The use of stress testing in regulatory and supervisory perspectives

Document Type : Original Article

Authors
Ali Salehabadi 1
Meysam Allahyari 2
1 faculty member of Imam Sadiq University
2 Ph.D. Student in Financial Management Imam Sadiq University
Abstract
There is significant difference in the behavior of risk factors in the general economic conditions and in crisis situations (eg financial crises). Under normal conditions, the behavior of risk factors can be easier to predict because their behavior does not change in the short to medium term noticeably. Therefore, the behavior in the future can be predicted from past performance. However, in critical situations, the behavior of risk factors is very unpredictable and past behavior doesn’t help predict future behavior. Hence we need another tool to measure risk as "stress test". Stress tests can be done from the micro and macro perspective. Micro perspective means that each of the financial institutions, especially banks may use this method for their risk management. And macro perspective means that the supervisory authorities on financial institutions can use this method to evaluate the risk of the financial system and to regulate the policies. As regard that research’s approach is using of macro stress testing as a tool for risk management in crisis situations, initially we will investigate of the using the stress test in the risk management and implementation in the micro level will be stated briefly, then we will discussed why and how the design and implementation of stress testing at macro perspective and its usage in supervisory and regulatory perspective. Finally a real example of the use of stress testing at the macro level by the supervisory authorities on financial institutions in Australia in 2005 will be explain.
Keywords
risk management
stress testing
Regulation
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