Advancements in stress-testing methodologies for financial stability applications

This paper provides an overview of stress-testing methodologies in Europe, with a focus on the advancements made by the European Central Bank’s Financial Stability Committee Working Group on Stress Testing (WGST). Over a four-year period, the WGST played a pivotal role in refining stress-testing pra...

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Bibliographic Details
Published in:Policy File 2024
Main Authors: Budnik, Katarzyna, Aurea Ponte Marques, Giglio, Carla, Grassi, Alberto, Durrani, Agha, Figueres, Juan Manuel, Konietschke, Paul, Catherine Le Grand, Metzler, Julian, Población García, Francisco Javier, Shaw, Frances, Groß, Johannes, Sydow, Matthias, Franch, Fabio, Oana-Maria Georgescu, Ortl, Aljosa, Trachana, Zoe, Chalf, Yasmine
Format: Report
Language:English
Subjects:
Bank management
Banking
Finance
Regulation of financial institutions
Risk factors
Risk management
Online Access:Request full text
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Summary:This paper provides an overview of stress-testing methodologies in Europe, with a focus on the advancements made by the European Central Bank’s Financial Stability Committee Working Group on Stress Testing (WGST). Over a four-year period, the WGST played a pivotal role in refining stress-testing practices, promoting collaboration among central banks and supervisory authorities and addressing challenges in the evolving financial landscape. The paper discusses the development and application of various stress-testing models, including top-down models, macro-micro models and system-wide models. It highlights the integration of new datasets and model validation efforts as well as the expanded use of stress-testing methodologies in risk and policy evaluation and in communication. The collaborative efforts of the WGST have demystified stress-testing methodologies and fostered trust among stakeholders. The paper concludes by outlining the future agenda for continued improvements in stress-testing practices.