Stress Testing Tool in Banking Risk Management – an Evidence from Serbia

Abstract

In the Paper, the basic types of bank stress tests will be showed as examples from the practice of a relatively small bank in Serbia with assets of less than a hundred millions euro’s. The tool is shown in two types of stress test (scenario of analysis and sensitivity test) with examples. Subject of the article is relevant to the problems that global economic crisis deeply affected and still affecting the Serbian banking sector. Crisis is prolonged and emphasizes the importance of more sophisticated tools and methods for risk management in financial institutions, especially those tools and methods dealing with the elaboration of sudden negative circumstances that could dangerously affect banks. According to extent of the crisis, bank management should envision possible situations and early signals to indicate any possible losses in future period. Special attention should be focused on actions of regulatory bodies in the forms of obligatory executions of complex and comprehensive stress tests. Stress tests are performed for banks individually and on level of national financial system. This article shows how relatively small changes in business environment can deeply affect a financial institution.