A Practical Approach

The purpose of stress testing is to quantify exposure to extreme market movements and geo-political events. Stress tests can explore potential adverse outcomes and expose vulnerable areas allowing management to set risk limits and manage liquidity and capital. For many banks, the recent financial crisis exposed the weaknesses of their stress testing programmes including an inability to forewarn of the devastating events. In recent years, regulators have started to pay greater attention to this function and have stipulated further requirements in order to make stress tests more robust and include more plausible scenarios.

To satisfy regulators and make stress testing a credible and usable tool, banks must take an integrated approach to stress testing focused around a framework; data management; governance; application architecture; and management information and dashboards.