Stress Test for Risk Assessment Under Basel Framework Applied in Banking Industry

Abstract

Stress testing in Banks is crucial for risk mitigation both from regulatory and managerial standpoint. The U.S. sub-prime crisis of 2008 triggered economic recession across the globe and various agencies like financial institutions, regulators, credit agencies, government policies, and consumers, among others (Phil Angelides et al 2012) were collectively seen a part of systemic breakdown. Across the globe, the Central Banks have been advocating Stress Tests from the macro-prudential view point and created advanced risk analytical framework to predict scenarios impacting capital adequacy. The paper which is more of a conceptual paper presents a brief review of various risk analytical methodologies including Macro Economic Stress Testing, Quantitative Computation of Stress Test Quantitative Computation of Stress Test etc. The paper also presents scope for future research on practice of stress tests in Indian Banks.