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READING 69: PRINCIPLES FOR SOUND STRESS TESTING PRACTICES AND SUPERVISION #79

Open Grefer opened 4 years ago

Grefer commented 4 years ago

https://www.melonsblog.cn/2020/02/reading-69-principles-for-sound-stress.html#more

Grefer commented 4 years ago

Shorter test durations and historical or hypothetical scenario-based testing were key weaknesses in stress testing practices. Actual events showed longer duration of stress conditions and breakdown of historical statistical relationships.

Grefer commented 4 years ago

Banks made a major mistake in assessing the riskiness of securitized products by relying on credit ratings of apparently similar issues, like corporate bonds. Securitized products are complex and possess different characteristics and risk exposures. Therefore, external rating for non-structured products should not be applicable to these products.

Grefer commented 4 years ago

Future contracts are used to offset cash market losses against the gains in the futures market. Hedging will be effective if the basis does not change between the opening and closing of the futures position. Changes in basis can reduce effectiveness of hedging and can produce significant loss.

Grefer commented 4 years ago

Stress testing for credit risk is quite recent, whereas stress testing for market and interest rate risks has been conducted for years. Pipeline risk increased, not decreased, as banks were forced to warehouse loans on their balance sheet due to deteriorating conditions in securitization markets.