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- Title
A Subordinated Stochastic Framework for Supervisory Stress Testing.
- Authors
Parnes, Dror; Jacobs, Michael
- Abstract
In this study we develop and demonstrate a combined stochastic framework for supervisory stress tests that assesses the probable first passage time and the time-related likelihoods for banks to breach their regulatory minimum capital ratios. Our proposed framework allows regulators to intuitively integrate credit characteristics of the individual loans and risky assets within a bank's portfolio with the idiosyncratic bank's merits (such as the general bank's policies, risk tolerance, size, connectivity, and interconnectedness within the entire banking system). We develop the necessary derivations, illustrate the stochasticity of the measurements through several Monte Carlo simulations, and further draw inferences from some sensitivity analyses for the model's parameters. The proposed stress testing framework can assist monitored financial institutions, policy makers, and regulatory bodies.
- Subjects
BANK loans; FINANCIAL institutions; STOCHASTIC processes; GAUSSIAN distribution; MONTE Carlo method
- Publication
Banking & Finance Review, 2018, Vol 10, Issue 1, p1
- ISSN
1947-7945
- Publication type
Article