A top-down stress testing framework

Improving risk analysis at both the macro-prudential and the micro-prudential level.

Since the onset of the global nancial crisis in 2007, stress testing has 7 become an increasingly important tool for bank supervisors, as witnessed by the publication of United States (US), European and various national stress testing exercises. In the Netherlands, stress testing has been used by

De Nederlandsche Bank (DNB) to assess the solvency of individual nancial institutions, and the robustness of the nancial system as a whole. Over the past few years, DNB has developed an extensive top-down framework for bank stress testing to improve its risk analysis at both the macro-prudential and the micro-prudential level.

The DNB top-down framework consists of a suite of models that each represent speci c parts of bank balance sheets and pro t and loss accounts, with the ultimate goal of modelling key drivers of bank capital ratios under stress. The data for the top-down models stems from a variety of sources, predominantly regulatory reports, but also various supporting datasets, such as data on household wealth and taxable income available from Statistics Netherlands (CBS). Specialised models have been developed for the mortgage and the government bond portfolios of Dutch banks, given their large size and speci c characteristics. Together, the suite of models in the framework can be used to analyse the impact of a stress scenario on individual portfolios as well as on total capital levels and ratios. An important advantage of a framework consisting of detailed models is that it allows assessment at a holistic as well as a granular level. The suite is also exible in the sense that it has been used to quantify di erent supervisory or policy questions over time and is frequently expanded with further models as novel nancial stability questions arise.

DNB uses the top-down framework for quanti cation of its risk assessments in its Financial Stability Report (FSR), to benchmark stress test calculations of supervised institutions, and to enhance the link between macro- nancial risk assessment and micro-prudential action. Future improvements of the framework would be the inclusion of liquidity stress and second round e ects, to allow for a more integral macro-prudential risk assessment.

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