Stress-testing the Banking Sector

Stress testing represents a methodical technique which is utilized to estimate the vulnerability of the financial system and its components such as selected portfolios or institutions by considering the impact of various hypothetical scenarios. Therefore, it represents a quantitative what-if application which aims to determine the impact on profits, capital, and cash flows of the financial system considering the case that presumed risks would materialize and deteriorate the system itself. In this book, we illustrate the methodology applicable to the stress test framework by a practical application of the stress testing exercise to the credit risk in the banking system of Albania. The aim of this study is to test the resilience of the banking system under circumstances of financial distress and deterioration of macroeconomic variables. In this perspective, this study aims to analyze the financial stability using the stress tests in the Albania financial system which is compromised predominately by the banking system.