On a practical level, respondents highlighted the value of providing a detailed narrative alongside a set of variable paths
Respondents recognised the benefits of using a suite of models to deliver a richer perspective on the potential impact of stress scenarios on banks’ capital ratios.
Ultimately, an undue reliance on stress testing could lead to a collective failure of imagination when trying to spot new and emerging risks to financial stability.
There were numerous calls for international co-ordination of stress-testing exercises, especially in relation to large multinational banking groups.
For example, scenarios did not always have to focus on V-shaped recessions, but could also consider L-shaped downturns in activity, where losses could be considerably different.
Respondents also noted that the Bank should consider sovereign risk, cross-border risks and banks’ behavioural responses when generating scenarios
Provide paths for a larger set of variables.
On bespoke scenarios, many respondents questioned the proposed principle that these would be expected to result in higher losses than the common stress scenario
It was felt important for the framework to leave clear ‘daylight’ between reverse stress tests and the design of bespoke stress scenarios
