How Well Do You Know Your Banks?

Stress testing has emerged as a critical analytical instrument for many prudential regulators. In response to the Global Financial Crisis, both US and European regulators have had to use stress tests to assess banks’ asset quality and risk management capabilities.

In contrast, having escaped the worst effects of the crisis, Asian regulators have not had to develop stress tests that are as rigorous. With slowing global growth and volatile macroeconomic conditions, however, the time is right for Asian regulators to enhance their stress tests.

We believe Asian regulators should make their stress tests more rigorous, by improving the way stress scenarios are defined and applied. Regulators should also help banks embed stress tests in planning and performance management processes. Once these foundations are set, regulators should make more use of stress testing data in prudential and policy-making processes. This paper draws upon approaches adopted by US and European regulators to examine key considerations Asian regulators will face in enhancing their stress testing framework, and defines the necessary next steps.

Authors:
Christian Pedersen – Partner and Head of Finance and Risk Practice, Asia Pacific
Jacob Hook – Partner and Head of Public Policy Practice, Asia Pacific
Jonathan Phua – Manager, Finance and Risk Practice