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Scenario design and stress testing

Scenario design and stress testing construct plausible, severe future conditions to examine how systems and institutions would perform. They complement probabilistic analysis where data are scarce or futures are deeply uncertain. Systemic Risk Management stewards this page for the Nexus Consortium.

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Scenario design and stress testing on the record.

The Global Centre for Risk and Innovation
  1. 01InstitutionThe Global Centre for Risk and Innovation (GCRI)
  2. 02The methodWhat scenario design and stress testing covers
  3. 03Reference practiceScenario and stress testing follow supervisory and planning practice
  4. 04In systemic risk workSevere, plausible and combined
  5. 05Applied inPlatforms that apply this method
  6. 06StewardshipWho maintains this page
  7. 07SourcesWhere this page’s references lead
02The method

What scenario design and stress testing covers.

  1. 01

    Core methods

    narrative scenario development; reverse stress testing; macro-financial stress testing; multi-hazard scenario construction; tabletop exercises; cascading impact mapping.

  2. 02

    Data and instruments

    historical analogues; model outputs; expert workshops; supervisory scenario frameworks; exposure and balance sheet data.

  3. 03

    Validation

    Scenarios are reviewed for plausibility, internal consistency and severity relative to history. Exercise outcomes are compared with actual events when they occur.

  4. 04

    Limits

    Scenario choice can reflect prevailing assumptions and miss novel combinations. Results depend on how participants and models represent responses.

  5. 05

    Use in risk decisions

    Stress tests reveal vulnerabilities that arise when several risks materialise together. They inform capital, contingency and coordination plans across sectors.

03Reference practice

Scenario and stress testing follow supervisory and planning practice.

ReferenceWhat it sets
NGFS scenariosClimate scenarios for financial analysis
Supervisory stress testingSevere but plausible scenarios
Reverse stress testingScenarios that break a system
04Process

How the process runs.

Process

Scenario design and stress testing: Bank stress test

The Basel stress testing principles describe severe but plausible scenarios, a method to quantify impact, and use of results; hurdles depend on the exercise.

  1. 01 Scenario and balance sheet

    1. 01Scenario designDataset · Independent reviewerScenarios capture the material risks identified, with a narrative explaining how. They are severe but plausible and varied.
    2. 03Balance sheet projectionModel · Independent reviewerMethods range from point-in-time static approaches to dynamic simulations that reflect future business activities and management actions.

  2. 02 Risk impacts

    1. 04Credit lossesModel · Credit risk functionCredit risk is one risk the scenario must capture. Banks also keep a model inventory and a validation function for stress models.
    2. 05EarningsModel · Independent reviewerThe risk identification process includes earnings vulnerabilities. Net interest income under a rate path is one common view.
    3. 06Market and counterparty lossesModel · Independent reviewerMarket stress tests supplement value-at-risk models with factor shocks or integrated scenarios, historic or hypothetical.

  3. 03 Capital and actions

    1. 02Management actionsStep · Independent reviewerWhere management actions enter supervisory submissions, authorities check they fit the bank’s other strategic plans, such as recovery plans.
    2. 07Compare projected capital with requirementsStep · Independent reviewerStress tests quantify risks and inform their understanding. Depending on objectives, they may or may not use hurdle rates or thresholds.

  4. 04 Authority

    1. 08Authority use of the resultsDecision · Independent reviewerAuthorities may use results as one supervisory input. For capital adequacy, they consider the response to deficiencies.

Outline of an external standard or method, from its public sources. It describes what the framework says, not a record of any run. It does not show that Nexus or any partner performs, certifies or approves a step. A gate is a step of the method, never a Nexus approval.

05In systemic risk work

Severe, plausible and combined.

Scenarios explore futures that cannot be assigned reliable probabilities. Systemic stress tests combine shocks across systems: a heat wave with a grid failure and a cyber incident. Reverse stress tests start from failure and ask what would cause it.

  • Combine shocks across systems.
  • Use reverse stress tests to find vulnerabilities.
  • Do not present scenarios as forecasts.
  • Applications on Risk Management.
06Applied in

Platforms that apply this method.

07Stewardship

Who maintains this page.

Systemic Risk Management stewards scenario design and stress testing: it keeps this description current and reviews how the method is applied across the platforms.

08Sources

Where this page’s references lead.

The bodies and documents this page is read against. Status and editions change; each link goes to the issuing body.

09Questions

Questions and answers.

Why does one institution host every method page?
GCRI hosts the STEM Commons so that each method has one canonical description. Platforms link to it rather than repeat it, which keeps definitions consistent.
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Write to the integrity concern form with the passage and the reason.
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