Seminar on Scenario Design in Stress Testing

The Seminar is part of the interinstitutional collaboration agreement between the Financial Stability Institute (FSI) of the Bank for International Settlements (BIS) and the Center for Latin American Monetary Studies (CEMLA) that has taken 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 was held on a digital format on March 7 and 8, 2023, and was attended by 82 representatives from 29 institutions and associates of CEMLA. The event was focused on the following topics: scenario design and cyclicality of stress test scenarios, and scenarios for climate-related stress testing exercises.

Stress testing is an important tool for authorities to assess the risks, including those associated with the economic cycle. It is based on scenarios which should be severe but plausible. Severity is adjusted as an economy moves through the phases of the cycle, for instance, diminishing it in a trough and increasing it during an expansion. Thus, in principle stress tests could be used to determine bank-specific countercyclical capital needs. The seminar also discussed some technical and institutional aspects of the scenario design and implementation.

The seminar also discussed the design of climate-related stress scenarios as part of an effort of some jurisdictions to tackle the risks to the economy and the financial system stemming from climate change. These scenarios have additional challenges, such as data gaps or the fitting of models designed for global climate change patterns into local specifications. There are international cooperation efforts actively working on addressing these issues and providing a common ground in aid of comparability and consistency.