Stress Testing And Risk Management In China's City Commercial Applications

Since the 1990s, stress testing techniques have been applied to risk management of individual assets, investment portfolios and overall financial institutions. The testing targets include the value of investments and portfolios affected by interest rates, exchange rates, stock prices, credit changes, bank's liquidity position and capital adequacy ratio, etc. After 1999, Stress testing is gradually applied to strengthen the macroeconomic stability of the financial system by supervisory authorities.China's city commercial banks are currently weak in risk management skills, techniques, data support, and also in insufficient human resources, especially backward in the quantification of risks. As a useful tool, stress testing can help these banks to adapt to the rapid changing market conditions, risk factors and macro-economic background. To face the challenges of financial globalization and to draw on the U.S. financial crisis in 2008, building an effective, operable stress testing framework for Chinese city banks according to their own operational environment and development situation is an important step to enhance their risk management capabilities. In view of this, summarizing the studies home and abroad, this thesis tries to build up a more comprehensive, practical and dynamic stress testing framework in order to providing a useful reference for China's city commercial banks.The thesis is composed of five chapters. The 1 st chapter is the history review of stress testing. In chapter 2, we discuss the theory of stress testing, i.e. the concepts, procedures, types and significance etc. Then In chapter 3, we analyze and compare different stress testing methods for the main bank risks, i.e. credit risk, market risk and liquidity risk. In chapter 4, making a domestic city bank as an example, we carry out stress testing, mainly on liquidity risk stress tests, by using the bank's actual operational data. Finally In chapter 5, we give our suggestions from three aspects:improvement of the market mechanism, external supervision of regulators and internal development of city commercial banks.