STRESS TESTING IN THE FUNCTION OF RISK ASSESSMENT IN THE BANKING SECTORS OF SOUTHEAST EUROPE (SEE) COUNTRIES

Original scientific paper
Autor: dr Lidija Barjaktarović, Maja Dimić, mr Dejan Ječmenica
JEL: G21, G01, P34

Summary: The business environment in which banking sectors function has become rather dynamic. In order to conduct their operations efficiently, banks adopt a risk management policy as the basic document closely defining detection and control of total bank’s exposure to all types of risk. A method widely used for the purpose of preserving financial stability is testing resilience to stress, which analyses the possibilities of individual financial institutions or the overall financial system, in terms of absorbing various types of shocks (risks). As an analytical method, stress test provides a quantitative assessment of a banking portfolio’s vulnerability, mostly related to unexpected, but realistic economic events and shocks. The objective of stress tests is to indicate, in a universal and systematized manner, potential problems within the banking system, thereby enabling the government and financial market participants to respond in a timely fashion. The collapse of the US financial market has exerted an adverse impact on the global economic and financial system. The analysis of stress tolerance, as a risk assessment instrument, has gained importance in the circles of international financial institutions and regulatory bodies since the outbreak of the global economic crisis.

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