First macroprudential stress test: Bank of Russia’s underlying approach
Key elements of the BoR-developed macroprudential stress testing methodology are covered in ‘Macroprudential Stress Testing of the Financial Sector: Global Practices and the Bank of Russia’s Approach’ analytical note. The document has been released today as part of preparations for the first stress test.
The purpose of macroprudential stress testing is to investigate a financial system's resistance to stress in order to identify systemic risks and enable the development of macroprudential regulation. The distinctive feature of this type of stress testing is that it is built on a model factoring in a financial system's reaction to a shock, as well as the effects of contagion between financial organisations and sectors within the financial system, alongside feedback between the financial and real sectors.
Based on global experience in financial sector stress testing – as a supervisory, counter-crisis and macroprudential policy tool in advanced economies – the authors explore the specifics of macroprudential stress testing and the ways regulators are currently putting it into practice.
To seek feedback from market players, the Bank of Russia intends to release a draft of its developed methodology for macroprudential stress testing in the near future. The draft methodology assumes an extended coverage, as its key distinctive feature, with credit institutions, non-governmental pension funds and systemically important insurers all set to be covered. Stress testing will also apply to non-financial institutions, in order to enable credit risk assessment. Moreover, a stress test should clearly assess interrelations within the financial sector, to enable systemic risk analysis.
The authors discuss plans for the further development of stress testing at the Bank of Russia alongside the ways it may be used in pursuing macroprudential policy (e.g., setting a countercyclical buffer).
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