Stress testing of the Serbian banking system

The National Bank of Serbia uses macroprudential stress tests to assess the resilience and vulnerability of the entire financial system and the impact of macroeconomic variables on the system stability, as well as on individual financial institutions.

Results of macroprudential stress tests are published as part of the Annual Financial Stability Report.

There are four types of stress tests based on the type of analysis, ultimate objective and method applied:

• Macroprudential/surveillance stress testing, Microprudential/supervisory stress testing,
• Crisis management stress testing,
• Stress testing as an internal risk management tool.

Macroprudential/surveillance stress test does not provide an answer as to how the banking sector will function in periods of crisis, but rather sheds light on key risks and their potential impact on capital and liquidity. In addition, this stress test attempts to analyse the risks to the banking system as a whole, taking account of the spill-over effects – risk transmission within a country’s financial system but also cross-border transmission, as well as the risk transmission between the financial sector and the real economy. Stress test results may be the source of information for early warning systems, and may facilitate crisis management and resolution in individual institutions.

Macroprudential stress tests usually do not propose specific measures for individual banks, but serve as a basis for macroprudential recommendations of central banks.

There are two significant dimensions to be taken into account in the stress testing process:

• balance sheet items targeted by the stress test,
• the degree of transmission of the initial shock through the financial system and real economy.

The shock may affect balance sheet items on the assets side (cash and cash equivalents, loans granted and securities purchased) and the liabilities side (client deposits, credit lines received and securities issued). Considering the structure of risks that banks face in their operation, credit risk and liquidity risk have the greatest importance.

The macroprudential stress tests used in the National Bank of Serbia currently enable the following:

• estimate of resilience of the banking sector and individual banks to the rise in credit risk caused by adverse macroeconomic developments;
• measurement of the liquidity risk due to the loss of depositors’ confidence and unfavourable macroeconomic developments;
• network modelling in the estimate of banking sector systemic risk and systemic importance of individual financial institutions;
• composite risk assessment for individual banks.