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Risks 2018, 6(3), 82; https://doi.org/10.3390/risks6030082

Bank Stress Testing: A Stochastic Simulation Framework to Assess Banks’ Financial Fragility

School of Economics and Management, University of Siena, 53100 Siena, Italy
A previous version of the paper was presented at the conference: “Stress Testing and Macro-prudential Regulation: A Trans-Atlantic Assessment”, Systemic Risk Centre, LSE, London, October 29–30, 2015.
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Received: 6 June 2018 / Revised: 19 July 2018 / Accepted: 8 August 2018 / Published: 17 August 2018
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Abstract

We present a stochastic simulation forecasting model for stress testing that is aimed at assessing banks’ capital adequacy, financial fragility, and probability of default. The paper provides a theoretical presentation of the methodology and the essential features of the forecasting model on which it is based. Also, for illustrative purposes and to show in practical terms how to apply the methodology and the types of outcomes and analysis that can be obtained, we report the results of an empirical application of the methodology proposed to the Global Systemically Important Banks (G-SIB) banks. The results of the stress test exercise are compared with the results of the supervisory stress tests performed in 2014 by the Federal Reserve and EBA/ECB. View Full-Text
Keywords: capital adequacy; economic capital; financial fragility; liquidity risk; Monte Carlo simulation; probability of default; Solvency risk; SREP; stochastic simulation; stress testing capital adequacy; economic capital; financial fragility; liquidity risk; Monte Carlo simulation; probability of default; Solvency risk; SREP; stochastic simulation; stress testing
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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. (CC BY 4.0).
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Montesi, G.; Papiro, G. Bank Stress Testing: A Stochastic Simulation Framework to Assess Banks’ Financial Fragility . Risks 2018, 6, 82.

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