of a bank's loan portfolio by bottom-up accounting approach, applying eleven pessimistic and plausible multi-variable scenarios with potential risks. The tests introduce several types of microeconomic shocks into the scenarios, which are designed to replicate those that occurred during the global financial crisis. The tests results show that this private bank is highly resistant to liquidity risk, despite significant losses on its investment portfolio. The stress tests prove once again, and especially after the 2008 financial crisis, that they are indispensable tools in the management of banking risks and against systemic risks.

Keywords: microprudential policy; stress test; liquidity risk; solvency. Pages: 34-70 (search for similar items in EconPapers)
JEL-codes: G01 G21 G32 (search for similar items in EconPapers)
Date: 2021
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