The Process

System-focused stress testing is best seen as a process: part investigative, part diagnostic, part numerical, and part interpretive. Ideally, this process begins with the identification of specific vulnerabilities or areas of concern, followed by the construction of a scenario in the context of a consistent macroeconomic framework. The next step is to map the outputs of the scenario into a form that is usable for an analysis of financial institutions’
balance sheets and income statements, then performing the numerical analysis, consider­ing any second-round effects, and finally summarizing and interpreting the results. Each stage of the process is important to understanding the sensitivity of a financial system to a particular shock or vulnerability. Those stages are not necessarily sequential, because some modification or review of each component of the process may be desirable as work progresses. The following subsections describe the key stages of the stress-testing process in more detail, with the intent of providing a better understanding of what is involved and of how to go about implementing them.

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