Publication detail

Conservative Stress Testing: The Role of Regular Verification

Author(s): doc. PhDr. Adam Geršl Ph.D.,
PhDr. Jakub Seidler Ph.D.,
Type: IES Working Papers
Year: 2010
Number: 12
Published in: IES Working Papers 12/2010
Publishing place: Prague
Keywords: stress testing; credit risk; bank capital
JEL codes: E44; E47; G21
Suggested Citation: Geršl, A., Seidler, J. (2010). “ Conservative Stress Testing: The Role of Regular Verification” IES Working Paper 12/2010. IES FSV. Charles University.
Grants: GACR 403/10/1235 (2010-2014) Institutional Responses to Financial Market Failures
Abstract: This paper focuses on how to calibrate models used to stress test the most important risks in the banking system. Based on the results of a verification of the Czech National Bank’s stress testing methodology, the paper argues that stress tests should be calibrated conservatively and slightly overestimate the risks. However, to ensure that the stress test framework is conservative enough over time, a verification, i.e. comparison of the actual values of key banking sector variables – in particular the capital adequacy ratio – with predictions generated by the stress-testing models should become a standard part of the stress-testing framework.
Downloadable: WP 2010_12_Gersl, Seidler


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