Stress test (finance)

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A stress test is a risk management tool in the financial sector. A distinction is made between micro-stress tests, which are used by financial institutions themselves or by micro-prudential supervision (e.g. regulators such as BaFin or the ECB ), and macro-stress tests, which are carried out as part of macro-prudential supervision (e.g., Deutsche Bundesbank , FINMA / SNB, FSA). Here, the effects of the change in risk factors are determined using scenario technology on certain dimensions, such as B. simulated core capital ratios. A distinction is made between scenario analyzes (variation of several risk factors) and sensitivity analyzes (one-dimensional scenarios in which only one risk factor is varied). Stress tests are used to obtain information about the potential effects of certain developments, to communicate this information and then to derive decisions. Stress tests are mainly used for the supplementary assessment of the market risk .

background

Stress tests are sometimes required by law at banks, fund companies or insurance companies in order to use hypothetical crisis simulations to show what effects they have on the earnings and thus equity situation of financial service providers and whether they can lead to a corporate crisis.

The value at risk is usually used to determine what value the loss of a specific risk position (e.g. a portfolio of securities) does not exceed with a given probability and in a given time horizon . However, this ratio has one major limitation: In contrast to the model, the risk is not normally distributed . Therefore, in addition to calculating the value at risk, a stress test is also carried out, which evaluates the effects of extreme scenarios that are not adequately taken into account in the value at risk. It is also possible to combine stress tests and VAR, as is e.g. B. takes place at the ECB to determine the credit VAR. Data-changing exogenous or endogenous factors such as economic parameters can e.g. B. rising / falling interest rates , bull market / bear market , commodity price changes , currency exchange rate changes or a general recession . Stress tests are a particular focus of the banks for the loan portfolio through the implementation of the ICAAP ( Internal Capital Adequacy Assessment Process ).

Regulatory stress tests

In particular, the 2007 financial crisis and the bankruptcy of Lehman Brothers in 2008 had serious negative effects, initially on relevant sub-markets ( stock exchange , interbank market ) and later on the global economy. Since the functional reliability of credit institutions, insurance companies and other financial service providers is essential for a functioning economy, stress tests have been introduced for certain credit institutions in the most important financial markets. These stress tests were based on a specific crisis scenario that influenced these institutions through precisely defined parameters. The general aim of such stress tests is to check the stability of the financial system. The stress tests are intended to uncover possible weaknesses that could have existential effects in the event of a real market disruption, verify the robustness of the core capital ratios and disclose effects on the liquidity of the institutions concerned.

The concept of macro stress tests was developed by the International Monetary Fund and the World Bank, and they have always been an important part of the Financial Sector Assessment Program (FSAP), which was first carried out in 1999 to examine national financial systems. It is noteworthy that the IMF in the Published the results of a stress test in 2007, which aimed to determine the potential losses from Asset Backed Securities (ABS). On the basis of an “unprecedented real estate price scenario”, the IMF concluded that the US real estate market and financial products based on it were unlikely to pose any systemic threat. Participants in the stress test were a. Lehman Brothers and Bear Stearns. One reason for the low losses in the stress test can be traced back to the assumption of the underlying credit quality. The significant deterioration in credit quality in 2006/07 was not taken into account.

In 2009, the SCAP was used for the first time to perform a macro stress test for 19 major banks in the USA. Special features of this stress test was the intention to force the banks to strengthen the equity base on the basis of the results and to publish detailed individual results of the banks. In addition, a comparative stress test (“top-down”) was carried out to check the results determined by the banks themselves (“bottom-up”). The result was that about 85% of the additional capital requirement came from 3 banks, Bank of America, Wells Fargo and General Motors Acceptance Corporation (GMAC). Bank of America previously acquired Merrill Lynch, Wells Fargo acquired Wachovia, and GMAC was hit hard by the crisis at General Motors, so most of the additional equity required for the stress test was due to special factors.

Regulatory stress tests in Europe

After the crisis, state and EU institutions organized by the Association of European Banking Supervisors CEBS subjected the European banking system to an EU-wide stress test with 21 banks for the first time in 2009; this was expanded to 91 credit institutions in 2010. The test simulated a severe recession, which was accompanied by a slump in the stock markets and turbulence in the market for government bonds. The only credit institutions that passed were those which, even under the stress assumptions, could still have a core capital ratio of at least 6%. Seven of the banks tested failed the stress test.

