Study On Stress Testing Of Commercial Banks

The financial crisis of2008originated from America swept the global world in months, leading to banks broken, stock indices slumping and global financial system sunk into severe turbulence. Having caused great loss to global investors and destroyed financial systems of different nations so quickly and easily, this financial crisis aroused people’s deep thinking and discussion on it, and attracted more attention of international organizations and supervisory department in all nations to the ability of fending off financial risks. It was under such background that Stress Testing began to play a more important role in the assessment of potential risks in financial institutions and system conducted by financial supervisory authorities.In the past, Value at Risk is the main method to measure the risk of assets portfolio. Being able to estimate the maximum possible loss of an asset portfolio in a certain period, VaR has been regarded as a classical technique to measure financial risk by risk managers. However, due to being unable to estimate the risk exposure under extreme market conditions such as financial crisis precisely, VaR is rather limited in the application to measuring the risk exposure under extreme market conditions. In order to cover the shortage of VaR, Stress Testing was brought into being, which was firstly put forward by International Organization of Securities Commissions aiming at analyzing the impact of the most unfavorable conditions on assets portfolio. After a series of research and practices by international organizations and scholars, stress testing has gradually been an effective technique to estimate the sensitivity of a financial institution or the whole financial system to extreme events, and a good compensation for VaR.Small losses although this crisis caused to our banking sector, the financial system of our nation got involved in the impact to some extent. A number of foreign banks getting broken rang alarm bells to banking sector of our nation. As a result, stress testing gradually attracted more attention of China’s supervisory authorities and financial institutions. A series of regulatory framework has been enacted and several stress testing have been conducted by main domestic banks led by People’s Bank of China and CBRC. However, regarding the facts of its short history and that we do not have a perfect stress testing system and that domestic research and practices used to applying foreign models mechanically, the preciseness of stress testing results has been deviated to a great extent.This paper will take China Minsheng Banking Corp. as an example, take existing empirical research and practices as a reference, combine with Minsheng Bank’s unique loan structure, build an empirical model based on Wilson(1997) and Boss(2002)’s research framework. Through setting different Stress scenarios, the author will estimate the risk exposure of SMEs loan and the ability to resist risk of Minsheng Bank under extreme conditions. The whole paper’s structure is as follows:The author explains the background, significance and aim of this paper, summarizes the theory of stress testing and introduces the situation of stress testing research at home and abroad in the first chapter.In Chapter Two, practices and applications of stress testing in the world are introduced and problems existing in the process of stress testing in our nation are summarized.By analyzing survival status of SMEs, risks confronted with by SMEs and SMEs’ unique meaning to Minsheng Bank, the author discusses the relationship between Minsheng Bank and SMEs in Chapter Three.In the fourth chapter, referring to existing stress testing research, the author chooses six macroeconomic variables and sample intervals, then by using the data from State Statistical Bureau, CSMAR database and Minsheng Bank’s statements report, builds an empirical model and analyzes the case.Conclusions are made and suggestions are put forward in the last chapter to help our banking sector conduct stress testing.The contribution of this paper lies in:the author combines mature foreign stress testing framework with the characteristic of domestic financial institutions, making a helpful attempt for building a stress testing system in accordance with the features of China’s financial system. Meanwhile, this work also provides a support to the SMEs credit management of Minsheng Bank. On the other hand, limited by the availability of data, sample size, and the author’s knowledge structure and academic level, some parts of the paper still need to be strengthened. Welcome your esteemed experts and scholars’ criticism points.