The subprime mortgage crisis in the US was an important turning point for the stress test models adopted by US and European banks because it showed they were “too mild,” the deputy chief of Taiwan’s central bank said yesterday.
Speaking during the opening day of a five-day conference in Taipei on bank stress tests, central bank Deputy Governor Yang Chin-long (楊金龍) said the stress tests performed by banks before the crisis failed because they underestimated the possibility of certain real-world situations.
In the future, simulations used for the stress tests need to more closely reflect “reality,” he said.
Perfect Time
Yang added that the eurozone debt crisis had again demonstrated the inadequacy of simulated stress tests used in the recent past, and he suggested that now was the perfect time to impose testing models that were more realistic.
Thomas Kick, a senior economist from Deutsche Bundesbank, said banks should design their own stress tests based on the environment in which they operate, adding that stress tests were an important part of financial supervision.
Stress tests simulate different adverse scenarios, such as market crashes, higher interest rates, or big increases in commodity prices, to determine whether a financial institution has adequate resources to respond effectively to the crisis.
German Rules
The conference, which ends on Friday, was jointly planned by a training center affiliated with the Conference of Governors of South East Asian Central Banks and Deutsche Bundesbank, the -German central bank.
It is being held to teach financial supervisory personnel how to run stress tests properly, to introduce stress test content and to discuss ways to integrate stress tests used by different countries.
Asian Gathering
Twenty-nine financial supervisory representatives from Bangladesh, Cambodia, Indonesia, Fiji, Malaysia, Mongolia, Sri Lanka, Hong Kong and Taiwan attended the conference, in which experts from German and Indonesian central banks were invited to host seminars.
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