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- Title
Stress Testing in a World of Compound Risks and Polycrises.
- Authors
Hopper, Greg; Rattray, Greg; Schuermann, Til; Power, Ben
- Abstract
Stress testing has become the tool of choice in banking for risk managers and regulators alike, and it is used widely as a way to assess resilience to severely adverse events. Yet, even the most creative risk manager would have been challenged to design a scenario that would have adequately captured the plethora of shocks that manifested from early 2020 to April 2023. The authors make use of the polycrisis concept to motivate a rethinking of stress test design. A broadening of the scope of threats to include geopolitics and a wide range of technology-related events are among the aspects that most require attention, with emphasis on the possibility of co-occurrence. Using the polycrisis effect calls for an interdisciplinary team of scenario designers to comprehensively cover the threat landscape facing firms, the capability for rapid evaluation of many scenarios, models that map scenarios to impacts on company financials that err on the side of being simple and robust, and an increased emphasis on nonfinancial risks and shocks. The authors design a broad polyscenario with some tailoring to three industries--banking, oil, and auto--by way of illustration.
- Subjects
RISK managers; TEST design; BANK employees
- Publication
Journal of Portfolio Management, 2023, Vol 50, Issue 2, p58
- ISSN
0095-4918
- Publication type
Article
- DOI
10.3905/jpm.2023.1.552