A regulatory stress test to-do list: Transparency and accuracy

Regulatory stress tests use forecasts of bank performance over hypothetical multi-year stress scenarios to set minimum regulatory capital requirements. Notwithstanding their popularity among US and European regulators, little is known about the accuracy of supervisory stress test models. Regulators...

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Bibliographic Details
Published in:Journal of risk management in financial institutions 2018-03, Vol.11 (2), p.132-147
Main Author: Kupiec, Paul H.
Format: Article
Language:English
Subjects:
Stress Test Accuracy
Stress Test Transparency
Online Access:Get full text
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Summary:Regulatory stress tests use forecasts of bank performance over hypothetical multi-year stress scenarios to set minimum regulatory capital requirements. Notwithstanding their popularity among US and European regulators, little is known about the accuracy of supervisory stress test models. Regulators keep the details of their stress test models confidential, inhibiting an independent verification of regulatory model performance. Using data from the 2008 financial crisis, this paper demonstrates how the lack of transparency and model inaccuracy have the potential to create costly misallocations of banking resources.
ISSN:1752-8887
1752-8895
1752-8895
DOI:10.69554/GUEU4467