Stress Testing Banks: Whence and Whither?

20 Pages Posted: 3 Apr 2018

See all articles by Pavel S. Kapinos

Pavel S. Kapinos

Federal Reserve Bank of Dallas--Financial Industry Studies

Christopher Martin

Federal Deposit Insurance Corporation (FDIC)

Oscar A. Mitnik

Federal Deposit Insurance Corporation (FDIC)

Multiple version iconThere are 2 versions of this paper

Date Written: February 7, 2018

Abstract

This paper provides a brief overview of the recent practice of stress testing banking institutions, focusing on capital adequacy. We argue that stress testing has been successfully used to mitigate bank opacity; quantify systemic risk under extreme but plausible stress; keep the participants mindful of severely adverse shocks, thereby mitigating “disaster myopia” and concomitant financial instability; and improve the data collection and analytical capabilities of financial institutions. Our paper then reviews several critiques of stress testing made by policymakers and academics. We also propose several modifications of the current stress testing practice, such as the fusion of liquidity and capital adequacy stress testing, expansion of granular data availability, and explicit modeling of sectors inextricably connected to banking as well as the feedback mechanisms from these sectors. Addressing these issues is likely to keep stress testing highly relevant for promoting financial stability in the future.

Suggested Citation

Kapinos, Pavel S. and Martin, Christopher and Mitnik, Oscar A., Stress Testing Banks: Whence and Whither? (February 7, 2018). Journal of Financial Perspectives, Vol. 5, No. 1, 2018. Available at SSRN: https://ssrn.com/abstract=3154350

Pavel S. Kapinos (Contact Author)

Federal Reserve Bank of Dallas--Financial Industry Studies ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

HOME PAGE: http://https://sites.google.com/site/pavelkapinos/

Christopher Martin

Federal Deposit Insurance Corporation (FDIC) ( email )

550 17th Street NW
Washington, DC 20429
United States

HOME PAGE: http://sites.google.com/site/chrismartin122/

Oscar A. Mitnik

Federal Deposit Insurance Corporation (FDIC) ( email )

550 17th Street NW
Washington, DC 20429
United States

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