BNM’s stress test for banks must simulate ‘worst-case’ scenarios
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Loading... - Tasya Piliang
- 07 Apr 2023
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The process should take into account a ‘perfect storm’ hitting local banks, says economist.
Even as Bank Negara Malaysia (BNM) confirmed last week that most Malaysian banks passed its macro solvency stress test, an economist has urged the central bank to ensure such tests take into account possible ‘worst-case’ scenarios.
“Although BNM’s macro solvency stress test appears to be robust and up to global standards, the bank stress test process should also be reverse engineered to mitigate for the worst-case scenarios, taking a bottom-up approach,” said Asia School of Business and Cornell University practice professor of finance Joseph Cherian.
He said the problem is that most stress tests are calibrated to most recent or slightly longer-term experience.
He highlighted examples such as tech start-up overvaluation that caused the 2000/2001 Dotcom crisis, and the sale of toxic financial assets repackaged as high-quality loans that brought US banks to their knees in the 2008/2009 global financial crisis.
“Certain events which brought ‘infamous’ banks down in the past may not necessarily repeat themselves, but it could be a totally different experience if they do.
“What if unemployment hits 10%, or inflation spikes to 12%, or bond yields and credit spreads hit the roof, or liquidity simply dries up?
“What happens if contraction is both severe and long lasting – will the same financial institutions continue to remain resilient?” Joseph asked, alluding to a doomsday or “perfect storm” scenario where all the above happens at once. Read More…
