Is there a case for a less severe equity stress test following 2008 returns?
Document ID: 2009-1485
Published on: 1st May 2009
Author: John Hibbert
Modern capital adequacy regimes require firms to set aside sufficient capital to survive extreme market and non-market events in order that they can meet their obligations with a high level of confidence. The assessment of these extreme possibilities is an inherently difficult task. In setting stress tests for capital assessment, regulators have taken care to avoid ‘pro-cyclicality’. From the authorities’ perspective, pro-cyclicality carries two major downside risks.
