Handbook of Financial Stress Testing

Discover current uses and future development of stress tests, the most innovative regulatory tool to prevent and fight financial crises.

J. Doyne Farmer (Edited by), Alissa M. Kleinnijenhuis (Edited by), Til Schuermann (Edited by), Thom Wetzer (Edited by)

9781108830737, Cambridge University Press

Hardback, published 14 April 2022

726 pages
26 x 18.2 x 3.7 cm, 1.61 kg

'This is by far the most comprehensive available reference work on financial stress testing. One need only review the list of contributors to appreciate its definitive quality – many of those who invented stress testing following the Great Financial Crisis are authors. The Handbook of Financial Stress Testing covers the subject in all key dimensions, and from philosophy to execution. I strongly recommend that this magnificent compendium be read by anyone concerned with the risk of future financial crises.' Darrell Duffie, Stanford University

Stress tests are the most innovative regulatory tool to prevent and fight financial crises. Their use has fundamentally changed the modeling of financial systems, financial risk management in the public and private sector, and the policies designed to prevent and mitigate financial crises. When financial crises hit, stress tests take center stage. Despite their centrality to public policy, the optimal design and use of stress tests remains highly contested. Written by an international team of leading thinkers from academia, the public sector, and the private sector, this handbook comprehensively surveys and evaluates the state of play and charts the innovations that will determine the path ahead. It is a comprehensive and interdisciplinary resource that bridges theory and practice and places financial stress testing in its wider context. This guide is essential reading for researchers, practitioners, and policymakers working on financial risk management and financial regulation.

Foreword Timothy F. Geithner
1. Introduction and overview J. Doyne Farmer, Alissa M. Kleinnijenhuis, Til Schuermann and Thom Wetzer
Part I. History and Objectives: 2. Objectives and challenges of stress testing Richard J. Herring and Til Schuermann
3. Fit for purpose? The evolving role of stress testing for financial systems Udaibir Das, Kieran Dent and Miguel Segoviano
4. Why banks failed the stress test: A progress report on stress testing ten years on Nicola Anderson, Alex Brazier, Andrew Haldane, Paul Nahai-Williamson and Amar Radia
Part II. Inputs and Outputs: 5. Macrofinancial stress test scenario design – for banks and beyond Marco Gross, Jérôme Henry and Elena Rancoita
6. The role of heterogeneity in scenario design for financial stability stress testing Mark D. Flood, Jonathan Jones, Matthew Pritsker and Akhtar Siddique
7. Designing coherent scenarios: a practitioner perspective Greg Hopper
8. Stress testing with market data Robert Engle
9. On market-based approaches to the valuation of capital Natasha Sarin and Lawrence H. Summers
10. Granular data offer new opportunities for stress testing Cees Ullersma and Iman van Lelyveld
11. Stress tests disclosure: theory, practice, and new perspectives Itay Goldstein and Yaron Leitner
12. Stress testing during times of war Kathryn Judge
Part III. Microprudential Stress Tests: 13. Stress testing for commercial, investment and custody banks Daniel Cope, Carey Hsu, Clinton Lively, James Morgan, Til Schuermann and Evan Sekeris
14. Microprudential stress testing for asset managers Jacques Longerstaey
15. Stress testing for insurers Brian Peters
16. Model risk management in stress testing and capital planning Eduardo Canabarro
17. A supervisory perspective on stress testing – The U.S. experience Tim P. Clark
18. Strengths and weaknesses of microprudential stress testing for financial institutions Christine M. Cumming
Part IV. A Macroprudential Perspective on the Financial System: 19. The structure of the financial system: Implications for macro-prudential stress testing Gonzalo Fernandez Dionis and Patricia C. Mosser
20. Holistic bank regulation C. A. E. Goodhart
21. Leverage and macro prudential policy John Geanakoplos
22. Monetary policy and financial stability William B. English
23. Stress testing networks: The case of central counterparties Richard B. Berner, Stephen G. Cecchetti and Kermit L. Schoenholtz
Part V. Macroprudential Stress Tests: 24. Enhancing stress tests by adding macroprudential elements William F. Bassett and David E. Rappoport W.
25. Accounting for amplification mechanisms in bank stress test models at the Bank of Canada Grzegorz Halaj and Virginie Traclet
26. Stress testing at the IMF Tobias Adrian, James Morsink and Liliana Schumacher
27. A comprehensive approach to macroprudential stress testing Anthony Bousquet, Jérôme Henry and Dawid ?ochowski
28. A complex systems perspective on macroprudential regulation Stefan Thurner
29. Stress testing a central bank's own balance sheet Nathanaël Benjamin, Abigail Haddow and David Jacobs
Part VI. Concluding Thoughts: The Road Ahead: 30. Stress testing the financial microcosm J. Doyne Farmer, Alissa M. Kleinnijenhuis and Thom Wetzer.

Subject Areas: Applied mathematics [PBW]