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Int. J. Financial Stud. 2014, 2(1), 15-81; doi:10.3390/ijfs2010015

Credibility and Crisis Stress Testing

*  and
Monetary and Capital Markets Department, International Monetary Fund, 700 19th Street, NW, Washington, DC 20431, USA
* Author to whom correspondence should be addressed.
Received: 4 September 2013 / Revised: 30 December 2013 / Accepted: 21 January 2014 / Published: 17 February 2014
(This article belongs to the Special Issue The Future of Banking Regulation and Financial Stability)
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Credibility is the bedrock of any crisis stress test. The use of stress tests to manage systemic risk was introduced by the U.S. authorities in 2009 in the form of the Supervisory Capital Assessment Program. Since then, supervisory authorities in other jurisdictions have also conducted similar exercises. In some of those cases, the design and implementation of certain elements of the framework have been criticized for their lack of credibility. This paper proposes a set of guidelines for constructing an effective crisis stress test. It combines financial markets impact studies of previous exercises with relevant case study information gleaned from those experiences to identify the key elements and to formulate their appropriate design. Pertinent concepts, issues and nuances particular to crisis stress testing are also discussed. The findings may be useful for country authorities seeking to include stress tests in their crisis management arsenal, as well as for the design of crisis programs.
Keywords: asset quality review; financial backstop; hurdle rates; restructuring; solvency; transparency; EBA; PCAR; SCAP asset quality review; financial backstop; hurdle rates; restructuring; solvency; transparency; EBA; PCAR; SCAP
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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Ong, L.L.; Pazarbasioglu, C. Credibility and Crisis Stress Testing. Int. J. Financial Stud. 2014, 2, 15-81.

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Int. J. Financial Stud. EISSN 2227-7072 Published by MDPI AG, Basel, Switzerland RSS E-Mail Table of Contents Alert