Stress testing has become the risk management tool du jour in the wake of the global financial crisis. In countries where the information reported by financial institutions is considered to be of sufficiently good quality, and supervisory and regulatory standards are high, stress tests can be of significant value. In contrast, the proliferation of stress testing in underdeveloped financial systems with weak oversight regimes is fraught with uncertainties, as it is unclear what the results actually represent and how they could be usefully applied. In this chapter, problems associated with stress tests using weak data are examined. We offer a potentially more useful alternative, the “breaking point” method, which also requires close coordination with on-site supervision and is complemented by other supervisory tools and qualitative information.

Contributor Notes

This chapter was previously published as IMF Working Paper 10/282 (Ong, Maino, and Duma, 2010). The authors would like to thank Martin Čihák, Pamela Madrid, Diane Mendoza, Nancy Rawlings, Robert Sheehy, Torsten Wezel, and participants at an internal IMF seminar for their useful comments.
Author: Ms. Li L Ong