Stress test (financial)

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A stress test is a risk management tool. One distinguishes micro - stress tests, which are used by financial institutions themselves, or from the micro-prudential supervision (eg the regulators such as BaFin), by macro stress tests in the context of macro-prudential supervision (eg German Bundesbank, FINMA / SNB, FSA ) are performed. Here, the impact of changing risk factors using scenario modeling to specific dimensions, such as simulated core capital ratios. A distinction scenario analyzes ( varying several risk factors) of sensitivity analyzes (one-dimensional scenarios where only one risk factor is varied ). Stress tests are designed to information about the potential impact of developments to attract, communicate this information and then derive decisions. In finance, stress tests are used for complementary evaluation of market risk in particular.

Background

What is the value of the loss of a particular risk exposure (eg, a portfolio of securities) with a given probability and does not exceed a given time horizon is usually determined by the value at risk. However, this indicator has a major limitation: the risk is not normally distributed in contrast to the model.

Therefore, a stress test is complementary to the calculation of the Value at Risk conducted that evaluates the impact of extreme scenarios that are not adequately addressed in the Value at Risk. It is also possible to combine stress testing and VAR, as is done for example with the ECB to determine the credit VAR.

Stress tests are at banks, investment companies or insurance companies either imposed by law to show through a hypothetical crisis simulation, the impact it has on the earnings and thus equity situation of financial service providers and whether they can lead to corporate crisis.

Parameter

Data -altering exogenous or endogenous factors such as economic parameters can be, for example, rising / falling interest rates, equity bull market / bear market, commodity price changes, exchange rate changes or a general recession. Currently stress testing is available on the credit portfolio through the implementation of the ICAAP ( Internal Capital Adequacy Assessment Process ) in the special focus of the banks.

Supervisory stress tests

In particular, the financial crisis in 2007 and the bank bankruptcy of Lehman Brothers in 2009 had serious negative impact initially on relevant sub-markets (stock exchange, interbank market ) and later also to the global economy. Since the reliability of credit institutions, insurance companies and other financial service providers is essential for a functioning economy, stress tests have been introduced for certain credit institutions in the major financial markets. These stress tests were based on a specific crisis scenario, which acted by well-defined parameters to these institutions. The general aim of such stress tests is to examine the stability of the financial system. The stress tests should uncover any weaknesses that might have existential implications in a real market failure, verify the robustness of the core capital ratios and disclose effects to the liquidity of the institutions concerned.

The concept was developed the macro stress tests just by the International Monetary Fund and the World Bank, and they always were an important part of the first carried out in 1999 Financial Sector Assessment Program ( FSAP) for the screening of national financial systems dar.

It is remarkable that the IMF, the results of a stress test published in 2007, the subsequent potential losses due to asset-backed securities (ABS ) aimed to determine. Due to an "unprecedented property price scenario ", the IMF came to the conclusion that probably ausginge no systemic risk from the U.S. real estate market and based thereon financial products. Participants in the stress tests were, inter alia, Lehman Brothers and Bear Stearns. One reason for the low losses in the stress test is likely to be due to the assumption of the underlying credit quality. Here, the significant deterioration in the credit quality of the years 2006/ 07 was not considered.

In 2009, a macro stress test for 19 major banks was conducted in the U.S. with the first SCAP. Features of this stress test was the intention to force the banks to strengthen the capital base based on the results and publish detailed individual results of the banks. Furthermore, also a comparison of stress test ("top -down" ) was carried out to check the calculated results by the banks themselves ("bottom -up "). The result was that about 85 % of the additional capital requirement on the 3 banks Bank of America, Wells Fargo and General Motors Acceptance Corporation ( GMAC ) accounted for. Bank of America took over Merrill Lynch earlier, Wells Fargo acquired Wachovia and GMAC was heavily affected by the crisis at General Motors, so that most of the additional capital requirement of the stress test is due to special items.

After the crisis in Greece 2009/2010 subject to government and EU institutions, the European banking system in May 2010 to a stress test. This was a severe recession was simulated, which was accompanied by a slump in the stock markets and turmoil in the market for government bonds .. Passed only had credit institutions who could still have a core capital ratio of at least 6% even under the stress assumptions. Of the 91 banks tested, seven failed the stress test ..

In autumn 2011, the European Banking Authority made ​​(EBA = European Banking Authority ) "a bolt stress test ". The EBA concluded, six banks in Germany have a capital requirement of 13.1 billion euros together. You would have to increase their capital base in order as required by the regulators to come to a core capital ratio of nine percent by the end of June 2012.

Also, the Authority had conducted " stress tests " for the Cypriot banks both in 2010 as in 2011. The EBA saw in the high proportion of Greek government bonds is no risk, as losses on government bonds were not provided. As a result, there were the two largest banks in Cyprus ( Bank of Cyprus, Laiki Bank) the test with ease. The central bank of the country then announced its " great satisfaction " with the results that " the ability of domestic banks show endure shocks in an unfavorable scenario ".

Less than a week after the results of the stress tests were published in 2011, Europe's leaders agreed on a new rescue package for Greece, which would also house depreciation on the value of Greek government bonds.

Nevertheless, nothing has been changed for months on the assessment by the supervisory authority. It was not until 8 December 2011, the EBA calculated possible losses on government bonds with one and came to the conclusion that the Bank of Cyprus and Laiki Bank were among a group of 31 institutions that need additional capital.

Macroeconomic stress tests

Macroeconomic stress tests, which are conducted by banks under Basel II and III are to assess the risks of the banks overall and indicates possible concentrations ( equities, derivatives, loans) in regions or industries. Also special vulnerabilities in certain situations ( for example: interest rates remain low, the real estate lending continues to rise, real estate bubble bursts ) are to be revealed by stress tests. From the perspective of national banks ( Bundesbank, SNB ) and the national regulators ( BaFin, FINMA) economic aspects of macroeconomic stress tests are relevant. These institutions must assess the impact of certain scenarios on the national economy (banks, insurance companies, industrial ) and required to take protective measures.