Financial Engineering Tools for Stress Testing in Banks

Vadim L. Babur (), Adel A. Daryakin, Nailya F. Yalalova, Aliya A. Ahmadullina and F. A. Feras
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Vadim L. Babur: Kazan Federal University
Adel A. Daryakin: Kazan Federal University
Nailya F. Yalalova: Kazan Federal University
Aliya A. Ahmadullina: Kazan Federal University
F. A. Feras: Kazan Federal University

A chapter in Regional Economic Development in Russia, 2020, pp 147-157 from Springer

Abstract: Abstract Under the conditions of economic instability, stress tests are being actively introduced to assess banking risks. Instability in local markets primarily creates problems for small- and medium-sized banks. It results in the outflow of funds from deposits and changes in the temporary structure of assets and liabilities. This work presents the main methodological approaches applied to stress testing of market risk and assessing the liquidity of banks. The authors also conclude that simple models based on the time value of money, in particular, the GAP, DGAP analysis models, could be successfully applied for identifying critical problems with liquidity, market risk, and taking urgent measures to eliminate them. As an information basis for calculations, the data of one of the regional banks are used. As a result of simulation of stress scenarios based on GAP and DGAP analysis, some risks of the bank were identified, and the likely response to this scenario was predicted. The analysis concluded that, despite the strong correlation between liquidity indicators and DGAP, they are not interchangeable. They complement each other and therefore, in the models of stress testing, one indicator cannot be replaced by another. Besides, a weak correlation between overdue loans and DGAP was revealed. Apparently, this can be explained by the fact that within a one-time interval these indicators are relatively independent. We believe that they should be analyzed in dynamics. The results of the study suggest that that the models despite their simplicity remain adequate and relevant. The undoubted advantage of such models is the ability to apply them independently or as a separate element within more complex, integrated stress testing models.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:spr:prbchp:978-3-030-39859-0_13

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DOI: 10.1007/978-3-030-39859-0_13

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