Credibility and Crisis Stress Testing

Abstract

Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: Credibility is the bedrock of any crisis stress test. The use of stress tests to manage systemic risk was introduced by the U.S. authorities in 2009 in the form of the Supervisory Capital Assessment Program. Since then, supervisory authorities in other jurisdictions have also conducted similar exercises. In some of those cases, the design and implementation of certain elements of the framework have been criticized for their lack of credibility. This paper proposes a set of guidelines for constructing an effective crisis stress test. It combines financial markets impact studies of previous exercises with relevant case study information gleaned from those experiences to identify the key elements and to formulate their appropriate design. Pertinent concepts, issues and nuances particular to crisis stress testing are also discussed. The findings may be useful for country authorities seeking to include stress tests in their crisis management arsenal, as well as for the design of crisis programs.

March madness in Wall Street: (What) does the market learn from stress tests?

“…This is in line with Spargoli's (2012) model in which a regulator will prefer to fully reveal banks' capital shortfall at times of crisis if she is able to recapitalize them, but will hold onto some information if she cannot recapitalize. Ong and Pazarbasioglu (2013) also emphasize the importance of credibility, as established through independent governance of tests, the requisite technical expertise, and clearly communicated plans for any backstop needs.…”

Stress Testing at the IMF

“…Geithner was director of the IMF Policy Development and Review Department from 2001 to 2003. On the credibility of stress testing during crisis periods see Ong and Pazarbasioglu (2013). 5 The Committee of European Banking Supervisors (CEBS), in charge of the European stress tests clarified at the time that "This is not a stress test to identify individual banks that may need recapitalization, as the assessment of specific institutions' needs for recapitalization remains a responsibility of national authorities.…”

Training the next generation of disaster risk managers through sustainability research and teaching

“…Ong and Pazarbasioglu (2014) discuss the lack of credibility in many stress tests and the need for tougher testing scenarios. Borio et al (2014) doubt the value of macro stress tests as early warning devices, i.e.…”