Bank Stress Testing: A Stochastic Simulation Framework

68 Pages Posted: 23 Nov 2013 Last revised: 6 Mar 2015

See all articles by Giuseppe Montesi

Giuseppe Montesi

University of Siena - School of Economics and Management

Giovanni Papiro

Banca Monte Del Paschi de Siena (MPS)

Date Written: June 28, 2013

Abstract

We present a stochastic simulation forecasting model to stress-test banks’ capital adequacy and to estimate probability of infringement of regulatory capital ratios and default probability. The stochastic methodology proposed is based on a simplified reduced model that provides a manageable stress-testing approach based only on those essential variables and key risk drivers that are truly relevant for assessing the bank’s capital adequacy, allowing for outputs that can be expressed and analyzed in probabilistic terms. We applied the proposed methodology in a simple stress test exercise on the G-SIBs banks; we performed two stress tests characterized by increasing severity, measuring the banks degree of financial fragility/resilience. The exercise results show sharp differences in the degree of financial fragility of the banks considered.

Keywords: Stress Testing, Monte Carlo Simulation, Stochastic Model, Solvency Risk, Credit Risk, Basel II, Basel III

JEL Classification: C15, C63, C67, G21, G28, G31, G32, G33

Suggested Citation

Montesi, Giuseppe and Papiro, Giovanni, Bank Stress Testing: A Stochastic Simulation Framework (June 28, 2013). Available at SSRN: https://ssrn.com/abstract=2358072 or http://dx.doi.org/10.2139/ssrn.2358072

Giuseppe Montesi (Contact Author)

University of Siena - School of Economics and Management ( email )

Siena
Italy

Giovanni Papiro

Banca Monte Del Paschi de Siena (MPS) ( email )

Italy

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
525
Abstract Views
1,949
rank
63,143
PlumX Metrics