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Stress Testing of Banking Systems

by Martin Čihák of the International Monetary Fund

September 2005

Abstract: In response to increased financial instability in many countries in the 1990s, policy makers became interested in better understanding vulnerabilities in financial systems, and particularly in banks. One of the key techniques for quantifying vulnerabilities is stress testing.

This article reviews the literature on stress testing of banking systems. The first section introduces the concept of stress testing. The second section overviews stress tests performed by international financial institutions, central banks, and other researchers. The third section describes the implementation of stress tests. The fourth section discusses specific issues relating to individual shock factors. The fifth section provides a conclusion.

JEL Classification: G21, G28, G29.

Keywords: financial systems, financial soundness, stress testing.

Published in: Czech Journal of Economics and Finance, Vol. 55, No. 9-10, (September 2005), pp. 418-440.

Previously titled: Stress Testing: A Review of Key Concepts

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