What matters most is the mindset of the those employing it
Micro stress tests: test the performance of individual portfolios or the stability of individual institutions
Macro stress tests: test the stability of groups of financial institutions and which can have an impact on the economy as a whole
Objectives of macro stress tests: Identify vulnerabilities and support crisis management and resolution
Ong et al (2010) propose to use reverse stress tests as simple tools to uncover vulnerabilities in countries with limited data
Integrate credit and interest rate risk in the banking booking. Need to model assests and liabilities simultaneously to take into account accounting consistency (Drehmann et al 2010)
Lack of econometrical equations means liquidity risk is modelled by a range of indicators that change in stressed conditions based on rules of thumbs calibrated to past prices (Kapadia et all 2011)
Most complete approach is RAMSI by the bank of England (Aikman et all 2009)
It has so far proved to be very hard to integrate market risk or liquidity risk with credit risk in the banking book
Two types of approaches: rely of history and use judgement to avoid the risk of relying excessively on the past (however judgement is often based on historical experience)
