Stress Testing: Balancing Resilience and Realism in Risk Strategy

Article

This article dives into the critical role stress testing plays in risk management strategies, balancing the need for resilience with realistic scenario planning. It explores how institutions can design comprehensive stress tests that are both plausible and effective, while addressing the challenges of data accuracy, model risk, and communicating results to various stakeholders.

Oct 01, 2024

Berislav Jozic, Head of Integrated Risk Management, Addiko Bank AG

Stress Testing: Balancing Resilience and Realism in Risk Strategy

Stress testing serves as a key control mechanism to assess an institution's resilience to adverse scenarios, informing stakeholders and aligning with overall risk strategy.
The design of stress testing scenarios must strike a balance between being stressful and plausible, ensuring relevance to real-world operations and stakeholder concerns.
Stress test results are vital for decision-making, particularly in budgeting and market-entry strategies, by predicting potential impacts under adverse conditions.
Common challenges in stress testing include ensuring data accuracy, calibrating models for stress situations, and tailoring the outcomes to meet the expectations of different stakeholders.