A survey of stress tests and current practice at major financial institutions

CGFS Publications No 18
April 2001

Preface

The Committee on the Global Financial System (CGFS), known until 1999 as the Euro-Currency Standing Committee, serves as a discussion forum for the central bank community on financial stability questions. The CGFS has frequently been asked to examine the potential implications of innovations in global financial market practices.

Recent projects by CGFS subgroups have concerned the functioning of international interbank markets, financial derivatives and the systemic consequences of standard risk management practices. As a follow-up to previous efforts relating to issues of risk measurement and management, the CGFS decided, in March 2000, to set up a Task Force to organise a global census of stress tests in use at major financial institutions. The findings of the Task Force, as detailed in this report, were discussed at the March 2001 meeting of the CGFS. The publication of the report is intended to contribute to the general understanding of the use of stress tests as a market risk management tool.

For individual financial institutions, the survey data are expected to provide a useful benchmark for assessing their own stress test programmes against those of all surveyed firms, a sampling of financial firms including internationally active and global financial institutions. In addition, the Committee recognised the potential usefulness of survey information collected over time for the market-monitoring programme that it conducts at the request of the Governors of the G10 central banks. In this connection, it was noted that survey results could provide useful insights into market participants' views on the sources and nature of potential future stress for global financial markets. In the future, having such information could assist the development of profiles of risk taking in financial markets. The Task Force was chaired by Alain Duchateau of the Banque de France/Commission Bancaire. He joins with the Committee in expressing appreciation for the co-operation of the surveyed banks with the Task Force. The Committee believes that the census is an excellent example of a co-operative effort between central banks and market participants. The survey responses can provide information that is valuable for the firms' own risk management purposes. They also can be used to usefully supplement standard sources of market information.

The CGFS continues to be interested in this topic. Consequently, I would like to invite comments both on the findings of the report, as well as on the likely costs and benefits of possible follow-up survey efforts.

Yutaka Yamaguchi
Chairman, Committee on the Global Financial System
Deputy Governor, Bank of Japan