London software testing news UK

Stress Testing Tension

Posted in Acceptance testing by testing in London on September 15, 2007

From The Business

LONDON – When Bank of England governor Mervyn King talked tough on repricing of credit risk this week, he inadvertently touched upon a grey area among many financial institutions: stress testing credit assets.

Banks, regulators and even the Bank of International Settlements have grappled with the challenge for years. But if ever there was a time for the industry – regulators and lenders – to come up with a consistent framework for stress testing the risk of default on bank loans, it’s now.

It would be partly reassuring to investors in the short term and help prevent a repeat of the current crisis in the future. Stress testing loan portfolios isn’t easy for two reasons – you need the right data and it’s hard mark the loan portfolios to their market values.

That’s perhaps why there’s such a profusion of models. Two years ago, BIS did an exhaustive survey on how various banks managed their risks. Sixty four banks reported that they did 960 stress tests involving over 5,000 risk factors. The number of stress tests was more than double than what the BIS had found in 2000.

A number of stress tests incorporate macro-economic and political events like Black Monday (1987), the Asian financial crisis in 1997, the Russian default in 1998 and the Sept 11, 2001 attacks on the U.S..

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