Reverse Stress Test: An Important Risk Management Tool

Authors

  • Biplab Chakraborty General Manager (Retd.), Department of Banking Supervision, Bank of India, Kolkata

DOI:

https://doi.org/10.33516/maj.v56i5.97-99p

Keywords:

No Keywords.

Abstract

In Reverse Stress Test (RST) the quest is for plausible exogenous trigger scenarios that might “break the bank.†RST is a nifty tool for thinking and experimentation with various test designs and configuration sets. RST has been advocated as a concurrent exercise to supplement the stress testing framework so as to avoid any possible myopic lapse in choosing scenarios as to the vulnerability of the bank’s business models. It helps address the concern that forward stress tests may miss the idiosyncratic vulnerabilities of individual firms. For most financial services firms, RSTs are not only a regulatory requirement but a risk management tool that grew in importance in 2020. The unexpected arrival of the COVID-19 pandemic shows how important reverse stress testing can be in managing business vulnerabilities.

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Published

2021-05-31

How to Cite

Chakraborty, B. (2021). Reverse Stress Test: An Important Risk Management Tool. The Management Accountant Journal, 56(5), 97–99. https://doi.org/10.33516/maj.v56i5.97-99p

Issue

Section

Risk Management

References

Stress testing principles: Basel Committee on Banking Supervision: October 2018

Guidelines on institutions’ stress testing: European Banking Authority: 19 July 2018

Guidance on Stress Testing for Banking Organizations with Total Consolidated Assets of More Than $10 Billion: SR Letter 12-7 Federal Reserve Board, US

Reverse Stress Testing for Banks: A Process-orientated Generic Framework: Professor Michael Eichhorn

Hochschule Harz, University of Applied Sciences, Germany: Dr Philippe Mangold University of Basel, Switzerland

Supervisory and bank stress testing: range of practices December 2017: Basel Committee on Banking Supervision

RBI Guidelines on Stress Testing