Disponible en Español
Seminar on Stress Testing in Covid times*
Digital format, February 10 and 11, 2021.
The Seminar is part of the interinstitutional collaboration agreement between the Financial Stability Institute (FSI) and the Center for Latin American Monetary Studies (CEMLA) that took place since 2016. As part of the agreement, an annual seminar is conducted with focus on technical approaches to prudential topics in financial stability with a regional perspective.
The seminar on Stress Testing in COVID times was held in a digital format, on February 10 and 11, 2021. It was jointly organized by the Financial Stability Institute (FSI) and the Center for Latin American Monetary Studies (CEMLA). It was attended by 84 participants from 35 organizations, including central banks and banking supervisory authorities from Latin America and the Caribbean (LAC), along with institutions from North America and Europe.
This seminar was devoted to the challenges posed by the COVID-19 crisis to stress testing, particularly to the design of appropriate scenarios for recent exercises and methodological adjustments that address more faithfully the exceptional impact of the pandemic on real and financial sectors.
The participants discussed the scenarios run prior and during the crisis as part of the stress framework devised by central institutions. Stress scenarios were based on forecasted negative growth and were revised throughout the first semester of 2020 when GDP had already fallen below levels of severe scenarios of pre-crisis stress tests in many countries. The presented COVID-19 scenarios commonly displayed a deeper initial downturn than in previous exercises but reflected different views on the recovery speed. In light of the heightened uncertainty about the further path of the pandemic, central banks tested a broader range of scenarios (e.g. the Federal Reserve tested a V-shaped, U-shaped, and W-shaped recession) or used reverse stress testing (e.g. Bank of England, Banco de la República). A point of discussion was how scenarios should reflect government responses, as, e.g., done in the ECB/EBA scenario.
Two methodological adjustments were prevalent in the presented exercises: First, the implementation of government relief measures aimed at firms and households alleviated credit risks temporarily while measures aimed at financial institutions directly lifted capital constraints which had to be reflected in loss projections, capital plans, and credit growth (e.g. Banco Central de Chile and EBA presented their approaches). Second, a dissection of bank portfolios had to account for the uneven impact of the pandemic on different economic sectors, e.g., by dividing the portfolio in more and less affected layers as done by Banco de México.
Stress Testing in COVID Times
Dr. Manuel Ramos Francia
Director General, CEMLA