The European Banking Authority (EBA), newly created in the wake of the crisis , carried out a further stress test at 91 European banks in 2011 as the successor organization to CEBS. In the tests carried out at Cypriot banks, the EBA saw no risk in the high proportion of Greek government bonds, as losses on government bonds were not foreseen. As a result, the two largest banks in Cyprus ( Bank of Cyprus , Laiki Bank ) passed the test with ease. The country's central bank then announced its “great satisfaction” with the results, which “show the ability of domestic banks to withstand shocks in an unfavorable scenario”. Less than a week after the results of the 2011 stress test were published, Europe's heads of state and government agreed on a new rescue package for Greece, which also included write-downs on the value of Greek government bonds. Nevertheless, nothing has changed in the assessment by the supervisory authority for months. It was not until December 2011 that the EBA calculated possible losses from government bonds in an additional EU-wide “lightning” stress test ( EU capital exercise ) and came to the conclusion that the Bank of Cyprus and the Laiki Bank belong to a group of 31 institutions in the EU that needed additional equity. Six banks in Germany would have a total capital requirement of 13.1 billion euros. They would have to increase their capital base in order to achieve a core capital ratio of nine percent by the end of June 2012, as required by the regulators.

In 2014, both the EBA, in cooperation with the ECB , in their new supervisory role in the European Banking Supervision Mechanism (SSM) , carried out an in-depth review of 130 banks in the Eurozone, consisting of a retrospective asset quality review and forward-looking stress tests; In the process, 25 European banks (including one in Germany) were found to have insufficient capital resources.

In recognition of the efforts of European banks to improve their capitalization, the EBA announced on March 3, 2015 that no further Europe-wide stress test would be carried out in 2015.

In the 2016 European stress test, 51 financial institutions from 16 countries were examined. Lately, legal risks have also been included in the evaluation. The result was largely positive.

literature

  • Basics:
    • Stress-testing the Banking System: Methodologies and Applications, ed. by Quagliariello, M., Cambridge University Press, Cambridge (UK) 2009.
    • Stress-testing financial systems: an overview of current methodologies. Sorge, M. (2004). BIS Working Papers No. 165.
    • Stress Testing: A Review of Key Concepts. Čihák, M. Czech National Bank Research Policy Note 2/2004.
    • Stress tests - introduction and basics, in: Stress tests in banks: From Basel II to ICAAP, ed. von Klauck, K., Stuttgart 2006
    • Scenario analyzes and stress tests in banking and insurance practice: regulatory requirements, implementation, control (2010)
  • Further development:
    • Borio, C. and M. Drehmann (2009). Towards an operational framework for financial stability: “fuzzy” measurement and its consequences. BIS Working Papers 284.
  • Macro stress tests and scenario based assessments (SBA):
    • Bank control and risk management , Wernz, J. (2012), Springer Gabler, Heidelberg / Berlin

Individual evidence

  1. ↑ See Jakubík, P. and C. Schmieder (2008), Stress Testing Credit Risk: Comparison of the Czech Republic and Germany. BIS, p. 43.
  2. ↑ See Deutsche Bundesbank (2004), Monthly Report October 2004, p. 81.
  3. ↑ See Drehmann, M., S. Sorensen and M. Stringa (2008). The integrated impact of credit and interest rate risk on banks: an economic value and capital adequacy perspective. Bank of England Working Paper Number 339, p. 61.
  4. ↑ z. B. Daniela Unger: Value-at-Risk based risk management for assessing market risks, 2009, ISBN 3640331826 , page 35 ff. Online
  5. ↑ See Moretti, M., S. Stolz and M. Swinburne (2008). Stress testing at the IMF, IMF Working Paper 08/206, p. 4f.
  6. ↑ See International Monetary Fund, Global Financial Stability Report, April 2007, Market Developments and Issues. P. 7ff
  7. ↑ See Board of Governors of the Federal Reserve System (2009). The Supervisory Capital Assessment Program: Design and Implementation. April 24, 2009
  8. ↑ See Board of Governors of the Federal Reserve System (2009), The Supervisory Capital Assessment Program: Overview of Results, May 7, 2009
  9. ^ Süddeutsche.de of May 7, 2009, Geithner gives the all-clear
  10. ↑ zeit.de, Die Zeit from July 23, 2010, Mark Schieritz: Residual risk of state bankruptcy. - The stress test shows: Europe's banks are safe as long as a country cannot go bankrupt. If not, they will fall like dominoes.
  11. ^ The time of July 23, 2010, Schäuble is pleased with the good results of the German banks
  12. ↑ a b How Cyprus' banks speculated into ruin , article from March 28, 2013 in: wallstreetjournal.de
  13. ↑ spiegel.de December 15, 2011: Ackermann criticizes banking supervisors
  14. ↑ A detailed review by the ECB shows that the banks need to take further measures. ECB press release. October 26, 2014, accessed February 20, 2015 .
  15. ↑ 25 banks fail the ECB stress test - one German, nine Italian. mamanger magazin online, October 26, 2014, accessed on February 20, 2015 .
  16. ↑ EBA updates on future EU-wide stress tests. EBA online, March 3, 2015, accessed March 4, 2015 .
  17. ↑ European banking supervision: Europe's big banks are largely solidly positioned . In: The time . July 29, 2016, ISSN  0044-2070 ( zeit.de [accessed August 7, 2016]).