Stress testing in Latin America: A comparison of approaches and methodologies

Report submitted by a study group established by the BIS CCA Consultative Group of Directors of Financial Stability (CGDFS) and chaired by Pamela Cardozo, Bank of the Republic, Colombia.

This report describes how major Latin American central banks conduct and use stress tests in assessing the soundness of their banking systems. Methodologies are compared with the help of a common stress-testing exercise run by the central banks participating in the study group. In general, central banks use top-down solvency tests to assess similar risks, but their tests differ, among other things, in the severity of assumed scenarios, assumptions about bank reaction to shocks, data granularity, and how banking indicators are calculated, the latter due to the fact that countries follow different Basel standards. As highlighted by the common exercise, differences across tests can lead to very dissimilar results and policy implications. The report also discusses how stress tests are communicated. Most central banks make stress tests public, but usually only disclose aggregate results. Furthermore, central banks do not normally measure the effectiveness of communication since stress tests are not commonly used as a policy tool.

JEL classification: C53, G10, G21, E37, E47.