Credit stress testing offers financial institutions a systematic methodology to prepare for crises, by examining how extreme movements in key variables impact on credit quality. In other words, stress tests provide information about risk factors that fall outside those typically captured by the VaR analysis. In this regard, MBA International candidates have prepared a consultative document that aims at providing Piraeus Bank with guidance in constructing and conducting credit stress tests. This project had four objectives: After a general introduction to the concepts and basic techniques of credit stress testing, it accumulates past experience, examines results and identifies best practices. Secondly, drawing on this knowledge, a methodology was developed, providing a basic framework and toolkit for conducting stress tests. Thirdly, this framework was customized for Piraeus Bank after being adapted to the Greek economic conditions and the bank’s credit profile. Finally, this customization enabled the development of a generic model for analyzing the potential impact of stressful events on Piraeus Bank’s credit quality.
