Stress-testing The Banking System: Methodologies And Applications

Stress-testing the Banking System Stress tests are used in risk management by banks in order to determine how certain crisis scenarios would affect the value of their portfolios, and by public authorities for financial stability purposes. Until the first half of 2007, interest in stress-testing was largely restricted to practitioners. Since then, the global financial system has been hit by deep turbulences, including the fallout from sub-prime mortgage lending. Many observers have pointed out that the severity of the crisis has been largely due to its unexpected nature and have claimed that a more extensive use of stress-testing methodologies would have helped to alleviate the repercussions of the crisis. This book analyses the theoretical underpinnings, as well as the practical aspects, of applying such methodologies. Building on the experience gained by the economists of many national and international financial authorities, it provides an updated toolkit for both practitioners and academics. Mario Quagliariello is a senior economist in the Regulation and Supervisory Policies Department of the Bank of Italy. He has been the representative of the Bank of Italy in a number of international working groups dealing with financial stability issues and has published several articles in international and Italian journals. He has a PhD in economics from the University of York. Stress-testing the Banking System Methodologies and Applications Edited by Mario Quagliariello cambridge university press Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo, Delhi Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521767309 © Cambridge University Press 2009 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2009 Printed in the United Kingdom at the University Press, Cambridge A catalogue record for this publication is available from the British Library Library of Congress Cataloguing in Publication data Stress-testing the banking system : methodologies and applications / edited by Mario Quagliariello. p. cm. ISBN 978-0-521-76730-9 1. Banks and banking. 2. Banks and banking – Risk management. 3. Bank failures – Prevention. 4. Financial crises. I. Quagliariello, Mario. II. Title. HG1601.S687 2009 332.10680 1–dc22 2009010745 ISBN 978-0-521-76730-9 hardback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party Internet websites referred to in this publication, and does not guarantee t