Consultative Paper on Credit Stress-Testing Monetary Authority of Singapore January 31, 2002 Introduction: The last decade saw an increase in the number of shocks that financial markets were subjected to. These shocks have also shown a greater tendency to spread to other financial markets, aided by improved financial infrastructure and lower barriers to international capital flows. The anticipation and management of these financial crises are among the most pressing problems faced by financial institutions.
Stress-testing offers financial institutions a systematic methodology to prepare for financial crises. In this regard, MAS has prepared a consultative paper that aims to provide risk managers with some guidance in constructing and conducting credit stress tests.
Although banks that possess counter-party risk rating and credit portfolio risk management tools can take better advantage of the techniques outlined in this paper, the principles contained therein are equally applicable to banks that have yet to build quantitative risk management systems.
The guidelines are neither prescriptive nor are they the minimum requirements that banks adopting the Internal Ratings Based (IRB) approach under the New Basel Capital Accord are required to meet in respect of stress testing. They do, however, reflect market best practices that banks should aspire towards. Download paper (136K PDF) 53 pages
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