Conservative Stress Testing: The Role of Regular Verification

Adam Gersl and Jakub Seidler

No 2010/12, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: This paper focuses on how to calibrate models used to stress test the most important risks in the banking system. Based on the results of a verification of the Czech National Bank’s stress testing methodology, the paper argues that stress tests should be calibrated conservatively and slightly overestimate the risks. However, to ensure that the stress test framework is conservative enough over time, a verification, i.e. comparison of the actual values of key banking sector variables – in particular the capital adequacy ratio – with predictions generated by the stress-testing models should become a standard part of the stress-testing framework.

Keywords: stress testing; credit risk; bank capital (search for similar items in EconPapers)
JEL-codes: E44 E47 G21 (search for similar items in EconPapers)
Pages: 12pages
Date: 2010-07, Revised 2008-07
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mac
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