Handbook of Financial Stress Testing

Description

Stress tests are the most innovative regulatory tool to prevent and fight financial crises. Their use has fundamentally changed the modeling of financial systems, financial risk management in the public and private sector, and the policies designed to prevent and mitigate financial crises. When financial crises hit, stress tests take center stage. Despite their centrality to public policy, the optimal design and use of stress tests remains highly contested. Written by an international team of leading thinkers from academia, the public sector, and the private sector, this handbook comprehensively surveys and evaluates the state of play and charts the innovations that will determine the path ahead. It is a comprehensive and interdisciplinary resource that bridges theory and practice and places financial stress testing in its wider context. This guide is essential reading for researchers, practitioners, and policymakers working on financial risk management and financial regulation.

J. Doyne Farmer is Director of Complexity Economics at the Institute for New Economic Thinking at the Oxford Martin School, and is the Baillie Gifford Professor at Mathematical Institute at the University of Oxford, as well as an External Professor at the Santa Fe Institute. His current research is in economics, including financial stability, sustainability, technological change and economic simulation. He was a founder of Prediction Company, a quantitative automated trading firm that was sold to the United Bank of Switzerland in 2006. His past research spans complex systems, dynamical systems, time series analysis and theoretical biology. He founded the Complex Systems Group at Los Alamos National Laboratory, and while a graduate student in the 1970s he built the first wearable digital computer, which was successfully used to predict the game of roulette. Alissa M. Kleinnijenhuis is a Research Scholar at the Stanford Institute for Economic Policy Research (SIEPR), at Stanford University. She is also a Senior Research Fellow at the Institute for New Economic Thinking at the Oxford Martin School at the University of Oxford. Her focal areas of research are financial crises and climate finance, linked by their emphasis on addressing externalities emerging from too-big-to-fail (or too-many-to-fail) financial institutions and climate change. Subtopics of special relevance in her studies are financial regulation, models of contagion and systemic risk, financial stress testing, financial intermediation, monetary policy, asset pricing, and climate financial risks and opportunities. Her recent work has shed light on the system-wide implications of key pillars of the post-crisis regulatory reform. She has also developed novel tools, including system-wide stress tests, to measure systemic risk and evaluate policies. Kleinnijenhuis collaborates with both policymakers and practitioners, including researchers at the Bank of England, the European Central Bank, the International Monetary Fund and Fidelity Investments. Til Schuermann is a partner at Oliver Wyman where he advises private and public sector clients on stress testing, capital planning, enterprise-wide risk management, model risk management, climate risk and governance including board effectiveness. He serves on several advisory and editorial boards and is an associate editor of the Journal of Financial Services Research and the Journal of Risk. He played a leadership role in the design and execution of the 2009 US bank stress test and advised the banking system stress tests for Spain (2012), Slovenia (2013) and the ECB's 2014 Europe-wide stress test. Thom Wetzer is Associate Professor of Law and Finance at the University of Oxford, Founding Director of the Oxford Sustainable Law Programme and Senior Research Fellow at the Institute for New Economic Thinking at the Oxford Martin School. His research examines how law and finance can generate value and advance the public good with a particular focus on financial regulation, corporate governance, financial risk management and climate risk. Wetzer actively collaborates with policymakers and practitioners, including at the Bank of England, the European Central Bank, the International Monetary Fund and De Brauw Blackstone Westbroek.

'This well documented compendium on financial stress testing could not arrive at a more timely moment. As the world embarks on a daunting mission to reign in global warming, stress testing promises to be a key tool for helping central banks and supervisors assess climate-related risks, not only on their own balance sheets, but in the economy as a whole, as well as the books of the banks it supervises.' Christine Lagarde, President of the European Central Bank 'Stress tests have grown from their beginnings as a simple, practical tool for communicating risk in a particular portfolio into a much broader framework. This Handbook is a thought-provoking package of thirty essays by leading academics, regulators and practitioners. Topics range widely, from fundamental scenario design to transparency considerations, feedback effects, micro versus macro perspectives, as well as the implications for different types of financial institutions. The Handbook has something for anyone interested in the state of the art, including risk professionals, regulators, policy-makers and academics.' Wilson Ervin, former Chief Risk Officer 'The 2009 bank stress tests were one of the turning points of the global financial crisis, and they are now a basic part of the supervisory toolkit. This volume provides a comprehensive overview of what we have learned about stress testing and what we still need to know to make it even more effective.' Ben Bernanke, former Chair of the United States Federal Reserve 'This excellent compilation of contributions on stress testing covers a vast spectrum ranging from the economic history of evolution of stress tests as a centerpiece in prudential regulation of the financial sector to the challenges going forward. The book covers both micro- and macro-prudential stress tests, provides a conceptual foundation for the use of both, touches upon ongoing issues such as stress tests for central counterparties, and is a must-read for practitioners, policy-makers and academics interested in creating a robust financial sector.' Viral Acharya, New York University Stern School of Business 'This is by far the most comprehensive available reference work on financial stress testing. One need only review the list of contributors to appreciate its definitive quality - many of those who invented stress testing following the Great Financial Crisis are authors. The Handbook of Financial Stress Testing covers the subject in all key dimensions, and from philosophy to execution. I strongly recommend that this magnificent compendium be read by anyone concerned with the risk of future financial crises.' Darrell Duffie, Stanford University