STRESS TESTING: CONSERVATIVE CALIBRATION AND REGULAR VERIFICATION
STRESS TESTING: CONSERVATIVE CALIBRATION AND REGULAR VERIFICATION

Summary/Abstract: This paper focuses on how to calibrate models to be used in stress tests that emphasize the most important risks in the banking system. The paper argues that stress tests should be calibrated conservatively and slightly overestimate the risks. However, to ensure that the stress test framework is conservative enough over time, verification, i.e. comparison of the actual values of key financial variables with predictions generated by the stress-testing models should become a standard part of the stress-testing framework.

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